This title comes from German, and literally means “storm and stress or turmoil." Seemed appropriate for now.
For reference, just over three months ago, the Dow set its most recent all-time high. Just about six weeks ago, both the S&P500 and NASDAQ set their latest all-time highs.
In the interim, the world-is-ending crowd has come charging through the thick fog of uncertainty, proclaiming that all the policy changes and tariff implementations will (finally) lead us to their long-anticipated recession. The resulting confusion helped create a rather rapid selloff that, as of this writing and from those highs, has the Dow off 7.9%, the S&P lower by 8.2%, and the NASDAQ falling by 19.9%.
In my opinion, this confusion has helped bring about the following results. I offer the following without comment. And, for the record, count me as being a free-market capitalist and not a political party person.
The latest University of Michigan consumer sentiment survey for March showed confidence moving to its lowest level since November 2022. The survey noted that while sentiment declined across all demographics, the drop was overwhelmingly driven by Democrats, whose
economic expectations have fallen to an all-time low. Their outlook is now worse than during the financial crisis, the depths of the pandemic, or even Mr. Trump’s first term. Just a year ago, the party-related results were almost totally opposite from now.
By contrast, Republican expectations remained high, maintaining a wide gap between the two parties—the largest ever recorded. Independent voters, usually a middle ground, now sit closer to Democrats than Republicans, indicating a broad shift in sentiment among those outside the GOP base.
Add to this yet another “the end is near” survey result from our friends at the American Association of Individual Investors. According to their latest survey, nearly 60% of their member investors remain bearish on the six-month outlook for stock prices for a record third consecutive week. Pessimism edged higher in the latest week, down just a touch from a multiyear high reached just two weeks ago.
The association said that never before has the bearish opinion result been above 57% for three consecutive weeks. The historical average for bearish views is just 31%.
The AAII group’s optimism has also been little changed for three weeks, amounting to only 19.1% this week. That’s far below the bullish historical average of 37.5% and is the lowest bullish reading since September 2022. This is the first time ever that optimism has been below 20% for three straight weeks.
So, these represent the current consensus thinking of the average investor. In my experience, most respondents to similar surveys are reacting to the latest news reports, as opposed to a more in-depth analysis. Further, when these groups are bearish, it’s often proven rewarding to take the opposite point of view with your investments. You can, as they say, look it up…
On Friday, our new Secretary of the Treasury, Scott Bessent, acknowledged there are some signs of weakness in the US economy. He said, “Could we be seeing that this economy that we inherited is starting to roll a bit? Sure. And look, there’s going to be a natural adjustment as we move away from public spending to private spending. The market and the economy have just become addicted to this government spending, and there’s going to be a detox period”. Well said.
As a former very successful investor, he understands how the markets work, which, I believe, puts us in a much better position to benefit from those decisions he makes to support them.
Secretary Bessent added that the administration is attentive to market moves. He predicted that both the real economy and markets would prosper over time. The administration is more focused on the long-term health of the economy and markets than on short-term gyrations.
He also said, “The reason stocks are a safe and great investment is because you’re looking over the long term. If you start looking at micro horizons, stocks become very risky. So, we’re focused on the medium and long term. I can tell you that if we put proper policies in place, it’s going to lay the groundwork for both real income and job gains along with continued asset gains.”
I believe the policy changes that are underway will be positive for our long-term growth. Keeping tax rates low, cutting regulations, and vastly reducing the size of the government bureaucratic bloat will boost the underlying growth rate of our economy in the future.
Unfortunately, we also know the US economy has been artificially boosted in recent years by intentionally massive deficits and a very loose monetary policy with, effectively, no accountability. Reducing that artificial stimulus and establishing accountability is like going cold turkey from pain meds.
Tim Hayes, chief global investment strategist at Ned Davis Research, wrote, “The overall takeaway from the reports and composite so far is that the market fears are out of proportion with market performance. If the economic and market worries are justified, much more market weakness and contraction evidence may lie ahead. But the weight of the evidence says something different.”
