Footnotes & Flashbacks: Asset Returns 3-16-25

Weak asset returns and rising volatility reflect forward-looking increases in prices, costs, and earnings fallout.

Mar 16, 2025

Tariffs have multiplier effects. Trump should “do the math and show the work.”

The actual price and cost impacts of tariffs are in the 1^st inning and not yet in trailing inflation metrics despite some early price hikes on tariff announcements. The real action lies ahead as tariffs kick in with April likely to be a bellwether month with reciprocal tariffs and targeted products.
The news flow ran the gamut the past week from the S&P 500 going into correction mode in just 16 sessions, gold crossing $3,000 for the first time, and HY credit spreads spiking. Even after the HY selloff, HY OAS is still over -135 bps inside the long-term median. In equities, we see all negative returns on the benchmarks for 1-month and 3-month time horizons.
The UST curve stayed quiet for the weekly deltas as the equity sell-off left the 7 bond ETFs ranked in positions #7 through #13 but only 3 UST bond fund ETFs positive and 4 bond ETFs negative as spreads took a hit and left AGG, EM, LQD and HYG in the red. The overall positive-negative score for the week was 9-23 in the peer group of 32 we track.
Energy ETFs (XOP, XLE, and AMLP) took the top 3 positions in weekly returns with only Utilities (XLU), Base Metals (DBB), and EM Equities (VWO) in positive range.

The above table tells an easier story in equities for the benchmarks we track with all the lines negative for 1-month and 3-month trailing timelines. Even the 6-month period shows poor numbers with 1 line (Russell 2000) in negative range, 4 of 6 under 1%, and only the Dow just over 1%.

We consider the Dow the least useful indicator as a price-weighted measure of 30 names, but tradition always keeps it in focus. Another reason to cite the Dow is that the chuckleheads in Congress and the White House essentially call the Dow Jones Industrial Average “the stock market.” We don’t include the Dow in the 32 benchmarks and ETFs we track further below.

The debt performance metrics are a tougher read this past week since there was so little action in the numbers. We looked at the UST deltas for the week already in Mini Market Lookback: Self-Inflicted Vol (3-15-25). We will post our Footnotes publication on the State of Yields later. When the tariff volatility started, we had initially seen a rally in the UST curve on flight to quality and cyclical fears. Those will continue to be factors.

The worries around stagflation are a more pressing wildcard in how the UST markets react and asset flows impact the UST curve. We saw consumer sentiment metrics this week (discussed in the Mini Lookback), and they were glum even if they drew little attention on the rally day.

As cited in our earlier commentary: “The Friday news in the U Mich consumer sentiment was brutal in the area of inflation expectations with the 1-year inflation expectation up to 4.9% from 4.3% last month. That is obviously a big move and is up a full 2 points from March 2024. The 5-year expectations moved up to 3.9% from 3.5%. That 3.9% in turn is up from 2.8% in March 2024.”

If Trump and his various mouthpieces and the Econ Swat Team are saying tariffs do not cause inflation or more loosely defined cause “an erosion of purchasing power” (economists like to play semantics with the term inflation vs. one time price hikes), then the average consumer is not buying the story. Those are material increases in inflation expectations.

A crash in the trade partners currency would help lower the price impact of the tariff, but then there is a multiplier effect on the US export market being damaged and on the economics of a company’s decision to relocate and/or reshore. The decision point on the currency offset is “Why take that capex risk when economic policies remain uncertain over the intermediate term and currencies can mitigate the risk?” Dollar denominated commodities such as oil are another issue, and Trump has tariffs aimed at the major base metals. Currencies will not ease the pain there for buyers.

Tariff realities have facts you don’t hear from Trump, Bessent, or Lutnick…

It was painful to listen to the talking heads from the Democratic side of the aisle talking about “rising prices” on the Sunday show circuit since CPI just reported muted and even improved numbers (see CPI Feb 2025: Relief Pitcher 3-12-25). They need to work on their tenses or wording or they will just sound stupid. Those were Feb 2025 inflation numbers.

