"The S&P 500 just had its worst quarter in years!"
Sounds scary, right? Maybe a little. But here’s what wasn’t highlighted.
Most sectors finished higher. Tech and discretionary stocks dragged down the averages.
In fact, during Q1, 305 stocks in the S&P 500 outperformed the index, and the average stock lost just 0.89%. In plain English, the big boys were feeling the pain. Most other stocks did just fine.
This really has been a tale of two markets—before 19 February and after. Before, the market had been acting as it had for several months. The Magnificent 7 and related companies were doing well, while the conservative stocks lagged behind. After 19 February, the script flipped. Now, it’s those Mag 7 and related firms that haven’t been doing well, while conservative sectors are having their moment.
The reason most give for this reversal has been related to tariffs. This may be accurate as far as it goes, but it misses an important point. The market in general, and in particular the Magnificent Seven stocks which had dominated it for many months, had been priced for perfection. So, in a very real sense, the market couldn't afford to have anything go wrong, at which point, everything seemed to go wrong. And fast.
An overlooked point, in my opinion, is that a great many of today’s investors, individual and professional, have never dealt with these kinds of market conditions, which adds to the overall fog of uncertainty and confusion. Reading about such events isn’t the same as living them…
This market environment has even tempted some serious investors to follow their worst impulses by going to cash, which provides absolutely no inflation protection. I strongly suggest that move is a truly bad idea. Please don’t believe in or fall for the four most dangerous words in investing: “This time is different.”
This current confusion is definitely different from any and all of the past real crises, as indeed all of them were completely different. All crises are different in some way.
But…they haven't been anywhere near different enough, whether in the past or recently, to derail America's leading companies' continued and relentless long-term growth in innovation and productivity. Check the long-term record, which includes many significant economic challenges.
For instance, consider this excerpt from Warren Buffett’s recent letter to his Berkshire Hathaway shareholders:
“Berkshire shareholders can rest assured that we will forever deploy a substantial majority of their money in stocks. … Paper money can see its value evaporate if fiscal folly prevails. … Fixed-coupon bonds provide no protection against inflation from runaway currency. Businesses, as well as individuals with desired talents, however, will usually find a way to cope with monetary instability, as long as their goods or services are desired by the country’s citizenry. So, too, with personal skills. Personally lacking such assets as athletic excellence, a wonderful voice, medical or legal skills or, for that matter, any special talents, I have had to rely on stocks throughout my life. In effect, I have depended on the success of American businesses and I will continue to do so.” Despite those other self-disclosed lacks, I’ve heard he’s done okay holding stocks through all types of markets…
Nonetheless, there’s never a shortage of market commentators on TV advising viewers to do things like “take some risk off the table” or “wait for a more attractive entry point.” All that sounds good, and it might even be appropriate for some. But if those commentators do consistently produce better returns using their advice, why aren’t they leading with the results of their programs and research? (File that under “things that make you go hmmm.”)
Regarding attempts to time the market, the Force is definitely not with you. While it might help if you get it right, for sure, it can prove very expensive if you get it wrong.
Timing the market means you need to get two trades right: one is selling before prices go down further, and the other is buying back in before prices go much higher. Get one of those wrong, and you’ll be behind…maybe by a lot.
The old market adage that “Time in the market beats timing the market” holds true in both bull markets and market downturns…
Helped by the always constant flow of negatively spun stories from the financial media, we’ve seen market sentiment become very, very poor in relatively short order. But the surveys are heavily influenced by recent market movements. They reflect only how people felt at one given moment in time. The Feb-Mar market drop likely played a considerable role in the low U-Michigan survey result. Sentiment surveys don’t always match what the people surveyed do because it’s hard to predict how feelings will affect actions.
Sentiment surveys won’t tell you what’s going to happen. They’re only one of many items used to get a sense of investors’ expectations. Remember that, over the next 3 – 30 months, stocks will move most on how reality shapes up compared to those expectations. The latest US surveys, along with the coverage of them, shows expectations are low and falling. This lowers the bar reality needs to clear to deliver the positive surprises that fuel bull markets.
Hard data tells a different story from consumer sentiment. The hard data has been a surer guide to the economy and likely will continue to be so for the foreseeable future.
