Why This Is Starting To Look Like Real Risk-Off Here

Few.

I’ve been cautioning market pullbacks for some time now. The basis for this has always been market conditions and economic data. While the story has yet to play out, some data, especially credit conditions and delinquency rates, have been indicating this for a while.

But GDP growth and a tight labor market have been winning out. As long as these two factors signal that everything's fine, investors seem willing to overlook the potential trouble spots. It’s what’s driven the S&P 500, Nasdaq 100 and bitcoin higher, while traditionally defensive assets, including utilities and Treasuries, have struggled to gain momentum.

2025, however, might be a year of change.

Recession in the U.S. has still largely been nowhere in sight, but there was some evidence that growth was slowing. Even when Trump made tariffs, an inherently inflationary economic tactic, a large part of his campaign, investors were mostly undeterred at first. While tariffs appeared to be strictly a negotiating ploy at first, that might be changing. We’ve got 25% tariffs on steel & aluminum, a 10% tariff on all Chinese imports, a promise to add on another 10% in March, tariffs on Mexico and Canada to go into effect on March 4th and the ongoing threat to tariff EU goods. These things are starting to stack up and investors are no longer comfortable.

Economic sentiment and consumer confidence have both seen big drops over the past couple months and inflation expectations have shot significantly higher.

Now we’re starting to get the data that confirms the economy is slowing. Retail sales dropped sharply in January. Composite PMI is also down sharply for the second straight month. The services sector is in contraction for the first time in more than two years. Initial jobless claims just shot sharply higher, the DOGE layoffs likely being a big contributing factor. Just this week, Trump stated that a “large-scale reduction in force” is still coming for surviving government employees.

Clearly, the list of obstacles to overcome is getting longer.

We’re seeing investors finally reacting to their fear too. Equities have been trending more defensive for about two months, but it’s been the month of February where they’ve gone almost uniformly risk-off.

These are the sectors and themes that have outperformed the S&P 500, some by some significant margins, over the past month. Utilities, staples, healthcare, low vol, value, quality. They’re all there.