The month of March gave us something we haven’t seen since 2022 – a 10% pullback in the S&P 500. And while that can feel pretty brutal while it is happening, we’ve seen it recover about half of that drop already. The question now is: Can the market return to new highs, or will it fail and retest the lows? At this point, it could go either way.
However, this activity has been largely in line with the seasonality of a first year of the US Presidential cycle. You can view the Seasonality chart here. Looking at this historical seasonality, a market pullback in February typically leads to a market bottom sometime in March. And then a market rally from April into May – where the next market peak often occurs.
One interesting shift in market strength has been the broad weakness in the technology stocks that gave us the great rally over the past couple of years. Recently, more “boring” stocks like Financials, Insurance, and Consumer goods are doing better. This shift could also be seen as a change to a “Value over Growth” environment. Not everything is bad, it is just that what worked over the past few years isn’t working as well and now has shifted to other parts of the market.
While news of tariffs are the main headlines we’re hearing about right now, much more important to us is what the Federal Reserve is doing. In their last meeting in mid-March, they voted to hold interest rates as-is for now. But they noted that unemployment is still rising and inflation isn’t where they want it to be just yet.
The Fed also suggested that rates would likely be cut two more times in 2025, so rates are expected to come down approximately 0.50% by year-end. Not the best news for savings accounts or Money Market funds. But that could lead to a renewed interest in other assets like Bonds, which have been largely a waste of time over the past several years.
Looking at the Relative Rotation Graph (RRG) – or as I like to say, “watching the ducks go around the pond” – most major indexes (S&P 500, NASDAQ, Dow, Small Cap, etc.) are moving up and to the right. As they left the Red (Lagging) box over a week ago, this suggests that strength is building in all of them. As they continue their rotation into the Green (Leading) box, I’d expect to see most of these indexes continue to move upward.
Relative Rotation Graph (RRG) chart of several major market indexes (Source: Optuma)
Our Shadowridge Long-Term Trend indicator went negative on March 4th and has recently made a few attempts to go positive, but that hasn’t lasted for more than a day or two. And while the reading is technically negative, the movement has really been more “sideways,” suggesting that that market hasn’t decided yet where it wants to go next.
Our Mid-Term Cycle indicator is back to positive as of March 19th but showed a shift in underlying strength as early as March 14th. The addition we made to this indicator/data that seeks out shifts at extreme points has been working well lately, so we’ll be watching for the next shifts (both up and down) as we move into April.
As of Wednesday night (March 26th, 2025), our Shadowridge Dashboard showed Positive to Negative market sectors as 4 to 7 with defensive areas of the market holding leadership and relative strength compared to the rest of the market. Sectors like Financials, Industrials, and Consumer Staples continue to lead the way. But if a shift to Technology and Communications starts to appear (and it looks like it could happen soon) that, to me, would suggest the market is ready for the next leg up.
Right now, there are 7 RGB Bond Indexes trending positive, above their 50-day Moving Average. The weakest appear to be Muni bonds, both investment grade and junk on the Interest Rate side. And on the Economic side, the one sector in “red” is Floating Rate, but that is expected to turn back to “green” as month-end dividends are paid out.
RGB Economic and Interest Rate Sensitive Bond sectors (Source: ShadowridgeData.com)
Many of the large Bond Indexes (Aggregate Index and US Treasuries) have declined in March, along with the rest of the market. I’m still not convinced that it is time to hold these “diversifiers” yet, as their correlation to the stock market is still too high. If this relationship begins to deteriorate, these could be great risk-off assets to own. But for now, we’re still not seeing that happen.
Bottom Line: The stock market might have found a bottom in March, but it’s possible it could get retested before pushing up towards new highs as seasonality would suggest. We’ve used this pullback to add to our longer-term holdings and have shifted some core holdings from growth to value (as the sector rotation suggested). Our bond holdings are still primarily in the Floating Rate and High Yield areas, but we are watching for reasons to shift into the more traditional Aggregate and/or Treasury indexes when they arise.
Stay safe out there!
1 The Standard and Poor’s 500 is an unmanaged, capitalization-weighted benchmark that tracks broad-based changes in the U.S. stock market. This index of 500 common stocks is comprised of 400 industrial, 20 transportation, 40 utility, and 40 financial companies representing major U.S. industry sectors. The index is calculated on a total return basis with dividends reinvested and is not available for direct investment.
2 Charts are for informational purposes only and are not intended to be a projection or prediction of current or future performance of any specific product. All financial products have an element of risk and may experience loss. Past performance is not indicative of future results.