Market Comment - March

The past four weeks have been characterized by an extremely difficult environment for investors, and it has not been easier for traders. The tape is becoming highly news-addicted, as it is subject to the return of Donald Trump, who talks a lot. Often, it is very difficult to understand what he means when he says certain words. What comes out of his mouth is often contradictory and misleading. The weakness in the US stock market can be attributed to the technology sector. The Magnificent Seven, which have led the S&P 500 during the past years, continue to underperform vigorously, weighing on the entire stock market.

For years, the financial press has been discussing the implications of the heavy weight the seven largest companies have. The 10 largest US stocks now account for 33% of the S&P 500 index’s market value, well above the 27% share reached at the peak of the tech bubble in 2000. Passive investors, who have profited from a stunning outperformance and have very much enjoyed the ride, are now starting to pay the price. The NYSE FANG+ Index, which is dominated by the Magnificent Seven, dropped a stunning 10.41%, while the FTSE All-World ex-US Index lost only 0.42%. Ex-US equity markets did only slightly better than the US, but because the US Dollar Index lost 4.26%, every market outside the US looked better, when calculated in US Dollars.

Investors are now facing the fact that they are invested in a crowded trade, through their passive investments, and overweight in technology. Consequently, a portfolio rebalancing by reducing technology exposure is needed. Meanwhile, our intermarket analyses of the US stock market are not improving. Our three confidence indicators continue to turn lower, which is not a good sign for equities. If we are jumping to a late-cycle stage, we usually see the FED stepping in. Unfortunately, the US central bank is as confused as investors. The uncertainty surrounding US tariffs makes it difficult to make sound decisions. Donald Trump promised to make a tariff announcement on April 2nd, and until then, the printing press will remain silent.

The good news is that he promised to be kind, so at least there is that. The US 2-year yield currently trades at 3.88%, while FED Funds are trading around 4.35%. This would give the central bank room for a 50bps rate cut. Like in 2022, when short-term treasury yields started to take off and the FED reacted too late, it will act too late in 2025 as well. We cannot emphasize enough how irrelevant a 2.00% inflation target is when it comes to the financial system. A worst-case scenario for global credit markets would be a deflationary bust. Such an event must be avoided at all costs. Inflation keeps a credit-based financial system stable.

In this context, we have to address the very fragile situation of the US small-cap energy sector. While it held up relatively well in March, the overall structure of this market remains concerning. A widening of credit spreads and a weakening of the price of crude oil could send several companies out of business. As the last big refinancing cycle happened during times of free money, courtesy of COVID, the next refinancing cycle for small energy companies could become extremely problematic. It has been our conviction for a while that we will see the end of the fracking boom in the US. Lower oil prices and rising financing costs would move the market much more quickly to its end.

The US has added over 3 million barrels per day to a total of around 14 million, purely from fracking. This capacity could be eliminated. On the other hand, building infrastructure for an oil rig costs almost USD 1 billion. "Drill, baby, drill" will be very expensive for the US, and it could be that we have seen the peak in US oil production in 2025. Finally, a high-yield credit default in the US energy sector in the coming months cannot be ruled out.