Over the weekend, at a March Madness watch party, I was asked about current market volatility. My explanation seemed well received and of value to them, so I wanted to share that commentary with you, our clients, and other friends. I’ve broken it down into questions I was asked during that time.
Why Is the Market Down? The single biggest reason the market is down is uncertainty. Essentially, the thinking goes like this: There is much-perceived uncertainty on numerous core aspects that impact the economy and people’s lives. Tariff and trade policy is totally unknown; major government institutions (USAID, Department of Education, Consumer Financial Protection Bureau) are being gutted or outright closed, and administration officials openly acknowledge the possibility of a recession. While the inflation rate of increase has slowed, “life’ has become very expensive, especially for those in lower income brackets. All that has led to a collapse in investor and consumer confidence, and markets are afraid all this uncertainty will cause a dramatic reduction in consumer and business spending, and that will cause an economic slowdown or, worse, a recession. Combine that with a lot of bullish optimism for continued corporate earnings increases, and you’ve got the recipe for a correction, which we saw in the S&P 500 as it dropped 10% from the February all-time highs.
Why Have Markets Bounced? There are a few reasons for the bounce. First, the White House has stopped issuing daily tariff threats and has been largely quiet on trade over the past week, allowing the market to catch its breath. Second, economic data has held up reasonably well, and we’re not yet seeing the type of collapse in activity people feared at the start of March. Economic data is still “ok.” Third, stocks became short-term oversold and were due for a technical bounce, and that’s what we’ve had.
Does this Bounce Mean the Correction is Over? No, probably not. The core reason for the pullback is uncertainty over future tariff and trade policy combined with the dramatic headlines of reshaping the federal government, and neither is over. Until trade and tariff policies are known and consistent, and we get a break from the dramatic overhaul of the Federal government, we should expect continued volatile markets.
Does That Mean the Bull Market Is Over? No, not at all. Despite the parade of media analysts (oft referred by me as the “Talking Heads”) warning of a further decline (many of whom were enthusiastically bullish to start the year), for several reasons it’s much too early right now to say the long-term bull market is over. First, trade and tariff threats may not prove to be net negatives for the economy. Most people think that to be the case, but it’s unclear because we don’t know what tariffs will be implemented and how long they will last. It remains possible this entire tariff drama will ultimately result in lower global tariffs on the U.S. Second, the economy is slowing, but resilient. Third, employment is relatively strong, and while political chaos will likely slow growth, it doesn’t mean a recession is necessarily coming. As long as employment is substantial, the chance of a recession will stay relatively low. Third, taking a longer view, economic positives are looming with tax-cut extensions and widespread de-regulation, which should boost growth later in the year.
How Should Investors Think About this Market? We have gone from a market priced to perfection when the S&P 500 was above 6,000 to a market that is not cheap but more appropriately priced for uncertainty. And as long as there is this uncertainty, we should expect volatile markets. Still, the outlook is not yet negative enough to warrant raising material amounts of cash or getting substantially defensive because 1) Markets are at a more reasonable valuation than they were six months ago and 2) There remains a viable option where many of these policies could be an economic positive in the medium and long term, and 3) Bailing on all equities now could result in missing ultimate upside. That said, as investors, we should all expect more volatility, acknowledge the possibility of a further decline, and be comfortable with our exposure and risk tolerance.
What Comes Next? We haven’t forgotten the general importance of asset allocation and diversification. For aggressive investors, owning shares in just a handful of U.S. technology stocks may have worked well as a strategy over the past few years, but this year has been a different story. We believe our current exposure to other sectors, geographies, and asset classes like bonds and alternatives benefits you, our investors, in navigating today’s market uncertainty. In fact, as these market downdrafts provide, we are making reallocations and putting cash reserves to work (gradually) in investment areas that offer opportunities. This approach is consistent with our oft-preached tenant that investment market performance, both up and down, most always portends the actual economic and earnings realities by six to twelve months.
I hope this review of current market dynamics is valuable to you. As always, please do not hesitate to reach out to me with any questions or concerns.
The views stated in this letter are not necessarily the opinion of Cetera Advisors LLC. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results.
A diversified portfolio and asset allocation does not assure a profit or protect against loss in a declining market.