This week let’s look at inflation psychology. Even though the Consumer Price Index has improved almost to normal levels since 2022 when inflation spiked, consumers still report being overwhelmed by it. This makes sense when we consider egg prices, for example, which are about twice as expensive as a year ago. And people are rightfully concerned about looming tariff-related inflation. Still, prices are lower for most of what we buy so we shouldn’t be as concerned about inflation as we are.

This concern shows up in surveys where consumers continually express how bad they feel about the direction of the economy, the markets, and their own prospects. (The chart below shows before "Liberation Day", by the way.)

However, what’s really interesting is what consumers have been saying hasn’t necessarily matched up with what they’ve been doing.

Historically when consumer sentiment, a leading economic indicator, reaches low levels like we saw in 2022, a recession soon followed. That didn’t happen – consumers, at least on average, were incredibly negative about the economy but still continued to buy more which helped keep our economy growing. Consumers have remained negative and are currently more pessimistic on the economy than during covid and almost as negative as during ’08 and ’09, although I didn’t include that in the chart. (Again, before Liberation Day.)

Have things really been that bad, or could surveys be showing the lasting impact inflation has on our psychology?

Economists, analysts, and journalists have wondered about this for some time but a recent study by the Federal Reserve examined this issue more closely. I’m reproducing sections below and including a link as well. The full article has a number of charts and explanatory information that wouldn’t show up well in this blog format, so please check those out if you’re interested.

To summarize in advance, the psychology around inflation and inflation expectations can be as impactful as rising prices. People can fear inflation so much that they develop a distorted view of how bad it is, both for their situation and the whole economy. This perception problem impacts people differently but, perhaps strangely, doesn’t necessarily change one’s level of consumption.

From a personal finance perspective, I think it’s important to understand the psychological issues at play and to develop methods for combatting the anxiety inflation can create. This is also important to prepare for a potential tariff-induced spike in inflation this summer.

One approach would be to test your financial plan for sustained inflation. Can you afford that? At what point should you be concerned? You can also analyze your annual spending. Has it gone up because everything is more expensive, or were there other contributing factors?

Ultimately, inflation is certainly an issue but it shouldn’t cause so many people as much concern as it seems to, especially at current levels.

From the Federal Reserve…

Despite low unemployment, moderating inflation and anchored inflation expectations, and rising incomes since mid-2022, surveys at the end of 2024 continued to report that consumer sentiment remained unusually low, below levels at the onset of the pandemic and on par with levels during the Great Financial Crisis. Why was there this discrepancy between consumer sentiment and the real economy?

This note summarizes the results of a household survey that aims to understand how changes in household incomes and spending between 2019 and 2024 and how behavioral changes households made to adapt to the economic environment shaped their economic sentiment. It includes nearly 10,000 representative panelists responses to various questions collected over two waves in October and November 2024. Using micro spending data, we link survey responses to respondents' total annual spending to gauge how actual spending and household-specific price levels for everyday retail purchases changed between 2019 and 2024. Being able to connect sentiment with verified spending is a novel contribution, above and beyond previous studies that explored economic sentiment in the post-pandemic period.

Our results indicate that:

1. The more people thought the prices they paid rose faster than their incomes, the worse they said they were doing.
2. Consumers were more likely to overestimate than to underestimate the inflation they experienced. Those consumers who overestimated their verified inflation said they felt worse about economic conditions.
3. Most respondents reported higher household incomes in 2024 versus 2019 but still said they did not feel good about the economy due to the effort they exerted to adapt to the economic environment.
4. After adjusting for inflation, verified spending on everyday retail items remained strong even among those who reported having lower incomes or among those who said they felt worse about the economy in 2024 compared with 2019.

Taken together, we show that what consumers have been saying differs from what they have been doing during the post-pandemic period; consumers say they feel worse, but through the end of 2024, they are buying more – not just spending more – than they did in 2019. This disconnect between what consumers have been saying and doing suggests that consumer sentiment surveys on their own have become weaker indicators of future consumer behavior and of the health of US consumers.

Historically, consumer sentiment moves in tandem with concerns regarding lower income and higher prices on household finances, and sharp drops in consumer sentiment tend to precede or coincide with recessions. This time, the sustained drop in consumer sentiment following the pandemic has not preceded or coincided with a recession. 

