We’ve all seen how manic the stock market has been lately. A record high in mid-February followed by a slide and abrupt fall into what seemed like oblivion, then a rapid recovery. If you only looked at your investment performance selectively and somehow managed to avoid all news while on an African safari or something, you might wonder what all the hubbub was about.

We’re almost done with the first half of the year and have 2.5% year-to-date from the S&P 500 and 2% from bonds to show for it. That obviously masks a ton of volatility. By its April low the S&P 500 dropped 15% year-to-date before rallying 20% in less than two months – a huge positive reversal, but it could have been much worse.

Still, you might be wondering who was buying while “everybody” (according to the media at the time) seemed to be selling. It turns out that retail investors did much of the buying while institutional investors headed in the opposite direction.

During April the share of daily market transactions by individual retail investors shot to the highest point on record. This is interesting because market data shows that individuals sold stocks aggressively following the big tariff announcements on April 2^nd only to start slowly buying back throughout the rest of the month as concerns abated. I haven’t seen the numbers but this trend mostly continued in May given recent market performance.

But are retail investors getting ahead of themselves and might head for the hills at the first sign of trouble? Stock prices are high again and that means extra short-term downside risk, so while you should always have a long-term perspective, it’s especially true now. I’ve mentioned in other posts how retail investors are considered the “dumb money” by the institutional folks who humbly style themselves as the “smart money”. The two groups are marching to different tunes lately and only time will tell who’s right.

I think one point from the information below is that selling indiscriminately during a market panic and then spending the next few weeks buying back into stocks doesn’t make much sense. Investors would have been better off by doing nothing since markets recovered so quickly, but that’s Monday Morning Quarterbacking. It’s tough out there and sometimes you have to cry uncle. There should be no shame in that.

Anyway, I wanted to share some information that came in yesterday on this topic from JPMorgan and a few snippets from S&P Global. Nothing is actionable here, just some context on what’s been going on in the markets lately.

From S&P Global…

In the first week of April, as President Donald Trump announced higher tariffs on nearly all global trading partners, retail investors sold off more than a net $7.48 billion, and then bought a net $7.32 billion over the following three weeks as they tried to time the market's bottom, according to the latest S&P Global Market Intelligence data. […]

The initial selling, followed by three weeks of buying, tracked the broad movement of the market during April.

From JPMorgan…

The S&P 500 has erased its year-to-date losses, overcoming a nearly 20% drawdown. With it, valuations have vaulted to 21x forward earnings, well above the 30-year average valuation of 17x. Although April may have been the high-water mark for volatility in terms of intensity and magnitude, risks have been mitigated but not eliminated. Earnings growth expectations still sit at an unrealistic 9% y/y for 2025, despite an anticipated slowdown in growth and headwinds from higher tariffs. The 10-year Treasury yield seems to be hugging 4.5% with risks skewed to the upside, while the Fed remains in wait-and-see mode. This is still an environment marked by pervasive uncertainty. So what is driving the rally?

Perhaps the question is not what, but rather who, is driving the rally:

Retail investors – Since the announcement of reciprocal tariffs, retail investors have been virtually undeterred. Retail flows tracked by our investment bank, which include purchase of single stocks within the Russell 3000, options and a comprehensive selection of ETFs, revealed that retail investors bought net $36 billion in March and $40 billion in April – back-to-back records for largest monthly inflows. The share of retail participation in the market notched an all-time high on April 29, comprising 36% of order flow. For comparison, prior to the pandemic, the retail share of the market rarely breached 10%. Buying activity somewhat cooled in May but was still positive. Consumers have long engaged in retail therapy; retail investors appear to be buying the dip with a similar mentality.

Corporate buybacks – Companies have also been buying back stock at a near-record pace; April was the third-highest month for buybacks in well over a decade. As highlighted in the chart below, this is the strongest year-to-date start for buybacks since at least 2013. Not only does this signal that companies are confident in their long-term prospects at these price levels, but also could reflect the confluence of strong cash balances and uncertainty. Companies may have money to spend but are wary of making capital investments given policy uncertainty […]

Retail and corporate investors alike may be supporting the recent rally in markets, but high valuations have reasserted themselves and risks still linger. Therefore, investors should be well diversified and prepared for pockets of volatility throughout the rest of the year. 

