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Where does the phrase “March comes in like a lion, and goes out like a lamb” come from? Well, good for me that I now have my Microsoft Copilot riding shotgun, so I never have to wonder about these things again. I simply ask the question. This is what my Copilot tells me:

Here are a few theories about its origin:

What happens when you have 70-degree weather in Chicago in February? Is March really coming in like a lion at that point? Or, if March comes in like a lamb, is it more than likely to go out like a lion? Based on the common theme above about March’s variability, it may not be a stretch to think that a calm start to the month may not end well. After all, we have the ending of the Bank Term Funding Program (BTFP), a very important FOMC meeting with dot plots updated that may set the tone for the year, and of course, the Ides of March (that is for you Mr. Risk).

In trying to assess what may transpire in this new month, it’s always best to look at what we learned this week on my three basic levels: fundamentals, behaviorals and catalysts.

FUNDAMENTAL

It was a week full of quite a bit of data - home sales, durable goods, sentiment measures and, of course, my favorite - the ISM. You notice I didn’t say GDP because I still don’t know why people care so much about this. This week we got the second revision of the 4th quarter GDP. By the time we know what the final number is, we will be finished with the 1st quarter. Do equity investors look forward or backward? That’s what I thought. This is why, of all the data this week, I won’t focus on GDP. However, there was plenty to focus on.

The ISM data came out weaker than expected at 47.8 vs. 49.1 last month and 49.5 expected. Remember I told you that below 50 and rising is the best time to own stocks? What else did I say? Below 50 and falling is the worst time. The market got a head fake like this last summer and stocks sold off into the early Fall. This time, it seems that many investors are willing to think that the ratio of new orders to inventories is still forecasting better ISM ahead. However, it also fell. Still enough news to probably hold onto one’s stocks, but this was definitely news that was worse than expected.

ISM was not the only survey that came out recently. We also got the University of Michigan consumer sentiment survey, which fell below expectations. You can see it in white where it popped because of the football team winning a national championship but is falling now because its basketball team is the worst in the Big 10. Just kidding, it has nothing at all to do with that, but I just wanted to find a way to highlight that the Michigan basketball team is the worst in the Big 10.

The University of Michigan survey samples about 500 households across the US that are considered a good cross-section of households. Some suggest it is archaic or not a large enough sample. However, the data itself is well-followed. It tends to be a little more focused on inflation than jobs, while the Conference Board Consumer Sentiment, in purple here, tends to be more focused on jobs than inflation. Either way, you can see both are falling right now after being more optimistic the last few months. However, neither are as bad as the NFIB Small Business Optimism index, which is plugging along at the lowest readings since the Great Financial Crisis in 2008. All suggest to me that maybe the lagged effects of policy are starting to kick in.

I have been discussing my anecdotal evidence in the greater Chicago area of how the economy looks. It has tended to be pretty good, in fact, surprisingly good. I always feel that Chicago is a good barometer of US economic health, because it is not swayed by the extremes of Silicon Valley in SF, Hollywood in LA, Wall Street in NYC or the oil markets in Houston. As a hub for all things to be distributed, by air, rail and truck, Chicago touches quite a few industries. This week we got the Market News Chicago PMI, and it came falling down pretty substantially, suggesting that its dislocation with the PMI was more of an anomaly. Much like fashion, perhaps Chicago is just a little late to the party.

Other leading economic indicators that came out this week included durable goods and construction spending. These numbers held on much better than ISM last year, suggesting that maybe the ISM was too negative. While volatile, these both fell sharply this month and suggest the economy is still not out of the woods.

I have always referred to HOPE and that housing leads the economy into and out of recession. The cost and availability of money hit here first, and it flows through the rest of the economy for better or for worse. Most focus on the NAHB real estate index in purple, which is coming off the lows. However, if we look at some other measures - pending home sales, building permits, and Mortgage Bankers Association purchase index, all are falling this month. This is an important time for the housing sector, right at the height of the Spring selling season. Right now, it doesn’t look that positive.

Finally, I wanted to share with you something I wrote on LinkedIn this week, regarding expectations.