For example, hiring at US companies accelerated last month, with private-sector payrolls increasing by 155,000 in March, according to ADP Research. The US economy added more private-sector jobs than expected in March, with payrolls growing by 228,000. Economists polled by Dow Jones expected an increase of only 140,000 jobs.
Households will continue to spend so long as employment remains strong and incomes are growing, even if they tell surveys they are worried about the future. Consider the parking lot index, an informal gauge of attitudes. Go to a Costco or Walmart and see how full those lots are. Folks may be talking one way, but they seem to be acting another.
Fears can be bullish in that they can affect sentiment and short-term returns in the heat of the moment. But they also help rebuild the wall of worry, which gives stocks more room to run, once people and markets work the immediate anxieties out of their system.
The consensus view today assumes that tariffs raise prices and trigger higher interest rates. But it would seem that this view may overstate the inflationary risk. Imports make up only a relatively small share of US consumer spending—only around 11 percent, according to the San Francisco Fed. If tariffs raise those prices, it doesn’t necessarily mean the entire Consumer Price Index will spike. Prices often fall elsewhere in response. That’s how our dynamic markets adjust.
More importantly, the Fed doesn’t respond to every price increase. If the inflation is caused by a one-time supply-side adjustment, like tariffs, the Fed may well “look through” any price increases. Fed chair Jerome Powell offered this comment: “While tariffs are highly likely to generate at least a temporary rise in inflation, it is also possible that the effects could be more persistent.” Boston Fed President Susan Collins noted that while some tariff-related inflation is “inevitable,” it likely wouldn’t merit a rate hike.
TO SUMMARIZE
While there are no facts or guarantees about future market performance, I suggest that this time probably won't be significantly different in the long run.
Today’s tariff commentaries have people spooked. We’re told they threaten to raise costs and depress demand, while upending global trade by changing the long-term status quo. (To be clear, economic conditions could deteriorate further in the near term, and stock prices could go lower.)
As long as people demand goods and services, companies will compete for that business. The publicly traded ones will continue to aggressively find ways to grow earnings, which are the most important driver of stock prices.
The American brand of capitalism that Mr. Buffett promotes isn’t just about how companies are able to come up with outstanding goods and services. More importantly, it’s about how they are unmatched at overcoming what often appear to be insurmountable challenges. That was probably the most important investor lesson to come out of the pandemic.
Discomfort is one thing; fear is something entirely different. And if you’re genuinely fearful, as in, one more lousy week and I’m going to sell, then clearly, you’re taking too much risk in your holdings. Because the truth is, this drop is relatively nothing.
As I write this, the S&P 500 is down 17% from its February high. That’s it. (A drop of 14% has been the average intra-year drop for the market for some time... no matter how that market year ended.) It can get a lot worse. It was quite interesting when I experienced a 22% selloff in just one day in October 1987…that’s 8400 Dow points in today’s market. The doom and gloomers were everywhere!! (By the way, the Dow still gained 2.3% that year…)
Because stocks anticipate, there will come a time when traders see a brighter future, and they won’t wait for good economic news to bid stock prices higher because stocks anticipate.
Everyone’s got their own investment strategy, time horizons, unique abilities and willingness to take on financial risk. As such, making adjustments to your portfolio right now may very well be a part of your plan. Maybe you’ll find some success. But if, for some reason, you decide to start trading in and out of this market, I’d advise you to very closely manage your expectations.
Despite the daily news flow, realize that the world today is freer, healthier, happier, cleaner, smarter, richer and more peaceful than it has ever been.
Optimism is the only reality!
Please contact me with any questions.
Michael J. Maehl, BFA™, CRC®
Senior Vice President
Retirement Income Specialist
509.944.1790
14 East Mission, Suite 4
Spokane, WA 99202
Email: m.maehl@opus111group.com
Website: www.opus111group.com
This commentary contains forward-looking statements. The economic forecasts set forth in this commentary may not develop as predicted. Investing involves risk including the potential loss of principal. Past performance is no guarantee of future results.
Michael Maehl uses the trade name/DBA, Opus 111 Group. All securities & advisory services are offered through Commonwealth Financial Network©, Member FINRA/SIPC, a Registered Investment Adviser. Fixed insurance products and services are separate from and not offered through Commonwealth Financial Network.