Volatility Continues, Gold Rises, and Pensions Begin Buying

Welcome to this week's Forward Thesis, where we analyze the technological and market developments shaping our future. This week delivered unprecedented trade deficit figures, record-breaking gold prices, and an acquisition by Elon Musk's xAI – all amid growing fears of a deepening trade war and weakening economic outlook.

Let's dive into the key stories moving markets.

Markets Continue Volatility

The S&P 500 suffered its worst quarter since 2022, tumbling 2% on Friday alone as data showed plunging consumer sentiment and surging inflation expectations ahead of Trump's planned "Liberation Day" tariff rollout. The index has now shed approximately 5% since the start of the year, with the Magnificent Seven technology giants on pace for their worst first quarter in at least a decade.

The selloff accelerated after President Trump signed a proclamation implementing a 25% tariff on auto imports and threatened harsher punishment for the EU and Canada if they join forces against the U.S. This move directly impacts car manufacturers from Toyota to Mercedes-Benz and General Motors, representing a significant escalation of trade tensions that began earlier this month.

Most concerning for investors was Friday's University of Michigan survey showing consumer long-term inflation expectations jumping to a 32-year high, just as the PCE inflation reading – the Fed's preferred gauge – picked up while consumer spending barely rose.

This toxic combination has revived fears of potential stagflation, where economic growth stalls while inflation remains elevated.

The market reaction has been continued extreme volatility across all asset classes — it’s fun for a day trader, but it’s a nightmare for most.

The Nasdaq Composite has now experienced five separate daily declines of at least 2% this month – the most for any month since the bear market of June 2022. Meanwhile, Wall Street's "fear gauge" – the VIX volatility index – topped 21, and Treasury yields plunged as investors fled to safety.

Record Trade Deficit Signals Companies Bracing for Pain

Perhaps the most alarming economic data point this week came from trade figures showing a staggering two-month goods trade deficit of $301 billion – a number revealing massive front-running of tariffs by U.S. companies.

February's deficit alone reached $147.9 billion, exceeding expectations by $12.4 billion, while January's figure was revised upward to $153.3 billion. For perspective, these monthly figures exceed the worst deficit seen during the first Trump trade war ($120 billion) by a substantial margin.

The composition of these imports tells a troubling story. Industrial supplies have seen particularly dramatic increases, with imports of oil, LNG, gold, and steel spiking dramatically.

This pattern suggests producers are bracing for a prolonged trade conflict rather than anticipating a quick resolution.

What makes this situation even more remarkable is that these figures don't yet account for the auto tariffs announced this week, which target approximately $240 billion in annual imports. With roughly 46% of all cars sold in the U.S. being imported (including nearly 3 million from Mexico alone), further front-running appears inevitable.

The automotive sector faces acute challenges. Approximately 7.4 million cars were imported into the U.S. in 2024, and according to industry analyses, there isn't a single major brand that produces vehicles with 100% U.S. content. If these tariffs remain in place for an extended period, industry experts warn bankruptcies could follow.

Gold Soars Above $3,100 as Investors Seek Safe Havens

Gold hit an all-time high above $3,100 per ounce this week, extending its remarkable ascent amid growing economic uncertainty. Physical gold buying has surged to levels previously seen only during depressions, with U.S. gold inventories up 100% year-to-date.

Swiss gold exports to the U.S. have reached unprecedented levels – exceeding even the March 2020 pandemic panic by more than double.

This flight to safety reflects deep concern about both inflation and economic growth prospects as the trade war escalates.

Several major banks have raised their price targets for the precious metal, with Goldman Sachs Group this week increasing its year-end forecast to $3,300 per ounce. Investors have plowed more than $12 billion into major gold exchange-traded funds in the past two months, the most since 2020.

Schassler predicts bullion will hit as much as $5,000 in the next 18 to 24 months – a forecast that would have seemed outlandish just weeks ago but now appears increasingly plausible as the trade war expands.

Pension Fund Rebalancing Provides Temporary Support

Against this challenging backdrop, stocks found some temporary technical support from massive quarter-end pension fund rebalancing. UBS estimates pension funds purchased approximately $85 billion of U.S. equities – the second-largest rebalancing on record and the most substantial since the 2020 pandemic. Additionally, target date funds acquired another $20 billion in stocks.

This institutional buying helped explain the market's resilience despite deteriorating fundamentals earlier in the week. However, with the quarter ending this weekend, this technical tailwind will dissipate, potentially exposing underlying weaknesses.