Chart of the Day - expectations

On the drive today I listened to the latest podcast by Bari Weiss. This one was called "Why the kids aren't alright" & it was a discussion with an author studying young children

The observation she makes is that her own grandmother, who grew up in abject poverty, during the Great Depression, with abuse, malnutrition, polio & more, was the happiest, most optimistic person she knew

Her own children's generation, who are growing up in the US & are the most privileged generation in the history of the world in terms of what is available & offered to them, have rates of anxiety, depression & worse that we have never seen before

As I listened to this, I wondered to myself if expectations were not playing a part in all of this. I had heard Mike Schmitz speak about how expectations were a reason people aren't more joyful i.e. things can never quite live up to our expectations, even if they turn out well

So naturally, as I think of expectations & how things can never quite turn out as well as we hope, I turn my attention to the mkts & the Nasdaq in particular. My students know one of my favorite charts is the earnings life cycle chart that Savita Subramanian from BAML included in her Quant Primer one time

It shows how the market gets focused on earnings growth & estimate revisions, but at some point, that only inevitably will disappoint as expectations get extrapolated too far. Then the stock (or mkt) is in the negative surprise/revision/estimate mode until it finally hits "Dogs"

That is, until it gets into the equivalence of anxiety & depression. I have shown before how markets go thru the five stages of grief that we all go thru when struggling with traumatic events in our lives

The first step as an investor in making sure this doesn't happen is to understand what the expectations are in the 1st place. Do we think those expectations can be achieved? How high is the bar? Is it getting unrealistic?

Conversely, if the bar is really low, it is much easier to show up in the positive surprise/positive earnings revision side of the ledger. This is the path to market happiness

Today's chart looks at the earnings growth expectations for the 100 biggest Nasdaq stocks. You can see for the coming 12 months, it is 16%, for T+1 it is 17.5%. It is still double digit in T+2

We can see the expectations for cash flow growth per share ranges from 18-24% over the next couple of years. Very good numbers. However, also very high expectations

We can see that in the P/E, where the Price to current earnings is 32x but if we are looking at T+2 numbers, it is only 21x. Yes, that multiple looks much more compelling, but that just implies a lot of growth is expected. Can it be achieved, not just for one name but for the top 100 names?

This is where we are now. Things are really good. However, we have to manage our expectations. That is the path to our joy in the markets

All in all, the news this week on the Fundamental side was less than positive. Maybe not enough to throw in the towel, but those green shoots that have gotten the market excited, and that were getting me very interested, seem to be waning. Certainly a yellow flag for me in this category.

BEHAVIORAL

It is always good to benchmark where we are from a behavioral standpoint. The CNN Fear and Greed, which uses several measures, helps to do that. Not surprising with stocks at all-time highs, Bitcoin surging, and credit spreads tight, the Fear and Greed Index is flashing extreme greed. On a short-term basis, this is something we should be cautious of.

The next chart comes courtesy of Bespoke. It speaks about the risks that happen in March. On the one hand, if you just pull up a graph of March seasonals, you can see that it is one of the better performing months of the year. However, we can all also point to recent March periods that were quite negative - March 2008, March 2020 and March 2023. Bespoke looked at the average change in March and parsed the data a bit more finely. We can see that all March periods have positive returns. In fact, when November-February are positive, March tends to be even better. However, if we look at the March returns after gains in January and February, and particularly after strong Februarys, we can that returns are decidedly negative. Beware the Ides of March after a strong start to the year it would seem.

Stepping back and looking at the trend in the SPX (and just about all markets really), we can see the trend is still solidly in tact. This week I have looked at Bollinger Bands which show me the 50 day moving average with 2.5 standard deviation bands around it. Interestingly, 2 standard deviation bands used to work well but with the prevalence of passive money leading to more momentum, I have found I needed to widen that a bit. While the trend is strong, we are starting to bump against those upper bands. In the lower panel, we can see we are also at a reading that suggests some pause, consolidation or correction as well.