[…] during inflationary episodes, consumers seem to put more weight on higher prices than on higher incomes when assessing their current economic conditions, and as long as income growth remains robust, consumers continue spending even though in sentiment surveys, they say they feel pessimistic about the economy.

[…] 80 percent of panelists said they put a lot or some effort into cutting expenses. Only 5 percent percent said they had not been trying to cut back on expenses. Second, as Figure 5 shows, negative sentiment increases with the number of "Yes" answers to the changes households made to cut back: the more changes households made, the worse they feel.

People's negative sentiment seems to be driven by the perception that incomes have not kept up with prices, even though real spending has increased, and by the effort they exerted to adapt to rising prices. Although sentiment improves with higher incomes, the more people said they had to make changes to their behaviors since 2019 to reduce spending, the worse is their sentiment. Moreover, those who experienced increases in their incomes still reported negative sentiment, citing the need to work more hours or take on additional jobs to earn extra income. In contrast with much of the history of consumer sentiment measures since the 1960s but similar to the history of consumer sentiment during other inflationary episodes, consumer sentiment in 2024 was more closely related to concerns about higher prices than to concerns about lower income. This situation may reverse as inflation continues to decline or if the labor market weakens.

Here's a link to the full article.

https://www.federalreserve.gov/econres/notes/feds-notes/tracking-consumer-sentiment-versus-how-consumers-are-doing-based-on-verified-retail-purchases-20250424.html

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What are we to make of recent market swings? Stocks fall precipitously, in some ways faster than ever. Then stocks rally in historic fashion. We’re not in the clear yet but it’s great to see prices rise. One thing is certain amid the variety of chaotic news and events shaping our markets lately: you shouldn’t try to trade the headlines. Instead, you should follow the plan you (ideally) already have in place.

You’ve heard me say things like this at least a hundred times before. I was about to do so again when I read a piece by Jason Zweig for his weekend WSJ column, The Intelligent Investor. Zweig opens with the memory of a nightmare where everything is backward and it’s impossible to know what to do. Sound familiar? He then provides maybe the simplest recipe I’ve heard for how to approach major uncertainty as a long-term investor. It’s essentially the same core steps I follow so I’m including excerpts below with some notes of my own [in brackets]. A link to the full article is also below.

From Jason Zweig…

… Now, my old nightmare seems to have come true in the markets. The Trump administration’s shifting signals about tariffs have sent stocks and bonds—and investors’ stomachs—heaving up and down. The key to survival is thinking clearly—and asking the right questions.

Orderly, predictable rules of international trade are like the traffic lights of the world’s economy. When everyone knows how the lights will work, traffic flows smoothly. When the lights morph into something like my old nightmare, it’s understandable why investors freak out.

U.S. stocks have averaged a return of 10.3% annually over the past century. In just two days, April 3 and 4, the S&P 500 lost 10.5%. Then, on April 9, it gained 9.5%—only to dive again the next day. Days have become years.

The human brain automatically goes on red alert whenever new information is surprising. So this month’s drastic changes in market prices can make you feel you need to respond with drastic changes in your own portfolio.

“In a volatile situation our brains tend to overweight the most recent events, because the older evidence could be outdated and less useful,” says Alicia Izquierdo, a neuroscientist at the University of California, Los Angeles. “When conditions are volatile, we may be very quick to learn, but what we’re really learning from is the short term, which may not necessarily be representative of the longer-term future.”

Now isn’t the time to step on the gas by “buying the dip,” loading up on stocks whenever they slump—or to slam on the brakes by dumping all your stocks out of fear they’ll fall further.

Instead, ask four questions.

The first, two-part question paraphrases an expression that the renowned former manager of the Fidelity Magellan Fund, Peter Lynch, has often used.

What do you own and why do you own it?

Meet with your financial advisers or, if you manage your own money, update your measure of how much of your portfolio is in each broad category of assets. You can’t make a reasoned decision about whether or what to sell if you don’t know exactly what and how much you own. (With the S&P 500 down more than 10% this year, you may be less overexposed than you were a few months ago.)

If you must panic, panic methodically. 

Long ago, you should have set a target for how much of your portfolio you wanted in large U.S. stocks. If you’re above that threshold, rebalance by selling big U.S. stocks and spreading the proceeds across smaller U.S. companies, international stocks, bonds and other assets. Do this in your tax-advantaged retirement accounts first, to avoid triggering capital gains.