The tariff price fallout is ahead not in the rearview mirror. There are some prices already rising since some producers jack prices quickly once they see tariffs on the way. In other cases, they keep prices flat and try to ramp up volumes to “beat the buzzer” and encourage inventory building. The action lies ahead.

Speaking of “lies,” we looked at some of the tariff issues with Canada in a weekend post that used dairy and potash as an example (see Tariffs: Strange Week, Tactics Not the Point 3-15-25 and tariff links at the end of this piece). Trump has the challenge of not being remotely conversant in the tariff realities and sea level transactions and economics of various industries.

Trump just rambles on about Canada “ripping us off” and “subsidies” and complaining about a trade deal that he signed off on and hammered down the throats of Canada and Mexico in 2018 (effective 2020). He also bragged about it at the time. He still will not admit the “buyer pays” and that he did not collect billions and billions from China in 2018-2019. That will chase him throughout this tariff trauma. The media and Washington politicians should not let him off the hook. The China “seller pays” story is a blatant lie he will not admit to. It should nonetheless haunt him.

Strange week of macro and micro connectivity…

Below we look at a few of the headline drivers that were a combination of sobering and alarming.

Tariffs: We covered the trip to the tariff psych ward already. The week saw recklessness galore (see Tariffs: Strange Week, Tactics Not the Point 3-15-25, Trade: Betty Ford Tariff Wing Open for Business 3-13-25). The reactions in equities and spreads were immediate since this past week affirmed Trump’s desire to fight a trade war and to cow global leaders who have their own domestic political priorities. Those leaders do not want to look like a US Senator (i.e. sackless wimpy yes men). The spread pain peaked on the days Trump threatened to double tariffs on Canada and apply 200% tariffs on EU wine and spirits (see Credit Spreads: Pain Arrives, Risk Repricing 3-13-25, Credit Spreads Join the Party 3-10-25 ).

The reality of the Canada relationship is that they have a lot of products we need. Trump’s trash talking on that topic is a combination of temperament and economic ignorance (maybe he thinks there is a massive stash of Potash or Uranium under Mar a Lago?). The checklist of high-volume imports would be embarrassing for him or his mouthpieces to discuss. They avoid getting into a line-by-line discussion (with live media) on major import line items. Potash? Uranium? Low cost hydroelectric to produce aluminum? Energy products? Pair of CCMs? Six-pack of Molson?

The old problem lurks here as well. If you can convince a lot of people that you won an election that you lost by 7 million votes, you use the same playbook and just embrace the rule of repeat, repeat, repeat. However, this time the listeners to his nonsense will eventually experience the price and cost impacts of tariffs and in many cases feel the payroll fallout. That election talk is just words. This current topic shows up in daily lives with a price and a cost. That strong rural vote? Try that sales pitch with a high potash tariff. Try it with potash withheld. After all, the US does not need Canadian potash according to Trump. All those effects are still ahead. The impact is coming. DOGE is now, but the tariffs are on the immediate horizon.

In the end, there is a reason that Canada is our #2 trade partner and #1 export market as a nation (EU #1 as a bloc). That status is generated by private sector decisions based on economics in a trade relationship that had been 99% tariff free. There are only economically driven transactions. “Subsidy” is a word Trump has grasped onto like “rip-off” and “rigged election” and “radical left,” etc. He cannot define the “subsidy” term in transaction terms. Like his “seller pays” view. He just makes it up.

Budget and debt ceiling: The budget was checked off, so no shutdown. The debt ceiling battle, which has more fatality risk to the global financial system, will unfold into the spring and early summer. Whatever your political party is, you have to consider UST default noise as a headline risk (it won’t happen). The rating agencies might even come out of hibernation and especially on the Moody’s Aaa.