As I mentioned, the trend looks pretty good in just about all markets with the exception of the MSCI Emerging Markets Index. It is not a negative reading, but right now it is directionless. I know this is becoming a popular place for investors to try and source a ‘catch-up’ trade, but I am not seeing it yet. You are better off buying India alone than this index. Not a laggard, but a much stronger trend. Clearly global investors are not feeling so good that money is flowing everywhere, at least not yet.

Another good measure of sentiment is the American Association of Individual Investors Index. I look at the difference between bulls and bears, and when this difference gets to be above 20 (60-40 bulls) or below -20 (60-40 bears), it is time to think like a contrarian. It does not need to happen quickly or permanently, but these levels are a pretty good indication of crowded trades. Right now, the bullish side of the trade looks crowded to me.

Finally, with all of the nice weather in Chicago, leading to March coming in like a lamb, I thought I would write about it on LinkedIn.

Chart of the Day - weather

Suffice to say that yesterday's weather was quite ... interesting. Temperatures were above 70 degrees Fahrenheit during the day. This time of year it is in the low 30s. However, that is not what is interesting

That warm front that was coming up from the Gulf of Mexico was confronted with a cold front coming down from Canada. That meant my drive home witnessed some of the most amazing thunderstorm activity you might ever see in what is supposed to be winter

As an aside, more than a decade ago I recall shoveling snow with the kids during a heavy thunderstorm. I witnessed 'thunder snow' for the first time in my life. I still think that would be a good name for a band

Today wasn't thunder snow but as any amateur meteorologist knows, when warm fronts and cold fronts collide, there is a risk of tornadoes. That is just what we got in the Chicago suburbs. While it is common to get tornadoes in the summer, it isn't so much this time of year

Since 1950, there have been 11 tornadoes in February in Chicago. 10 of those have come since 2017. The other was 2006. Do you think we might be seeing more weather volatility than we have in the past?

Speaking of weather volatility, we are going from a high of 74 degrees during the day to a low of 24 degrees tonight. 50 degree drop in the course of one day. Makes for interesting events

In his book "Options Volatility & Pricing", often referred to as the options trader's Bible, Shelly Natenberg draws a comparison between weather & implied volatility forecasting. Both data sets exhibit serial correlation but also mean reversion

The best guess for tomorrow's weather is typically something like today's weather. However, if today was unseasonably warm, we might expect a reversion back toward that 32 degree long-term mean. You just wouldn't expect it all in 24 hours

The same is true with implied volatility. Our best guess for tomorrow's implied vol would be like today. Over the medium term, we might expect it to revert back to longer term mean

The chart today is of the VIX Index, a measure of constant 30 day implied volatility of SPX options. I plot it over the last 10 years and have a regression drawn in with s.d. bands

We can see that at 13.43, implied volatility today is is well below the 18 ish mean level over the last 10 years. It fact it is more than 1 s.d. low. However, the best guess for tomorrow's volatility is not too different than today

Over the medium term, we might expect this unseasonably mild volatility to revert back to normal. This would mean a more volatile environment, or more volatile market, going forward

Let's hope that the mean reversion doesn't happen in 24 hours, the way the weather in Chicago did

The behavioral category is also leaning negative for me right now. Not red flags but certainly yellow flags that we have gone a bit too far. Surveys are too bullish, technicals extended, market measures extreme and seasonals negative. The trend still looks positive over the medium term, but the behavioral category right now gives me some pause.

CATALYST

What will get people to change their mind? Most of the bears have thrown in the towel. Bulls are sitting on nice profits. Why would they change positioning now? This is why I look for any catalysts. With earnings largely complete, and well-priced into the market, and geopolitics negative, but not getting worse for now, about the only catalyst I tend to look at is how economic data is coming in relative to expectations. You remember from a few weeks ago that 95% of the market thinks we will have no landing or a soft landing. Is anything happening that can change that?

The best place to look is the Citi economic surprise indices. These are put out by the Citi FX team for help in determining the direction of FX markets. As you see above, they have them for the USD, JPY, EUR and CNY. They even have an aggregate for the global data called GL. For the last couple of months, the data has been better than expected. This does not mean good in an absolute sense, it just means better than forecasters were thinking.

