Greetings & Happy Spring.
Up until mid-February the financial markets were moving along a fairly solid path. First quarter corporate earnings held up well and optimism was high. Just two weeks ago our team discussed the fact that the US economy has never fallen into a recession with industrial production at an all-time high (recent levels).
Having just passed the 5-year anniversary of the March 2020 Covid ‘Market Crash’, we had planned to send a note revisiting some (financial) takeaways from that very scary time in world history.
Through mid-March the S&P500 had fallen 10%ish from the February all-time highs. In our opinion, these corrections are welcome/healthy and usually solid opportunities. In fact, the average annual market pullback is -14% so this one felt very normal, especially considering the market’s solid returns in 2023 & 2024. Recent investor sentiment has been extremely negative, and we had begun to add equity exposure.
Fast forward to President Trump’s ‘Liberation Day’ press conference last Wednesday. Wall Street was expecting clarity on tariffs & trade policy. Considering the rhetoric over the last many months ‘some’ tariffs were to be expected. What we received, instead, were plans to essentially halt global trade. Or at least that is how the financial markets and most economists have perceived it. In two days, the stock market fell over 10% on record volume as confusion and fear permeated the global financial markets. Panic has certainly set in.
Unlike most in the news who suddenly act like tariff experts, we do not profess to be said experts. The good news is we – nor you – need to be. We do know a thing or two about market panics, but we’ll discuss those later.
The bullish argument on President Trump’s ‘Plan’ is centered around (a) this is the first ‘shot’ in a long negotiation process, (b) the world needs American trade dollars, (c) many countries will ‘fall in line’, and (d) the Administration is not interested in dropping us into a ‘Recession by Tariff’.
The bearish argument is akin to (a) China will take over and fill in our trade gap, (b) the U.S. can never recover from this, (c) economically speaking, Armageddon is coming.
There have been many ‘the world is coming to an end’ scenarios/arguments over the last 95+ years and, so far, those have never happened. Most of you won’t be surprised to find out, this time around, we won’t be subscribing to that line of thinking either. That is not to say we don’t have major concerns. However, we are big believers in capitalism. And market history. And the fact that usually, when it comes to the financial markets, the worst-case scenario does not play out. Markets loathe uncertainty. Markets overshoot, both to the upside and downside. Emotions run high when uncertainty sets in. Many investors decide to sell now, and think later, believing “It’s Different This Time”. That certainly happened last week and could continue in the near-term.
Let’s review prior market panics:
- Since 1950, the S&P500 has fallen by 10%+ in 2 days only five times. The average return 6 months later was +15.8%, with the worst period being +.5%. The average return 12 months later was 32% (worst +18%)
- The American Association of Individual Investors weekly sentiment poll has been around for 37 years. This past week was the 3rd time more than 50% of investors have been bearish for 5 weeks in a row. The last two times marked the market bottom in 1990 and 2022.
- The Russell 2000 (U.S. Small Cap Index) is not as old as the S&P500. The prior four times it fell by over 4% on consecutive days, the average return 6 months later was +18% (worst -.6%). The average return 12 months out was +54% (worst +11%)
We are not pretending the above returns are guaranteed 6 or 12 months from now. We are not calling Friday’s market levels the ‘bottom’ of this panic cycle – this market could certainly go lower this week and beyond. We are however, trying to convey there is A LOT of fear out there. There is A LOT of ‘bad’ baked in right here, right now. Prices have dropped very quickly and accordingly – if history is any guide – this is a time to be opportunistic.
Does being fearful make sense? Sure. There is always plenty to be a bit scared of. But ‘scared’ is not an investment strategy, nor a plan. And not all emotions are actionable, especially in the financial markets.
In hindsight, most market corrections and bear markets look the same. They’re not. Major pullbacks have all happened for very different reasons. The key during each was to not get caught up in the madness of the moment and to try and maintain a long-term perspective.
It was beyond scary when three planes crashed into the World Trade Center and the Pentagon on 9/11/01. The market closed for a full week but selling out was not the answer. Markets recovered over time.
You didn’t need to be a banking expert when the entire global banking system lent against worthless mortgages in 2008/09. Those losses were temporary too. You didn’t need to be a pandemic expert in 2020 when COVID hit. Panic selling when the world shut down was a major mistake. It wasn’t necessary to be an interest rate expert in 2022 when bonds fell 20% b/c the Fed raised rates 10 times. The markets adjusted and we got through an S&P500 decline of 25%, while the Nasdaq fell over 35%. That’s how capitalism and markets work. Patience, however painful, paid off again.
It IS different this time. But only because this time the market is very panicked about tariffs and what may be coming. This is a bit scary – pullbacks always are. The next few months may be filled with more uncertainty and volatility. They may create a lot of doubt. But staying the course – tuning down the news/noise – and understanding market history & the opportunities panics provide is vital.
Four weeks ago, there was very little evidence of a potential recession. Despite a healthy economy, the financial news media mentions a recession every single day. The fact is the U.S. economy has been in a recession for 2 months in the last 15 years…during COVID.
Our economy is strong over time. That said, the world markets are VERY nervous. There is a famous quote about volatility: “The stock market is the only market where things go on sale and all the customers run out of the store”. For the record, we have no intention of doing that, ever.
Again, we plan to take advantage of this extreme volatility. We believe it is an opportunity. We believe you should too.
Thank you. Please do not ever hesitate to reach out with questions or concerns.
Sincerely,
Your LJI Team