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Good morning. I hope you and yours had an enjoyable Memorial Day. I took the day off so this quick note is my post for the week. I'll be back on schedule next Tuesday.

- Brandon

As you’ve likely heard, the Trump Administration announced early Monday that it reached an agreement with China where both sides would decrease tariffs on each other during a 90-day pause while trade negotiations continued. Markets around the world cheered this announcement and major indexes here at home opened yesterday up around 3+% and held that through the close. The NASDAQ rose over 4%.

Here are some of the tariff details as reported yesterday by the Wall Street Journal:

• We’re lowering our “reciprocal” tariff on Chinese goods to 10% from 125%.
• We’re still planning to tack on an additional 20% fentanyl-related tariff on Chinese goods.
• China is reducing it’s retaliatory tariff on our goods to 10% from 125%.
• These tariff reductions are supposed to last for 90 days while talks continue.
• Combined, it’s reported that our average tariff on Chinese imports would be nearly 40% (existing and new tariffs) if all this actually sticks.

Going into the weekend markets anticipated a tariff reduction to maybe 50% or 80% from 145%, so the outcome of the Trump Administration’s talks with the Chinese delegation in Geneva over the weekend was better than expected. However, these new tariffs will still have a meaningful impact on pricing and profitability for a wide variety of imports and the businesses and consumers who rely on them (so pretty much everybody).

Who knows what ultimately comes of this agreement over the next 90 days. Investors may be assuming that cooler heads are prevailing and the ultimate tariff amounts might be substantially less than 30%. Whatever the final number, the surge of uncertainty in recent weeks is reverberating through the economy. Numerous anecdotes tell of business plans interrupted, paused and cancelled orders, and so forth, even business closures. The busy Port of Los Angeles expects a 25% reduction in imports during May following reductions in April. This is expected to create shortages for certain goods this summer, but how this plays out across the country and in macroeconomic numbers is anyone’s guess.

Along these lines, the CEO of Flexport, a logistics management company, has an interesting perspective on these supply chain issues and has been making the media rounds talking about the real-world impact on importers. Here's a link to the company’s X (Twitter) feed where you can watch some of the CEO’s interviews on CNBC, the PBS Newshour, etc.

https://x.com/flexport/status/1920883274206826847

One of many takeaways for individual investors from this turn of events is the importance of staying the course amid uncertainty and fear. We’ve now had yet another reminder of how quickly markets can fall before climbing rapidly and in surprising fashion. We’ll likely see more volatility in the near-term, but it’s a cost all long-term investors must bear. It’s unpleasant but I think it’s worth it over the long run.

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This week let’s look at a couple of important issues getting some press lately: rising student loan delinquencies and the decreasing affordability of home ownership. Both aren’t necessarily new problems but both keep getting worse.

Student loan repayment was mostly paused early in the pandemic and became a political football in the years since. Understandably, millions of borrowers stopped paying on their loans back then and got used to it. This forbearance ended over a year ago with a one-year “onramp” allowing borrowers time to restart making payments without having late payments hit their credit report.

That onramp ended last October and now we see reports for the first quarter of 2025 showing that about a quarter of borrowers who were required to make payments were behind during Q1. This means, among other things, that these borrowers are seeing big declines in their credit scores.

According to a report by the NY Fed, most newly delinquent borrowers already had poor credit, with scores lower than 620. But a big chunk of borrowers, about 36%, had decent scores in the 620-719 range. Unfortunately both groups saw large credit score declines that rose the higher a borrower’s score was before becoming delinquent. Those 620-719 borrowers, for example, saw an average decline of 140 points – something that has real-world implications like dropping them into subprime auto loan territory and takes a few months to a few years to recover from. The report also said most delinquent borrowers are in the south and over age 40, and more older borrowers were seriously past due at 90+ days, so they’re having a tough time.

