Highlights for this week include:

• The first look at March private sector economic activity from S&P Global’s surveys suggest stronger economic growth at the end of the first quarter, albeit at a slower pace compared to the end of last year.
• While consumer confidence is being negatively impacted by uncertainty around tariffs and government spending cuts, we note that further labor market strength remains the key for future consumer spending. Weekly jobless claims, a timely and accurate labor market indicator, remain consistent with job growth.
• The S&P 500 had a -10.3% peak-to-trough decline over 2 1/2 weeks during the recent correction and recent market dynamics have been positive, despite the heightened uncertainty around tariffs. We note that pullbacks are common occurrences, and usually present good buying opportunities. Given our outlook for further economic growth, we continue to recommend that investors stay focused on their long-term investment plan.

Business Surveys Suggest Stronger Economic Growth at the End of the Quarter

At the end of the month, we get an important early look at that month’s private sector economic activity from surveys of the service and manufacturing sectors provided by S&P Global. The preliminary March surveys showed an encouraging pickup in the larger service sector, which offset a renewed fall in the smaller manufacturing sector. Combined, the surveys suggest stronger economic growth at the end of the first quarter, albeit at a slower pace compared to the end of last year.

The service sector benefitted from a pickup in activity after unseasonable cold weather dampened activity across much of the country in January and February. Manufacturing activity, which has been sluggish for several years, retreated after the frontrunning of tariffs had temporarily boosted factory output in the first two months of the year.

However, uncertainty continues to cast a cloud over the outlook for business, which began the year in high spirits. Concerns center on the potential impact of Federal spending cuts, tariffs, and wider policy changes from the new administration. A key concern over tariffs is the impact on inflation, with the March survey indicating a further sharp rise in costs as suppliers pass tariff-related price hikes on to US companies. Firms' costs are now rising at the steepest rate for nearly two years, with factories increasingly passing these higher costs onto customers.

Consumer Confidence Reflects an Uncertain Outlook but Jobless Claims Remain Low

The Conference Board’s March reading of consumer confidence is another survey reflecting an uncertain outlook with the index declining again, falling below the level that had prevailed since 2022. We note the link between consumer expectations from the survey and actual spending has been weak during this expansion. The health of the labor market remains the key driver of future spending. Importantly, the Conference Board survey showed the labor market differential (the share of respondents who say jobs are plentiful less the share who say jobs are hard to get) moved broadly sideways, suggesting little change in the unemployment rate.

Weekly jobless claims are a timely and accurate indicator of the health of the labor market. Despite tariff-related uncertainty, claims suggest the labor market remains resilient. State initial unemployment claims fell slightly last week and remain at a low level. In addition, federal government-sensitive claims have shown a minimal DOGE-related spending cut impact so far. This data is consistent with continued job growth in March.

Seeing Several Important Signs Since the Recent Market Low

The S&P 500 had a -10.3% peak-to-trough decline over 2 1/2 weeks during the recent correction, and recent market dynamics have been positive despite the heightened uncertainty around tariffs. The NYSE established 90% and 86% upside volume on March 14th and 17th, indicating significant buying demand right at the bottom. The S&P 500, Nasdaq 100, and Dow Jones Industrials all staged impressive rallies on Monday, after Trump alluded to lighter-than-expected tariffs and the rebound in S&P Global’s business survey. We are once again seeing outperformance from cyclical sectors (Financials and Communication Services) relative to defensive sectors (Consumer Staples and Health Care), which is a sign of a risk-on market.

We note pullbacks and consolidations are common, even during bull markets. The key market risk going forward is a major further deterioration in the economic outlook. The S&P 500 has experienced a median annual drawdown of 10% during the last 40 years, with severe drawdowns associated with recessions. The S&P 500 has declined by a median of 24% from peak to trough around recessions since WWII.

However, S&P 500 corrections are usually a good buying opportunity. Looking at the 21 cases of corrections of 10% or more since 1980 shows recessions associated with seven and no recession associated with 14. At six months following the down 10% threshold, stocks are up on average about 10% in the no recession case and about 4% in the recession case. At one year following the down 10% threshold, stocks are up on average about 12% in the no recession case and are up about 1% in the recession case.

This highlights the importance of upcoming economic growth data for the trajectory of the equity market. As noted above, the incoming data remains consistent with further economic growth, albeit slower. We continue to recommend that investors stick with their long-term investment plans.