The timing is particularly notable given the sharp divergence between institutional and retail positioning. While pension funds mechanically bought due to quarterly rebalancing requirements, hedge funds have been selling global stocks at their fastest pace in four years.

Meanwhile, retail investors continue to buy the dip aggressively, creating a real divergence between Wall Street and Main Street sentiment.

Tech IPO Market Stalls as CoreWeave Disappoints

The IPO market suffered another setback this week when CoreWeave – one of the most anticipated offerings of the year – delivered a lackluster debut. The Nvidia-backed cloud computing provider raised $1.5 billion, 40% below its initial target, and ended with a diluted valuation of $23 billion – roughly in line with its last funding round but far short of the $35+ billion target.

When the dust settled Friday, CoreWeave shares closed at $40, flat from their IPO price. The company narrowly avoided becoming the fifth out of the year's ten largest U.S. IPOs to leave investors in the red. The only other $1 billion-plus listings this year – Venture Global and SailPoint – are down 60% and 15% from their IPO prices, respectively.

The disappointing performance casts a shadow over plans to take other long-awaited companies public.

Despite the challenging environment, Klarna Group, StubHub Holdings, EToro Group, and Ategrity Specialty Insurance have all filed listing plans in recent weeks, suggesting some issuers remain determined to test the markets.

Musk's xAI Acquires X in $45 Billion Deal

In a stunning Friday announcement, Elon Musk revealed that his artificial intelligence startup xAI has acquired his social media platform X (formerly Twitter) in an all-stock transaction valued at $45 billion, including debt.

The deal includes $12 billion of debt, which raises the overall valuation for X to $45 billion – remarkably, $1 billion more than Musk paid for the platform in 2022.

The strategic merger integrates "data, models, compute, distribution and talent" across both companies, positioning the combined entity as a formidable competitor in the AI space. Notably, the $80 billion valuation for xAI places it closer to rival OpenAI, which is currently valued at $157 billion and reportedly finalizing a SoftBank-led funding round that could boost its valuation to $300 billion.

The analyst highlighted that this move gives xAI the strategic capability to manage or even limit data access to competing firms.

The acquisition comes as X experiences its first year of ad revenue growth since Musk's takeover. According to research firm Emarketer, X is forecasted to achieve $1.31 billion in U.S. ad sales in 2025, marking an increase of 17.5%, with global ad revenues projected to reach $2.26 billion.

Upcoming Events of Note

As we enter a new quarter, several critical developments will shape market direction:

1. April 2 "Liberation Day": Trump's deadline for implementing broader reciprocal tariffs arrives Tuesday, with heightened uncertainty about potential exemptions and carve-outs. The president has described these upcoming levies as "very lenient," though markets remain skeptical.

2. March Jobs Report (April 4): This critical economic indicator will provide insight into whether the labor market remains resilient amid mounting trade uncertainty. After Friday's weak consumer spending data, the employment picture takes on added significance.

3. Q1 Earnings Season: Beginning in mid-April, first-quarter results will reveal how companies are navigating trade disruptions and planning for potential protracted tariff regimes. Analyst expectations have been lowered, with economists dialing back growth forecasts and raising inflation projections.

4. Fed Response: The central bank faces a challenging balancing act as tariffs complicate the inflation outlook. Boston Fed President Susan Collins said it's "inevitable" inflation will be boosted by tariffs in the near term, while St. Louis Fed President Alberto Musalem warned policymakers shouldn't assume their price impact will pass quickly.

The combination of escalating trade tensions, massive front-running of imports, record-breaking gold prices, and deteriorating sentiment creates an exceptionally challenging environment for investors. With Friday's data showing inflation expectations jumping to a 32-year high just as a key gauge of price pressures picked up alongside weaker consumer spending, the stagflation narrative will be difficult to dispel.

UBS Global Wealth Management's David Lefkowitz lowered his S&P 500 year-end target to 6,400 from 6,600 to account for recent economic turbulence but still sees stocks recovering as 2025 progresses.

Whether that optimism proves justified will depend largely on how markets digest Tuesday's tariff announcements and whether economic data shows resilience or deterioration in the weeks ahead.

With investor sentiment at extreme bearish levels (historically a contrarian indicator) but policy uncertainty at extraordinary heights, navigating this environment requires exceptional care.

But that's why you read The Forward Thesis.

Until next time.