Charts and Smarts^®

Diamonds and Pearls: Hopes of a tax refund–fueled consumption boost are running high. While elevated home prices and rising markets appear to have bolstered consumption for higher-income households, with the saving rate already having compressed meaningfully over the past year, consumption is likely to converge back to the continued cooling trend in nominal income growth.

When Doves Cry: It’s not just the growth outlook where investors appear to be somewhat offsides, but the inflation backdrop as well. Core goods are responsible for nearly the entirety of the inflation overshoot, with tariffs being the key culprit. As tariff effects peak and roll off while shelter disinflation and softening wage growth push down on supercore services, inflation is likely to resume progress back to the 2% target, suggesting the consensus and the Fed are overly hawkish on the rates outlook.

Purple Rain: Investors love to point to fundamentals for any sharp market movement. And while fundamentals tend to play a role in triggering sharp moves in asset prices, the technicals tend to take over as the driver of the move. The violent rotation that has gripped markets in late January and early February appears to be yet another episode of a sharp momentum unwind that has increasingly become a hallmark of markets over the past decade.

Sign o’ the Times: Where do flows go when the momentum trade unwinds? Well, into anti-momentum, of course! And right now the antithesis of a momentum factor dominated by growth, tech, and artificial intelligence is naturally high dividend paying value names with stable earnings. No wonder the momentum unwind has benefited both cyclical and defensive sectors alike.