Making matters worse for seriously delinquent borrowers is that the US Dept of Education and the US Treasury have restarted the collection process this month. This includes garnishing wages, Social Security payments, even claiming would-be tax refunds.

If you or someone you know is in this predicament, one idea is to look at your retirement savings or other investments (assuming these exist) for cash to help pay off or pay down student loan debt. Maybe you’re out of work or your taxable income is otherwise a lot lower than normal. You’ll want to talk with a tax person as well, but you could take a distribution from your account, pay the tax and perhaps also a penalty. This would hurt your savings but taking the hit might ultimately be better than paying excess interest and continuing to damage your credit score. You could also look at consolidating your debt somewhere, but that can be a nonstarter if you’re already having trouble making your payments.

Okay, the second item is the affordability of home ownership. Home ownership peaked nationally at almost 70% of the population in 2004 but the average since at least 1960 is still over 60%. It’s about 55% in California and 75% in less expensive states like South Carolina, according to the US Census Bureau. Still, affordability is at a 35-year low across the country.

Inventory is low compared to population growth so prices are high. According to JPMorgan and Zillow, nationally we have a shortage of roughly 4.5 million homes based on population growth. That sounds funny when compared to news stories about the housing market slowing down lately due to rising inventory, but it’s different perspectives covering different timeframes.

Mortgage rates are at about the long-term average of 7% but still seem expensive compared to recent history. Underwriting standards are stringent, with about $110,000 of annual income needed to qualify to buy the average home in most states, according to a report from Bankrate. Add that to higher purchase prices and private mortgage insurance on first-time homebuyer programs and home ownership can be prohibitively expensive, especially for first-timers.

Among other things, this means buyers have to be a lot more established and usually older before the dream of home ownership can become reality. The following chart from JPMorgan shows this increase over time.

Reading about this reminded me of when my girlfriend (and long since my wife) and I bought our first house in the late-90’s at age 19, well below the average at the time shown in the chart and half of what it is currently. I think we put down 3-5% on an old bungalow in Sonoma, CA that may not have had any right angles in it. Our loan was part of an FHA first-time homebuyer program. I recall our interest rate being 7.5% and, plus the private mortgage insurance and other monthly costs, we barely scraped by. Still, we loved being homeowners. We did a ton of repairs on our own, learned from mistakes, and eventually sold the house to start the typical move-up process. We’ve benefitted from being owners versus renters over three decades but earned every penny through sacrifice and stress.

There are many financial planning issues related to home ownership but I’ll close with the thought that home ownership isn’t for everyone and doesn’t have to be. Some people will never afford to own a home and others might simply prefer not to. It’s just kind of sad that homeownership seems to be out of reach for so many.

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You may have heard over the weekend that Moody’s, one of our country’s three main investment-related credit rating agencies, downgraded the US to one step below AAA. S&P was the first to downgrade us back in the summer of 2011, then came Fitch in 2023 and now Moody’s. We’ve completed the set, so to speak.

While S&P’s downgrade shook the markets back in 2011, the reaction this time is more of a yawn; it’s newsworthy but not necessarily news because it confirmed what most already understand to be true. The US is on a long-term unsustainable debt path but we’re still the “cleanest dirty shirt” in the laundry basket of western economies, as was said back in 2011. We’re growing, have good structure, and our currency is likely to remain the most trusted for the foreseeable future. All that and more is probably why the markets have mostly shrugged off the Moody’s announcement.

Still, some of the details and analysis since Friday are interesting, and perhaps a little soothing given some of the headlines in recent months, so I’m reproducing snippets from Moody’s and my research partners at Bespoke Investment Group.

From the Moody’s press release – a link to the full document is below [emphasis mine].

Successive US administrations and Congress have failed to agree on measures to reverse the trend of large annual fiscal deficits and growing interest costs. We do not believe that material multi-year reductions in mandatory spending and deficits will result from current fiscal proposals under consideration. Over the next decade, we expect larger deficits as entitlement spending rises while government revenue remains broadly flat. In turn, persistent, large fiscal deficits will drive the government's debt and interest burden higher. The US' fiscal performance is likely to deteriorate relative to its own past and compared to other highly-rated sovereigns.

