In 20 days spanning the end of February and beginning of March, the S&P 500 fell 10.1% from peak to trough, marking the fifth-fastest correction in the past 75 years.
Growing signs of economic weakness, chaotic news out of Washington, tariff threats (and implementation) and broad uncertainty about the future have all played their parts.
It is always tough (and famously a fool’s errand) to make precise predictions about market tops and bottoms, but the good news is that we are probably not headed into a recession, and, If I had to guess, I would say that more weakness may lie ahead but there are signs the worst is behind us.
Notably, sentiment is dark, which is a positive in the contrarian sense, and insiders have become more active.
That said, Jim Paulsen, who was the first to call the correction several weeks ago in his Paulsen Perspectives Substack, sees more signs of economic and market weakness ahead.
He cites contractionary forces like higher yields, a strong dollar, weak money supply growth and a slowdown in fiscal stimulus growth. He also makes a good case that several nuanced measures of employment activity are at levels that normally precede a recession.
No one knows for sure, of course, but he thinks growth will slow to 2% and that the ten-year yield could fall close to 3%.
The kind of economic weakness that would get us there would also shake up stock investors. He is not yet forecasting a recession, which would cause a bear market.
“Labor market indicators have become more concerning lately,” Paulsen wrote on March 10. “Although this does not guarantee a recession anytime soon, it does suggest recession ‘fears’ among investors will likely continue intensifying and remain problematic for the stock market.”
He also cites a persistently higher U6 underemployment rate. U6 means unemployment that includes people who are unemployed, marginally attached to the labor force, and part-time workers. “These worries may keep the stock market turbulent until greater economic policy support is forthcoming,” he says.
A Bullish Alternative
Offering a counterpoint, Ed Yardeni of Yardeni Research remains fairly bullish on growth. He recently raised his subjective odds of a recession this year to 35% from 20%. But he is still betting on the resilience of the economy.
As for negatives, he points out that President Trump’s tariff policies are creating a retaliatory trade war rather than negotiated settlements. More “reciprocal” tariffs will be imposed on April 2. Trump wants to raise revenues with tariffs, which implies some tariffs will be permanent.
On the bright side, he suspects that a fair amount of recent labor market and consumer spending softening was due to severe cold weather in January and that the Atlanta Fed GDPNow Q1 contraction forecast was caused in part by large gold imports, which is probably a one-off event.
In balancing the opinions of these two well-regarded market commentators, there are two factors that stand out to me.
Sentiment Is Flashing a Contrarian Buy Signal
Standard sentiment measures like the Investor Intelligence Bull Bear ratio and the American Association of Individual Investors survey have turned significantly darker. They are flashing buy signals. However, cash levels at investment funds recently remained low, and sell-side strategists were recently quite positive, suggesting too much bullishness, according to a recent Bank of America Survey. In my view, the sentiment signal is mixed but modestly bullish.
Insiders Are Stepping Up
After staying sidelined for the past several months, actual insiders (not institutional owners who report because of large position size) have stepped up to buy in the past two weeks. Notably, there have been many $1 million-plus purchases, which is unusual and certainly a change for corporate executives and board members. Insiders with good records who are buying in size ($100K or more) are most interested in cyclical areas like energy, tech, banking, and industrials. This suggests they don’t see a recession coming. They are also showing an interest in biotech, which has been especially weak.
The bottom line: There’s a case for more selling ahead, but some bullish signals are starting to emerge, chiefly, increasingly negative sentiment (positive as a contrarian signal) and the pick-up in insider buying.
