This post will focus mostly on the current market volatility. Right now, investors are trying to make sense of a huge change to our trade policy.
Thursday and Friday’s trading sessions resulted in the 5th biggest 2-day decline for the S&P 500 on record, down 10.5%. Looking at the futures market, tomorrow looks like another big down day.
There has been extensive coverage on the immediate impact and potential outcomes. At this stage, I think it’s too early to determine how things will unfold, and what the short- and long-term effects will be.
My perspective (and hope) is that the tariffs are primarily a negotiating tool. Notably, just one day after announcing them, President Trump responded to a question about their negotiability by saying, “It depends. If somebody said that we’re going to give you something that’s so phenomenal, as long as they’re giving us something that’s good…the tariffs give us great power to negotiate.”(source)
- Discipline Funds – The author, Cullen Roche, is a brilliant economist. He’s anti-tariff, as most economists are, and point #2 from this blog explains why.
- Apricitias Economics – This was written right before the tariff announcement, but has a lot of great insight.
It’s times like these that remind us about the importance of diversification. We have to focus on what we can control: Our fees, our taxes, and – what’s highlighted most right now – our stock market risk.
The market has returned an average of 10% per year since 1928, despite an average intra-year decline of -16%. We’re at -17% right now. Unfortunately there is no upside without the occasional downside. It is the classic risk-reward tradeoff.
Things may get worse before they get better, but historically the biggest “up” days have clustered around the biggest “down” days.
Long-time clients know that I often refer to the 50% stock market decline that occurred in 2008-09. While I’m not predicting a repeat, Warren Buffett said it best: “Unless you can watch your stock holdings decline by 50% without becoming panic-stricken, you should not be in the stock market.” This is why most investors choose not to allocate 100% of their portfolios to stocks. And within individual stocks, the declines can be more extreme.
I completely understand the discomfort around the current market situation; It’s perfectly normal to feel uneasy. But it’s important to distinguish between discomfort and fear.
If you’re genuinely fearful, it’s probably a sign that your risk is too high. If that’s the case, please reach out.
What’s also an important tool is to rebalance your portfolio. That ensures that your portfolio remains inline with your risk profile.
The good news:
1. Bonds have acted as a ballast, performing well the past couple of days.
2. International stocks have outperformed US stocks since the start of the year.
3. The tariff situation is self imposed. It is not a systemic shock, like Covid or the real estate crisis of 2008-09. They can be removed or reduced at a moment’s notice.
For further reading, I recommend the following article and advice:
- An Investor’s To-Do List for Chaotic Markets – Written by Christine Benz of Morningstar.
- Advice from Jason Zweig of The Wall Street Journal: “If you overhaul your entire portfolio in response [to what’s going on now], you aren’t just acting as if you know what the market is going to do next, which is close to impossible. You’re also acting as if you know what Donald Trump is going to do next—which is impossible.”
Below I’ve summarized a few interesting data points about the recent stock market decline, as well as some interesting points from the past month.
- 📉 Large 2-Day Declines – “The S&P 500 fell 10.5% over the last 2 trading days which was the 5th biggest 2-day decline since 1950.
- What has happened in the past following the biggest 2-day declines?
- Stocks were substantially higher over the next 1, 3, 5 years every time.” – Charlie Bilello.
- 🐻 Previous Bear Markets & Corrections – This chart illustrates that the long-term trend is up, but with many 10%+ declines along the way.
- ⑦ Magnificent 7 vs. S&P 500 – The Magnificent 7 are down ~15% since the start of the year (down close to 25% since this chart was created).
- These stocks have done amazingly well the past couple of years. But now we’re seeing how those with diversified portfolios are feeling more insulated from these concentrated declines.
- 📊 A Bad Q1 Following an Election is Normal – From Ryan Detrick at Carson Research:
- “It is perfectly normal to see weakness in the first quarter of a post-election year. In fact, out of all 16 quarters in a four-year Presidential cycle we just left one of the very worst.”
- 📈 The Best 15 Years On Record! – From 2010 – 2024, the S&P 500 has performed better than any other 15-year period going back to 1970, returning 12.2%. A remarkable run.
- 📉 IPOs at a Low – Since 2000, about 100 companies per year have gone public. Recently, we’ve been way below that. The recent volatility is likely to push more companies to wait it out for calmer times.
Real Estate
- 💵 Housing Prices During A Recession – An interesting look at nationwide home prices during recessions. Aside from 2008-09, they’re remarkably stable and positive.
- 🏡 Days on Market – From The Wall Street Journal:
- “The state with the fastest-moving market in February was Rhode Island, where the median home sat on the market for 37.5 days. The slowest-moving market was Montana, at 108.25 days on market.”
- ↕️ Year over Year Home Price Growth / Decline – San Jose leads the nation in home-price appreciation over the last year.
- What’s also interesting is that “12 of the nation’s 50 largest metro area housing markets now have falling year-over-year home prices:
- -3.8% -> Austin, TX
-3.6% -> Tampa, FL
-2.0% -> San Antonio, TX
-1.7% -> New Orleans, LA
-1.6% -> Phoenix, AZ
-1.5% -> Jacksonville, FL
-1.4% -> Dallas, TX”
Apple
- 📱 Apple’s Growth & Valuation – I thought this was an interesting take on Apple from Scott Galloway.
- “The reality is that Apple is a mature smartphone company. The iPhone accounts for 51% of revenue and is one of the most valuable franchises ever created. Everything else is a side project. But growth has stalled: Hardware revenue dipped 1% last year, and while services grew 13%, they’re still only a fourth of total sales.
- Apple execs have responded to the lack of innovation by ramping up R&D spending to 8% of revenue. So far, the additional expenditure has produced a failed car project, a flopped VR headset, and incremental product updates.
- The big question: If Apple isn’t a growth stock anymore, does it deserve a growth valuation? It trades at 38x earnings, the same as Amazon, despite Amazon growing nearly 6x faster. Among the Magnificent Seven, Apple now looks most like Tesla — a low-growth company with an inflated, brand-driven valuation.
Quote of the Month
“What you learn from history is that the market goes down. It goes down a lot.
The math is simple. There’s been 93 years this century. The market has had 50 declines of 10% or more…about once every two years, the market falls 10%…
…Of those 50 declines, 15 have been 25% or more. That’s known as a bear market…So every six years you’re going to have a 25% decline. That’s all you need to know. You need to know the market’s going to go down sometimes.”
– Peter Lynch, 1993
As always, please reach out if you have any questions or would like to connect.