The stable outlook reflects balanced risks at Aa1. The US retains exceptional credit strengths such as the size, resilience and dynamism of its economy and the role of the US dollar as global reserve currency. In addition, while recent months have been characterized by a degree of policy uncertainty, we expect that the US will continue its long history of very effective monetary policy led by an independent Federal Reserve. The stable outlook also takes into account institutional features, including the constitutional separation of powers among the three branches of government that contributes to policy effectiveness over time and is relatively insensitive to events over a short period. While these institutional arrangements can be tested at times, we expect them to remain strong and resilient.

While we recognize the US' significant economic and financial strengths, we believe these no longer fully counterbalance the decline in fiscal metrics.

A significantly faster and larger deterioration in fiscal metrics than we currently expect would weigh on the rating.  A rapid move out of dollar assets by global investors could precipitate such a deterioration if it resulted in much higher interest rates, causing the interest burden to rise faster than we currently expect. We do not consider this to be a likely scenario since a credible alternative to the US dollar as global reserve currency is not readily apparent.

And now some analysis from Bespoke.

Just after the close on Friday, Moody’s downgraded the US from Aaa to its next-highest rating, marking the third time since 2011 a major ratings agency has removed the AAA (or equivalent) from US sovereign debt. The new Aa1 rating is still extremely high in the scheme of things, and the sort of downgrade that would force sales of UST by existing holders [such as pension funds and others who are required by their own investment policy to buy AAA-rated bonds] would require a far larger cut to ratings. That’s not on the horizon. Moody’s had previously had the US on credit watch negative but has shifted that outlook to stable.

Back in 2011, S&P originally removed the AAA rating for US credit over risks that the US would not actually pay its bills and a default might take place if the debt ceiling was not extended by Congress. This sort of ratings downgrade makes some sense at the margin. Debt ceiling brinksmanship is messy enough that it’s not hard to imagine a scenario where Congress doesn’t raise the debt ceiling by accident or a day late, and Treasury refuses to make payments on debt due thanks to this cap. While that scenario’s likelihood is very low, we think it is materially higher than one where the payment of debt in US dollars is threatened, either by strategic default or because cash is not available to meet outstanding obligations.

US federal debt is denominated in dollars, and the issuer of that debt also issues dollars. To be sure, schemes like monetizing the debt (the Federal Reserve issuing new reserves to fund purchases of bills or UST when the market won’t buy them) would hypothetically have huge negative effects. But they’re always an option making the possibility that fundamentals like debt-to-GDP or the fiscal deficit would drive a US default basically zero. Despite that dynamic, Moody’s cited those two ratios among others as the key drivers of concern that led to the downgrade on Friday, which is a bit confusing.

Here’s a link to the Moody’s press release if you’re interested.

https://ratings.moodys.com/ratings-news/443154

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Last week was another good one for stocks, part of a streak of nine positive days that ended when the market closed in the red yesterday. We haven’t seen a nine-day winning streak in about 20 years. We’re not out of the woods yet but it’s wonderful to see positive returns after all the volatility lately.

That said, let’s review some news about Social Security anxiety. Maybe it’s caused by headlines and mixed messages about fraud and waste, personal data security, or simply the health of the system. Whatever the reasons, people nearing retirement and those receiving benefits are understandably nervous about this important income stream.

Apparently this anxiety led to a large bump in March of people filing for their benefits compared to a year ago. I understand the “bird in the hand” idiom but I hope people who file earlier than planned understand what they’re doing.

Most know that waiting to start their Social Security benefits makes good financial sense. People have heard from experts (and from me) for years about how waiting locks in higher benefit payments for life. They’ve heard how one typically only needs to live to 80 or so before breaking even on waiting. Social Security benefits keep growing until age 70, so that’s the ultimate goal here. However, most people file well before then, either at their Full Retirement Age of 67 (typically) or earlier starting at age 62. This latter group willingly accepts a monthly benefit that gets incrementally smaller the earlier they start receiving payments, perhaps as much as 30% smaller for life.