How to use this measure for other markets has always been an interesting exercise. I would be lying if I said I found the best way to do so. It does not have a strong link to absolute equity performance. However, I remember a discussion with Ed Yardeni where he said he thought it did a decent job of forecasting moves in the market relative to the 200-day moving average. The white line above is the SPX minus its 200-day moving average. The blue line is the Citi economic surprise for the US. It is not a horrible fit at all. Right now, it is suggesting that the market needs to move back toward it’s 200-day moving average, as it has gotten too stretched relative to the data. We can see this was the case for a lot of 2021, and it took time, but eventually did work. I wouldn’t trade this like a quant signal, but I would say that I think it is fair to say the market looks stretched on this basis.

I also compared the Citi surprise index relative to the monthly change in 10-year Treasury yields. Again, a pretty decent fit and this would seem to suggest that Treasury yields might need to come a little lower because the data do not support them at current levels. At least yields are moving directionally the same in this chart versus the equity chart. Also, these indices can stay apart for some time. I would say right now the move lower in yields is corroborating the relative weakness in the data we are seeing.

Finally, the last LinkedIn post I want to share. In this, I look at banks. Banks have been a topic of conversation for me quite a bit lately. In addition, I have seen a lot of news come across on banks. I thought I would aggregate it.

Chart of the Day - banks

Do banks even matter anymore? I get that this is the sense increasingly across a younger generation. My grandparents would go to the bank routinely once a week to deposit cash from a week of work

My parents at least bi-weekly to deposit a check. My generation - only if we needed something extra - FX for a trip abroad, maybe a loan (but even did that online), or something wasn't working right

My kids? It is all digital. As we saw last March too, there isn't any loyalty whatsoever. Deposits flow to the highest rate even if not a bank. Loans are coming from FinTech firms

Even corporates are eschewing banks for private credit markets. I just finished a multi-part private credit series for the CFA Society (you can find it on any app or on the CFA Chicago website). These pools of capital are aggressively taking market share that used to belong to banks

The thought is when Basel III Endgame comes out (no, it is not a Marvel movie), private credit will take even more share. The Basel Committee on Banking Supervision is a multi-national organization that members have agreed to adopt in their jurisdiction. The US will adopt these regulations

These reforms are primarily aimed at determining how much capital a bank should keep on its balance sheet. As opposed to customers’ deposits, this capital is money that shareholders have put into the bank and is an important measurement because it represents funds that are not owed to anyone and can, therefore, serve as a buffer against any sudden drawdowns or losses in the business

The reality is, banks still matter. The regulators are making it more difficult for them, but that is aimed at getting banks to go back to the safe and boring business of banking

The chart today is a smattering of headlines that came to my inbox from S&P CapIQ. This is just the last 2 weeks. Read thru these headlines & tell me that you are feeling warm & fuzzy about the economy

Banks are facing more enforcement actions by regulators, seeing higher credit loss provisions, worried about CRE exposure, seeing more overdrafts, experiencing more credit card delinquencies & charging off more loans. This does not sound like a booming economy

I threw in the venture capital funding drying up just for fun, even though it is not 'bank' related, though I wonder if we are still feeling some of the effects of Silicon Valley Bank being gone as we know it

I am sure many thinks banks don't matter anymore. However, creation of bank credit is how the money supply rises (or does not). Private credit is largely unlevered. Banks, even more restricted, are 10x levered

Banks do matter. Right now, banks are seeing a tough time of it

It is hard to feel too strongly about this category right now, because it is a bit softer connection on much of the data. However, I think it is fair to say that at the margins, on the catalyst/news flow basis, things are getting a little worse and not a little better. This is not the end of the world at all. However, for a market that is going to new all-time highs, it is potentially not the supportive news we would want to hear.

Is it enough to cause major swings? If we are to believe Bespoke and the Ides of March. However, for me, looking across all of this information, while March has come in like a lamb, I am inclined to think it may go out like a lion. Or, as my Copilot said, it should at least be variable and unpredictable. That tells me it is best to…

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