He added: “We’re more likely to see widespread recognition that the market fears have not been justified, in which case stocks will start recovering from this extreme pessimism.”
If tariffs, as the media and politicians would have it, were actually driving the selloff, we’d see broad market declines, not just a selective retreat from high-risk, high-valuation stocks. This isn’t about tariffs—it’s instead because the marketplace has suffered one of its periodic bouts of risk on, risk off.
Volatility can trigger uncertainty, and uncertainty breeds fear. When markets swing dramatically, many people react as if they’re in danger as our brains are wired to avoid risk and loss. This often causes them to make quick, emotional, rather than rational, decisions. Additionally, the media always plays up short-term market moves, where every dip can be made to feel like a crisis and reinforcing the fear that investors should “do something – right now” even when staying the course is most often their best strategy.
All we really know, according to history, is that while the stock market usually goes up and the long game remains undefeated, you can get smoked in the short term. It’s why you should always keep your stock market seat belts fastened and have a cash reserve along with your “regular” investments.
Corrections, recessions and bear markets
There’ve lately been a lot of comments in all this uncertainty about corrections, recessions and bear markets. At this point, all those do is add to the current investor confusion.
Corrections are usually short and sharp. They start for any or no reason, and fear reigns. Often, they come with big scary stories and forecasts of far worse ahead. (Sound familiar?) Instead of calling it a buying opportunity, headlines focus on ways for you to cut volatility and limit your downside risk.
A recession is defined as a period of economic decline characterized by a slowdown in business activity, increased unemployment, and reduced consumer spending. Recessions are a fact of investing life. As highly unpleasant as that may be to accept, they’re inevitable occurrences in any dynamic economy.
Here are indicators of a recession. How many do you see happening now?
• Unemployment: A significant increase in unemployment
• GDP: A decline in real GDP (output)
• Spending: A decline in household spending and business investment
• Bankruptcy: A higher number of households and businesses unable to pay back loans
• Business closures: An increase in the number of businesses that close down
Since World War II, recessions have become less painful, lasting an average of 11.1 months.
Finally, bear markets usually start gradually, with gentle declines that lull people into believing they’re a buying opportunity. In any case, the vast majority of the time, the decline is normally long, gradual and grinding. The panic-inducing drops usually come at the end, when it’s clear that a bear market is well underway and few can tell if any bottom is anywhere close. And usually about the time the new bull market is getting its legs under it.
So far, this particular downturn looks very correction-like. It isn’t a slow, rolling decline—it’s been a sharp shock off a high, powered by many scary stories
No one knows how far things will go. Just know that no one yells out an all-clear signal to alert you when it’s time to get back in. Markets don’t bottom on good news…just news that’s less bad.
In closing, please consider the following data as some good reasons to stay with your diversified portfolio of high-quality holdings.
When considering the size of the market drop to date, compare those to the bigger picture, longer-term data as a really good reason to stand fast.
According to analyst Tom Lee, since 2010, the S&P has provided a 12.2% return. Also, since 2010, we’ve had:
• Fourteen 5-10% pullbacks
• Six 10-20% corrections
• And two bear markets where stocks fell more than 20%
You may recall that this period includes all the bad market news and reactions during that time…
In 2023, the Dow rose 12.9% and 13.7% in ’24. Since it’s inception in 1886, the index has provided a return of 8.7%.
The S&P, in 2023, provided a 26% return and 25% in ’24. Since that index began in 1957, it has provided its investors with an 11% result.
Also, since 1957, on average, the value of the S&P500 index has more than tripled every 10 years, including dividend reinvestment.
Whether this year will be better than, same as, or worse than the longer-term average, I have no idea. What I am comfortable saying is that long-term investors who aren’t distracted from reaching their long-term goals will likely prevail.
Please get in touch with me with any questions or comments.
Michael J. Maehl
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.