As a reminder, the tariff architect in the White House had earlier proclaimed in a CNN Town Hall meeting in 2024 (before the election) that if the GOP House “did not get everything they wanted” then they should “do a default.” Trump is now President, so the tune will be different. The assumption here is that if the process breaks down, Trump will just exceed the debt ceiling and issue debt to raise $$$ and refinance. He has some constitutional support on that one (14^th Amendment, etc.). He can just dare anyone to sue him to default.

The rolling return visual

In the next section, we get into the details of the 32 ETFs and benchmarks for a mix of the trailing periods. Below we offer a condensed 4-chart view for an easy visual on how the mix of positive vs. negative returns shape up. This is a useful exercise we do each week looking for signals across industry groups and asset classes.

The symmetry of positive and negative returns across the time horizons above show the recent struggle. As we cover below in the time horizon slices, it is always useful to look at the broad benchmarks from small caps to large caps as priorities in framing takeaways. The smaller industry ETFs – while important indicators –are not the main events for overall market flavor.

The 7 bond ETFs run from short duration UST 1-3Y (SHY) to long duration 20+Y UST (TLT) with a mix of credit across Corporate Bonds (LQD), Emerging Market Sovereign (EMB) and HY (HYG). The Aggregate Bond ETF (AGG) cuts across UST/Agency bonds, MBS, ABS, and Corporates.

The industry level groupings can be volatile in price action, and we see such swings this past week with energy equities across upstream (XOP), midstream (AMLP), and diversified energy (XLE) holding the top 3 slots after frequent weeks on the low end of the return mix.

The Magnificent 7 heavy ETFs…

Some of the benchmarks and industry ETFs we include have issuer concentration elements that leave them wagged by a few names. When looking across some of the bellwether industry and subsector ETFs in the rankings, it is good to keep in mind which narrow ETFs (vs. broad market benchmarks) get wagged more by the “Magnificent 7” including Consumer Discretionary (XLY) with Amazon and Tesla, Tech (XLK) with Microsoft, Apple, and NVIDIA, and Communications Services (XLC) with Alphabet and Meta.

We already addressed the table above in Mini Market Lookback: Self-Inflicted Vol (3-15-25). The tech story line had bumped up against valuation concerns, but the UST curve uncertainty and tariff/retaliation scenarios would present diverse threats to different business lines.

The same valuation challenge is true in the toxic political backdrop that has been hammering Tesla. Amazon as a mass retailer and a leading freight/logistics provider has also raised plenty of justifiable worries on the ability to sustain such valuations. If trade wars do in fact head in the wrong directions and notably with the EU and China, the retaliation strategies could turn to unsettling the tech bellwethers and challenging the tech services sector. That is when the market damage would be much more severe.

We already addressed the 1-week returns in the Mini Market Lookback: Self-Inflicted Vol (3-15-25). The 9-23 score includes 3 energy ETFs (XOP, XLE, AMLP) and 3 bond ETFs (TLT, GOVT, SHY) in the 9 positives with EM Equities (VWO) and Base Metals (DBB) accounting for 8 of the 9 in positive range. That leaves the single ETF of Utilities (XLU) among more traditional industry equity ETFs. The rest were in negative range.

We see Transport (XTN) in dead last over on the extreme right as airlines took a beating the past week on the major carriers downgrading their guidance. The soft trend in domestic demand was a factor even beyond some severe weather-related issues. Crashes, fires, and weather including the current severe Eastern/Southern US weather (myriad tornadoes) make for tough prospects ahead for 1Q25 airline earnings.

Corporate travel issues were cited by some as was reduced government travel on DOGE actions. One should expect more than a little “I hate America” adjustments to travel and vacation plans for Canadian snowbirds and disgusted Europeans. We doubt any carrier would break out the volume adjustments in those terms.

United gave some sense of scale in government business with the government around 2% of business but government consultants and “government adjacent” business another 2% to 3%. The short-term view is serious enough for some carriers to retire some older and less efficient aircraft sooner than expected. The comments indicated that 2Q25 would stabilize, but the blank check fare hikes and booming travel volumes seem to be an aging memory. Consumer health and sentiment is not what it was last year.

