Warm and sunny weather appeared this week in Ohio. Unfortunately, the stormy stock market conditions appear to be sticking with us.
Since an all-time high on February 19th, a more uncertain mood is gripping the markets. Today, the S&P500 officially joined the Nasdaq in “correction” territory – defined as a pullback of more than 10%. Volatility is to be expected as part of long-term investing and the current drawdown remains shy of the average pullback experienced in any given year (-14%). Why then does the experience so often feel akin to climbing the stairs to ascend but hopping on the elevator when going down?
Suffering the most in recent weeks are generally the areas of the market trading at the highest valuations – including the group known as the Magnificent 7. Client portfolios are weathering the drawdown better due to our value emphasis; bonds and international stocks (despite tariffs) are actually positive year-to-date. Weren’t the Mag 7 companies again favored by the consensus entering the year? And wasn’t US supposed to remain “exceptional” compared to the rest of the global investment landscape? Our January update “Press Pause” encouraged investors to question crowded trades and consider if other more attractively valued areas of the market might be better locations for long-term investment.
In recent weeks, abrupt pivots around tariffs and foreign policy are causing economic uncertainty. Consumers, business leaders, and financial markets do not like heightened uncertainty. Planning becomes extremely difficult. At a time when the US economy appears to be shifting into a slower gear, the enforcement of tariffs on products from Mexico, Canada, and China appears to jeopardize the US economy’s soft-landing (avoid recession); hence the market jitters.
Our February commentary was titled, “If You Don’t Know, Don’t Shoot!” Therein we noted that policy changes often impact markets in ways that do not align with headlines. While Trump suggested over recent days that he is not concerned about the stock market, we know market performance was often viewed as a real-time approval rating during his first term. Interestingly, data by respected market research firm Strategas reminds us that surges in policy uncertainty tend to be followed by strong positive returns 3, 6, and 12 months later so long as a recession is avoided (chart below).
Above all and not different than election years, we discourage investors from shooting at shadows. It’s the combination of 1) monetary, 2) fiscal, 3) trade, and 4) regulatory – as a package – that will ultimately determine the future growth and inflation impulses of the economy, and by extension the markets. Taken together, pullbacks like the current one present long-term investors opportunity to invest at cheaper prices. And buckets of time investing means that those requiring cash from their accounts can source from assets like bonds which are weathering the storm vs. selling those that are being rained on.
Please call us with any questions or if we can be a resource during these volatile market moments – we’re here to help!
Our very best regards,
Steve Henderly, CFA
Nvest Wealth Strategies, Inc.
(614) 389-4646