Besides recent headlines, what are some reasons to start your benefits early?

• You need to stop working earlier than planned, haven’t saved enough, and your work prospects are slim. In short, you need the money. If so, take it but hopefully you’ve weighed all of your options with a financial planner, tax person, or perhaps a knowledgeable family member.
• You’re in poor health and don’t think you’ll make it past 80 (as a round number – your breakeven age may be different).
• You’re single. Starting your benefits early could impact what your spouse ultimately receives.

Maybe all three reasons fit your situation. If so, you should still talk it over with someone but filing early is probably appropriate.

Granted, there are multiple ways to think about this and one could (and some do) argue that my viewpoint is overly clinical and focused too much on dollars and cents. If Social Security could blow up any day one might as well enjoy the money now, and so forth. While I don’t have a crystal ball and can’t guarantee that anything will or won’t happen, I can suggest that it’s unlikely the system will implode during our lifetime. The quote attributed to President Trump below is one of many – they don’t call Social Security a third rail of Americans politics for nothing.

The following article excerpts from the Wall Street Journal discuss the recent Social Security filing numbers. A link to the full article is below.

Americans anxious about the future of Social Security are claiming their benefits earlier than planned, even though it can mean less income over the rest of their lives.

The Social Security Administration has been shedding staff and changing requirements for claiming benefits over the phone. President Trump has been pushing to cut government spending, though he has vowed not to reduce benefits.

Pending Social Security claims for retirement, survivor and health insurance benefits totaled 580,887 in March, up from 500,527 a year earlier. While multiple factors likely contributed to the increase, agency officials said at a March 28 meeting that “fearmongering has driven people to claim benefits earlier.”

Many effects of the Trump administration’s swift and sweeping changes to federal agencies aren’t yet apparent, but with Social Security, they are already changing households’ financial decisions. Americans have long been anxious about Social Security’s stability, and Trump’s second term is heightening those anxieties.

“That is leading people to make decisions based on fear,” said Kathleen Romig, director of Social Security and disability policy at the Center on Budget and Policy Priorities. 

Economists and financial advisers generally discourage claiming early. Benefits increase with each month someone waits to take them beyond the minimum claiming age of 62. The increases stop at age 70.

Benefits starting at 70 are 76% higher than at 62, according to Laurence Kotlikoff, a Boston University economist and founder of Maximize My Social Security. A person who postpones benefits until 70 instead of 62 would come out ahead if they live to at least 80, he said.

Liz Huston, a White House spokeswoman, cited other causes for the increase in claims in March, including aging baby boomers claiming benefits and a new law that raises benefits for some government retirees.

She said: “There is no confusion. President Trump has been extremely clear: he promised to protect and strengthen Social Security.”

Calls to the agency since the beginning of October are up 19% compared with the same period a year earlier, officials said at the meeting. Website traffic and field office calls are higher as well, they said.

Recent surveys reflect the concern. More than 75% of U.S. adults worry a great deal or a fair amount about Social Security, a 13-year high, according to a March Gallup poll. Democrats expressed greater concern than Republicans.

When Social Security’s finances are referenced negatively in the news, workers tend to report a desire to claim benefits earlier, according to a 2021 study by the Center for Retirement Research at Boston College. 

Social Security’s finances have long been under pressure because of the aging of the population. Unless Congress shores up the retirement program, it is projected to deplete its reserves in 2033, which would trigger a 21% reduction in benefits. 

Social Security officials said at the meeting that many Americans are visiting field offices for help accessing their accounts on the agency’s website. Some are paying the agency $100 for certified copies of their earnings records, on which benefits are based. 

A Social Security official said at the meeting that personal data is secure and the agency has backups. He acknowledged two website outages in March that he said were brief.

Retirees also take Social Security sooner than expected for reasons including deteriorating health and job losses. About a quarter of people filed for benefits when they turned the minimum claiming age of 62 in 2023, the most recent data available.

Here’s a link to the full article.

https://www.wsj.com/personal-finance/retirement/social-security-benefits-early-trump-changes-27ecd4ee?mod=personal-finance_trendingnow_article_pos1

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