State of the markets (10 things on my mind)
The Sandbox Daily (2.27.2025)
Welcome, Sandbox friends.
Today’s Daily discusses:
a dash of insight (10 things on my mind)
Let’s dig in.
Blake
Markets in review
EQUITIES: Dow -0.45% | S&P 500 -1.59% | Russell 2000 -1.59% | Nasdaq 100 -2.75%
FIXED INCOME: Barclays Agg Bond -0.15% | High Yield -0.19% | 2yr UST 4.053% | 10yr UST 4.266%
COMMODITIES: Brent Crude +1.75% to $73.80/barrel. Gold -1.46% to $2,887.8/oz.
BITCOIN: -1.27% to $83,126
US DOLLAR INDEX: +0.82% to 107.291
CBOE TOTAL PUT/CALL RATIO: 0.92
VIX: +10.63% to 21.13
Quote of the day
“Pain comes from within, and you are free to let go of pain.”
- Marcus Aurelius
A dash of insight (10 things on my mind)
Early in 2025, the global economy faces a shifting landscape marked by uncertainty and change.
U.S. markets are in the midst of another intense growth scare, with a Fed that’s worried about upside inflation risks as clear downside growth risks have developed. Fear is currently driving investor behavior, leading to sharp declines in even the strongest stocks. But history tells us that this turmoil won’t last forever.
The question on everyone’s mind: does the recent move metastasize into a much larger downdraft for markets?
Below is a sample of key data points that have my undivided attention.
Tomorrow’s note will opine on something nobody seems to be discussing and take on a decidedly brighter tone. HINT: it’s one of Sam Ro’s 10 Truths About the Stock Market, a personal holy grail of sorts.
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1. Investor Sentiment
Investors have turned historically bearish despite equity markets notching a new high as recently as last week.
In the entire history of the American Association of Individual Investors (AAII) sentiment survey, there have only been six other weeks when bearish sentiment was higher, and these occurred during the 1990 recession and Iraq’s invasion of Kuwait, late in the Global Financial Crisis, and most recently, back in September 2022 right before the cycle lows.
A key difference between now and those periods is that in each one, the S&P 500 was down at least 10% from a 52-week high when bearish sentiment exceeded 60%. Today, the S&P 500 is down just over 3%.
As Bespoke Investment Group noted: “It takes a lot less to strike some fear into investors than it has in the past.”
2. Consumer Confidence
Consumer Confidence, as surveyed by the University of Michigan and The Conference Board, shows consumers are starting to lose economic confidence.
Given that consumer spending drives the economy and influences inflation, confidence and the means to spend can significantly impact markets. This continues to be one of the most hated bull markets, but at some point confidence won't be a red herring but a driver of real concern.
3. Steve Cohen “negative for the first time in a while”
Steve Cohen, hedge fund billionaire and founder of Point72 Asset Management, warned of slower U.S. economic growth and a "significant correction" in the markets – citing tariffs (as a tax), less immigration, and DOGE “austerity” cuts to government spending.
After a stellar run, Cohen is leaning towards the idea that the best gains for investors may be behind them.
4. Defensive leadership emerges
One key relationship to take the market’s temperature – offense or defense – is the ratio between consumer discretionary stocks (XLY) and consumer staples (XLP), a relationship with an excellent leading indicator for the overall market at major turning points.
Looking at relationships between groups tells a lot about positioning and risk appetite.
After collapsing during the 2022 bear market, this ratio has been steadily repairing itself over the last two-and-a-half years, threatening an upside breakout which would have confirmed the next leg of this bull market. However, a decisive breakdown at a key resistance level shows that defensive positioning has taken over.
As Steve writes: “The tactical trend has turned down, and the primary trend is in jeopardy. Momentum just hit its most oversold reading since the bear market lows in 2022.”
This is a decidedly a big checkmark for the bears.
5. Walmart’s read-through
Walmart, the second largest Consumer Staples stock in XLY and a de facto read-through of the U.S. consumer ($WMT is the world’s largest annual revenue generator), recently reported better-than-expected fourth quarter results.
BUT, the big box retailer gave profit guidance for the first quarter and fiscal 2026 that was much softer than expectations as Walmart projects its profit growth will slow.
6. Credit remains in check, for now
Despite U.S. economic policy uncertainty mooning aboard a SpaceX Rocket falcon, credit spreads remain remarkably resilient.
