A Few Updates

There’s been a lot going on over the past month or two. So much that it seems like a part-time job keeping up with it all. I’m guessing you may feel the same way. Some are excited and energized by the variety of news while others are unsettled, and that’s putting it mildly. Much of the news isn’t directly related to the markets but the cumulative weight of it impacts investor mood and we’ve been seeing this play out in stock and bond prices.

As of last Thursday the S&P 500 index had fallen about 10% from its recent peak barely a month ago, a technical correction. The tech-heavy NASDAQ index fell nearly 14% in the same timeframe. That may feel like a lot because it happened so quickly, but we’ve experienced deeper short-term declines before during Covid and the Financial Crisis, for example.

Historically, according to my research partners at Bespoke Investment Group, the declines of the past few weeks are about average in terms of market corrections and we usually see at least one correction per year. However, these declines can be demoralizing when they happen so quickly on top of all the other news we’re digesting right now, so it was good to see a bounce of 2+% on Friday and stocks closing up yesterday.

Here's a brief summary of the news specifically impacting markets.

Tariff concerns, inflation, and recession –

Inflation has continued to stabilize across the economy. Inflation expectations are ticking higher, however, largely due to uncertainties around the Trump Administration’s tariff policies. Which tariffs stick, how high they’ll go, and how long they’ll last is anyone’s guess, but fears about them are showing up in boardrooms and around kitchen tables throughout the economy. The rest of the economy is doing reasonably well so how much this impacts corporate and personal spending will take some time to play out. That’s not really new information but it underpins much of the uncertainty in the markets right now.

Treasury Secretary Bessent has suggested in recent weeks that the economy might go through a “detox” and that there’s no guarantee we won’t see a recession. I think he’s probably right and others agree. Google searches for “recession” spiked recently for the first time since 2022 when we experienced two quarters of negative GDP growth (the back-of-the-envelope recession definition). The market thinks the Fed might reduce short-term rates by this summer, perhaps in response to an economic slowdown. We’ll hear the Fed’s opinion on all this tomorrow, so that will be interesting as usual.

Declining consumer sentiment –

All this is impacting sentiment. This isn’t new information either but it’s developing. The University of Michigan has been reporting a worsening consumer mood so far this year and, while this is skewed based on political affiliation, each of the last few months is worse than the prior month on inflation expectations, current conditions, and unemployment expectations. This is only consumer opinion however, but was updated last week and helped fuel the stock selloff.

Stock market valuations –

Stock prices rose following Election Day after a solid couple of years. Many suggested that valuations were high and primed for a pullback. Valuations can stay elevated for some time and usually don’t cause market declines alone, but high prices can provide cover when investors get freaked out.

Bearish investor sentiment –

The American Association of Individual Investors regularly publishes data on investor sentiment and, as you can likely guess, it’s in the dumps. Last week the AAII said that over 55% of investors surveyed expressed bearish sentiment for the third week in a row. This gets us near to Covid and Financial Crisis levels, although not near the lows of those periods. Investor sentiment is typically a contrarian indicator and these readings seemed overblown. That probably helped buyers come back over the past few days – again, it’s a contrarian indicator.

Government shutdown –

As last week progressed we were looking at an increasing likelihood of a government shutdown happening over the weekend. That potential crisis also fueled the stock selloff but was averted at the last minute and helped stocks to surge on Friday. Like it or not and appreciate the details or not, we won’t have to worry about shutdown risk until at least September, so that’s something to cross off the list of uncertainties.

Social security –

While news about the SSA doesn’t directly impact stock and bond prices, it adds a negative layer to sentiment. Government officials have referred to the program as a Ponzi Scheme and there have been numerous articles lately explaining how fragile the payment system technology is. And this morning there’s news (or maybe just rumor) about a “plan” within the SSA to disrupt payments for certain recipients. Whether all this “news” is true or not, rumor or not, it’s understandable that current benefit recipients are stressed about it.

What to do about all this?

Stock market volatility is likely to remain high for a while; there’s just too much uncertainty. But that’s to be expected and something we have to deal with as long-term investors. And we have to deal with the rapidity of change as well.

Most balanced portfolios are about flat for the year because while stocks have fallen a bit (down about 3% ytd), bonds have picked up some of the slack (up about 2% ytd). Because the various asset classes and sectors in your portfolio probably aren’t that far out of balance, there may not be opportunities for large-scale rebalancing. But I’m still watching daily and will act accordingly for portfolios I’m responsible for managing. Otherwise, keep contributing to your retirement accounts if you’re still in savings-mode because volatility can be your friend by helping you to buy at a discount.

Regarding Social Security, we’ll have to wait and see what, if anything, untoward happens with the system. But I doubt it (as I knock on wood…). That said, I can test your plan to see how benefit reductions of X% might impact you and we can come up with contingency plans.

I may miss next week’s post as I’ll be travelling that day. Otherwise, have a great week!

Have questions? Ask us. We can help.