by Professor Jeremy J. Siegel, Senior Economist to WisdomTree and Emeritus Professor of Finance at The Wharton School of the University of Pennsylvania
Last week brought another wave of volatility to the markets, with investors grappling with mixed economic signals, geopolitical developments, and ongoing trade policy uncertainty. While the headline jobs report appeared solid, the household employment data told a more concerning story, with a sharp rise in the U-6 unemployment rateâone of the largest non-recessionary spikes on record. This divergence reinforces the need to monitor labor market softness as a potential early warning sign of economic deceleration.
The Federal Reserve remains in a holding pattern, and this weekâs CPI and PPI reports will be crucial in shaping expectations ahead of the Fedâs upcoming quarterly meeting. While weâve seen some slippage in GDP and other economic indicators, the Fedâs stance may turn out to be more hawkish than markets anticipate. Governor Bowmanâs recent comments about a rising neutral rate underscore the Fedâs cautious approach, and I wouldnât be surprised if the new dot plot disappoints investors hoping for a more aggressive rate-cutting cycle.
At the same time, we continue to see erratic and unpredictable trade policies, particularly around tariffs. Trumpâs back-and-forth stanceâimposing tariffs one day, removing them the nextâcreates unnecessary market uncertainty, making long-term planning difficult for businesses. This indecision has led to a choppy trading environment where markets initially rally on positive headlines, only to give back gains just as quickly. The latest example was the reaction to reports of a proposed Russian peace plan for Ukraine on Friday, which sparked a brief rally before fading. Market sentiment remains fragile, with elevated hedging activity and the VIX Index hovering in the 24-25 range, suggesting persistent investor caution.
Meanwhile, the bond market is flashing signs of caution, with the 10-year Treasury yield dipping to 4.25%âa slight inversion relative to the Fed Funds Rate at 4.33%. This signals two key factors at play: first, investors are seeking refuge in longer-duration assets amid market volatility, and second, there are growing concerns about a potential economic slowdown. While I still see the 10-year yield edging back toward 4.5% unless we see more pronounced economic weakness, the recent drop suggests that investors are going to bonds for their hedging properties.
One area I remain concerned about is the money supply. January data showed virtually no growth, which could indicate a stalling credit environment. While Iâm not ready to call this a bearish signal yet, I will be watching Februaryâs numbers closely. A prolonged stagnation in money supply growth could be a headwind for economic activity.
On a more positive note, energy prices have provided a bit of relief, with WTI crude falling into the mid-$60s range. This decline should help keep gasoline prices in check, potentially offsetting some inflationary pressures stemming from tariffs. Despite all the talk of tariffs driving up costs, we might actually see lower gas prices in the near term.
Looking ahead, the upcoming CPI and PPI reports, followed by the Fedâs quarterly meeting, will set the tone for monetary policy expectations. Additionally, the April 2 reciprocal tariff deadline remains a key inflection point for markets. Until then, I expect continued volatility, with sentiment swinging on headlines. While thereâs potential for a rebound, the market valuations are elevated versus history, so there isnât a strong incentive for aggressive buying just yet.
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