The 1-month score was similar to the 1-week returns at 9-23, but with the top quartile dominated by bond ETFs at 6 of the 8. Base Metals (DBB) was #1 and EM Equities (VWO) at #6 in the top quartile. The single other ETF with a positive return was at the top of the second quartile with the Pharma-heavy Health Care ETF (XLV). In other words, only one traditional domestic equity-based ETF was in positive range. The only bond ETF that did not make the top quartile was HY (HYG) with the spread widening impact.

In the bottom tier, we see 4 of 8 line items comprised of tech-heavy or Mag 7 influenced assets with Consumer Discretionary (XLY) at second to last with TSLA and AMZN in the mix. Both posted double-digit negative returns for the month as detailed in an earlier chart. Transport (XTN) was on the bottom for the 1-month and 1-week periods as discussed in the prior chart.

The 3-month scoresheet at 14-18 is still weighed to the negative side with all 7 bond ETFs positive and 7 of the 14 that were in the black. The negative side had bigger swings than the positive side with the #1 line at +3.26% while each line in the bottom quartile posted double-digit negative returns.

As with the 1-week returns, Transport (XTN) is on the bottom with Consumer Discretionary (XLY) second to last. Homebuilders (XHB) remain on the wrong side of the consumer story even with mortgage rates easing off a bit. Regional Banks (KRE) has a rough 3 months after the pop in the immediate aftermath of the election.

The worst news in the bottom quartile was Small Caps (RUT), Midcaps (MDY) and NASDAQ all sitting in the bottom tier with the S&P 500 in the red also but just across the line in the third quartile just above the bottom. The tech weakness is evident with NASDAQ in the bottom quartile at -10.7% just ahead of the Tech ETF (XLK) at -10.3%. The NASDAQ 100 Equal Weight ETF (QQEW) is at the bottom of the third quartile.

The trailing 1-year numbers are hard to whittle down quickly after back-to-back years of 20+% S&P 500 returns for the first time since the late 1990s. At a score of 28-4, the big winners are Utilities (XLU), Regional Banks (KRE), Communication Services (XLC), Financials (XLF), and the high dividend Midstream Energy ETF (AMLP). With two great years in the stock market in 2023-2024 (i.e., Biden years), Trump has mysteriously downplayed/dismissed the importance of stock market signals.

The negative return mix all make sense with Homebuilders (XHB), Transports (XTN) and Materials (XLB) all in the red. The E&P ETF (XOP) marches to its own beat with oil prices, but Homebuilders (XHB), Transports (XTN), and Materials (XLB) have high exposure to cyclical elements in their business profiles.

Builders have material exposure to the UST curve and the inflation realities (tariffs) and anxieties (consumer expectations) but also to supplier chain costs with lumber and aluminum in the crosshairs. Steel tariffs are a threat to multifamily and apartment construction, so those costs also flow into rents. That means home price pressure and apartment rents facing more cost recovery challenges.

Credit Spreads: Pain Arrives, Risk Repricing 3-13-25

Trade: Betty Ford Tariff Wing Open for Business 3-12-25

CPI Feb 2025: Relief Pitcher 3-12-25

JOLTS Jan 2025: Old News, New Risks in the Market 3-11-25

Credit Spreads Join the Party 3-10-25

Footnotes & Flashbacks: Credit Markets 3-10-25

Footnotes & Flashbacks: State of Yields 3-9-25

Footnotes & Flashbacks: Asset Returns 3-9-25

Mini Market Lookback: Tariffs Dominate, Geopolitics Agitate 3-8-25

Payrolls Feb 2025: Into the Weeds 3-7-25

Employment Feb 2025: Circling Pattern, Lower Altitude 3-7-25

Gut Checking Trump GDP Record 3-5-25