Research.LeutholdGroup

Markets are no longer hanging on every Fed whisper — fiscal policy has muscled into the spotlight. As investors navigate this new landscape, the old game of decoding central bank signals is giving way to something much clearer

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Out of necessity, bear market rallies and the first leg of a new advance look nearly identical; if they didn’t, the game would be too easy. However, the action (or lack of it) within the most economically sensitive groups would seem to support our bearish take. 

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If the full extent of the market decline, which began in March, bottomed on April 8th, it will stand as the deepest loss in our register of severe corrections (-12% to -19%) dating back to 1959. It is notable that, other than 1999, in all prior cases the SPX bottomed with a Normalized P/E ratio below its median of 19.4x; on April 8th, that figure (25.4x) still ranked in bubble territory.

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A Zweig Breadth Thrust (triggered in late April), has historically been a boost for the seasonal market doldrums common from May through October, with stock gains much higher during that period than in the absence of a ZBT. Maybe that explains why the “Sell In May” phenomenon hasn’t received the usual attention this year.

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To date, hard data points have held up very well in the face of Tariff Tantrum 2.0. Yet, strong retail sales in March could have been due to tariff front-running with added staffing propping up the latest employment numbers. For now, we think “soft” data, especially surveys of purchasing managers better capture the potential economic impact of the tariffs.

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We recently finished a study featuring 30 versions a favorite forecasting “toy”—the Treasury yield curve. In this expanded report we unearthed value in several variants we didn’t test in the original 2023 study. In particular, higher forecast correlations were produced when using yields on 2-yr. and 3-yr. Treasury notes in lieu of the 10-yr. Treasury yield.

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While the stock market has reversed about half of its February–April decline, the risk of a self-fulfilling confidence collapse remains elevated. In April, the Conference Board’s Consumer Expectations Index dropped to a level that’s been observed only once outside of a recession (mid-2011).

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We were overly attuned to the short-term action in February that we missed a monumental event at the end of that month: A close in gold above the previous, inflation-adjusted all-time high recorded in January 1980. It took 45 years, but even those with the worst-imaginable entry point have now seen gold fully realize its promise as an inflation hedge.

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The outperformance of foreign stocks in 2025 is not a new story, but it’s now been formally “validated” by new signals from a pair of models we use for timing potential allocation changes. 

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The market decline will almost certainly be accompanied by a recession. For months we’ve maintained that the wealth effect had become the main support of an expansion whose list of beneficiaries had been narrowing like that of stock breadth and leadership. The administration’s draconian tariffs will deserve some blame, but it’s not partisan to underscore that the expansion was on precarious footing long before the Tariff Tantrum.

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The stock market losses in 2025 have materialized so rapidly that many investors might feel trapped, hoping for a bounce that provides better exit prices. The challenge may be that an imminent bounce and the “new narrative” to support it will seem so compelling that the urge to exit may dissipate.

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The risk is now extremely high that the breakdown in confidence will become self-fulfilling. The near 30-point collapse in Consumer Expectations from the post-election high could translate into a reduction in real-GDP growth of more than two percentage points over the next year.

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The gap between the ISM Manufacturing Price Index and the New Orders Index has blown out to dangerous levels, indicating that price increases are outstripping growth in orders—a stagflationary condition historically detrimental to stock prices. 

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The stock market declines of April 3rd and 4th were a mass liquidation with no distinguishing between Growth or Value. Still, there are signs that a rotation from the former to the latter is underway. And keep in mind that the most reliable catalyst for a transition in leadership is a bear market.

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On April 4th, the S&P 500’s loss from its February 19th high reached -17.4%, a decline we’d consider a “severe correction”… if we thought it had fully run its course.

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There’s been an intriguing relationship between the speed of a severe decline and the likelihood of a strong recovery. Yet, the cyclical backdrop is also a key factor, and today’s message from a range of economic measures is that the current correction is not a safe one to buy.

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Prior to Liberation Day, there was growing talk of a new bull market in a practice that had not experienced one  in years: Diversification. After being in the green all year until recently, our simple proxy for a diversified portfolio is now down 2.1%, but compared to the domestic equity benchmarks, that seems rather palatable.   

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It’s worth considering that “this time” is not different. In fact, this time and may well be the same as it ever was, and the recent stock market collapse could morph into a perfectly normal cyclical bear market. Based on the average loss of the last 13 (non-recessionary) bear markets, SPX could drop to 4,153. 

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This cycle’s earnings performance has been exceptional. If EPS were to top out today, the peak-to-peak annualized performance from the last cycle high will have been the strongest among six cycles since the early 1970s. Nonetheless, nominal growth in EPS has been boosted by elevated inflation, which has supplied almost one-half of the last five years’ growth rate.

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Early this month we trimmed net equity exposure to 50% across tactical allocation strategies. Breadth, leadership, and momentum into the SPX high on February 19th all showed divergences that could have been pulled from an “analyst’s handbook” of bull market tops.

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