When markets are under pressure, it also shows up in credit spreads.
The bond market is the biggest asset class in all of capital markets, with a total valuation over $150 trillion. If there’s serious systemic risk in the stock market, credit spreads will notify investors.
So far, these spreads aren’t flashing red. But, if credit begins to blow out, this development would be a change in characteristic of the entire bull market that emerged from the October 2022 lows.
7. Microsoft sparks concerns about AI overcapacity
TD Cowen’s research report highlighting channel checks showed Microsoft canceling leases for data center capacity, raising concerns about AI spending visibility.
8. Risk appetite collapses
The carnage in crypto has been sharp and fast.
Here’s a warm welcome to all the new retail investors experiencing crypto’s knee-jerk price behavior for the first time. As The Strokes once rang out: “hate to say I told you so.”
Bitcoin has now corrected 25% from its high point last month. The good news is that Bitcoin is now oversold after catching down to its 200-DMA. For long-term investors, entry points from a risk/reward setup are becoming much more palatable.
9. U.S. exceptionalism faces hurdles
U.S. economic growth since the pandemic has far superseded that of any other major developed economy.
While several cyclical factors were at play, along with greater resistance to tighter monetary policy, potential real GDP growth in the U.S. is significantly greater due to higher productivity, better demographic prospects, and a strong labor market.
However, directionally, the U.S. economy may be taking a break, while data in other parts of the world appears to be looking up at the start of the year.
Today, the U.S. must contend with emerging risks from DOGE, sticky inflationary pressures, a housing market that won’t unthaw, and threats to immigration. As Neil Dutta of RenMac wrote in a note recently to clients: “Downside risks to the economy are stirring. Uncertainty is rising while the economy is slowing. Ultimate, this will push the Fed to resume policy easing.”
Here is each G7 country’s cumulative increase in real GDP since just before the pandemic, showing one reason why the U.S. equity market has outperformed RoW:
United States 🇺🇸: +12.2%
Canada 🇨🇦: +7.6%
Italy 🇮🇹: +5.1%
France 🇫🇷: +3.5%
United Kingdom 🇬🇧: +3.0%
Japan 🇯🇵: +0.2%
Germany 🇩🇪: +0.0%
10. Mag7 hits air pocket
I tried to get through this whole post without mentioning the Magnificent 7. Alas, it’s unavoidable given the price action painting the tape.
The consistent patterns of U.S. outperformance since the Global Financial Crisis, together with higher equity concentration as the U.S. became a more prominent force, has meant that diversification – once described by Harry Markovitz as the ‘only free lunch in investment’ – have failed to boost absolute- and risk-adjusted returns. Some have derided diversification as diworsification.
For more than a decade, investors would have been served better by ignoring the rules of diversification and rather concentrating exposure to the U.S. equity market. And, for that matter, a very small group of technology companies.
Not only did the U.S. market grow in size relative to others, but it became more concentrated by stock than other markets. As a result, a few large companies generate a disproportionate return.
Having a diversified portfolio across assets and across geographies and styles would have reduced returns. This goes against the tremendous weight of history.
I do not suggest that pattern is changing (yet), however the market structure poses new challenges and risks that we have not seen before.
Sources: MacroCharts, University of Michigan, The Conference Board, CNBC, Bloomberg, Torsten Slok, TD Cowen, RenMac, Steve Strazza, All Star Charts, Joe Politano, Goldman Sachs
That’s all for today.
Blake
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Welcome to The Sandbox Daily, a daily curation of relevant research at the intersection of markets, economics, and lifestyle. We are committed to delivering high-quality and timely content to help investors make sense of capital markets.
Blake Millard is the Director of Investments at Sandbox Financial Partners, a Registered Investment Advisor. All opinions expressed here are solely his opinion and do not express or reflect the opinion of Sandbox Financial Partners. This Substack channel is for informational purposes only and should not be construed as investment advice. The information and opinions provided within should not be taken as specific advice on the merits of any investment decision by the reader. Investors should conduct their own due diligence regarding the prospects of any security discussed herein based on such investors’ own review of publicly available information. Clients of Sandbox Financial Partners may maintain positions in the markets, indexes, corporations, and/or securities discussed within The Sandbox Daily. Any projections, market outlooks, or estimates stated here are forward looking statements and are inherently unreliable; they are based upon certain assumptions and should not be construed to be indicative of the actual events that will occur.
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Great insights, Blake