Before you pull any trigger, though, be sure to ask what I call the second question: 

Why do you own stocks?

Do you own them primarily because you wanted to benefit from the stability of longstanding trade agreements between the U.S. and the rest of the world? Probably not. Most likely, you’ve always owned stocks because you wanted to participate in the long-term growth of the U.S. (and global) economy. [It’s also reasonable to ask what the alternatives are for growing your savings over time. Buying real estate, starting a small business, getting involved with private investments, or maybe private lending… all can have their place but all come with risk and complexities… how do those options compare with buying stocks and bonds in a liquid and transparent market, and for very low cost? Put simply – it’s hard to match the public markets even though they can be subject to bouts of major volatility.]

That leads directly to the third question: 

What has changed?

There’s no doubt that Trump’s trade moves have damaged much of the rest of the world’s trust in the U.S. Just look at how the U.S. dollar and Treasury bonds have slumped since March.

But people, companies, markets and countries are remarkably resilient. They will bounce back—although anyone who claims to know how long that will take is either a liar or a fool.

And markets might not recover on the timeline you need. [Going back to the late-1800’s, US stocks have rarely lost money over a rolling ten-year period. And balanced portfolios with 60% in stocks and 40% in bonds have never lost money in the same timeframe since 1995 to capture the tech bubble bursting, the Great Financial Crisis, and Covid. “Never” can also be used for US stocks going out to 14+ year rolling periods to smooth out the impact of WWII.]

Look inward: If you’re in or near retirement, you can’t wait years or possibly even decades, as full market recoveries have sometimes taken in the past. Moving equal monthly increments of your U.S. stock assets into inflation-protected bonds, which still should provide a stream of income that will stay constant despite any rises in the cost of living, can make sense. [I generally agree with this but the details depend on your situation.]

Finally, ask the fourth question: 

If you didn’t already own this asset, would you buy it at this price?

Beware of what behavioral economists call anchoring. That’s the tendency to measure your gains and losses against a vivid, recent reference point rather than against what matters: the price you originally paid.

Take Apple, for instance. From April 2, when Trump announced his tariff plan, through April 8, the stock fell 23%; at that point, it was down 31% in 2025. But, if you’d originally bought it 10 years earlier, you still had a gain of more than 500%; if you’d bought it five years ago, you were still up over 160%.

Much of the pain you feel is regret over not selling at the absolute peak. Reframe your regret by measuring the latest market price against what you paid in the first place. You may find that you’re sitting on a profit, not a loss.

If you can’t answer the four questions, you have no business taking drastic actions. [Then the answer would be to wait and ride things out… it’s counterintuitive but inaction is often the best action in the long run.]

Here’s the link to the full article.

https://www.wsj.com/finance/investing/investing-questions-markets-chaos-521d8286

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The first quarter (Q1) of 2025 began well but ended in a confused slump driven primarily by political anxiety. This uncertainty fed into consumer and investor confidence that declined throughout the quarter and caused a correction in major stock market indexes like the S&P 500 and NASDAQ. Bonds perked up as investors rushed to safety which helped buoy performance for balanced portfolios. That lift was good to see after a few crushing years for bond investors, but it unfortunately took pain in the stock market to get there.

Here’s a summary of how major market indexes performed during Q1 and for the year so far:

• US Large Cap Stocks: down 4.3%
• US Small Cap Stocks: down 9.5%
• US Core Bonds: up 2.7%
• Developed Foreign Markets: up 8.1%
• Emerging Markets: up 4.5%

If there was one word to define the quarter and the day-to-day reality of the markets during Q1 it would be tariff. The Trump administration made rebalancing global trade through the use of tariffs a key part of its election pitch and kicked off 2025 with a slew of tariff announcements. There would be 25% tariffs on goods from Canada and Mexico, then Columbia, then smaller tariffs on goods from China, followed by other tariffs on goods such as steel and cars made outside of the US. Some of the tariffs went into effect during Q1 while others were paused or renegotiated. Some were set to start just after Q1 closed, while others were planned as reciprocal tariffs. Most of these announcements and related news adversely impacted investor confidence and market prices almost in real time. And when this news was added to additional policy announcements not directly related to the markets but that were still unsettling for many, these changes quickly destabilized what had been a positive market outlook as the year began.

Investor optimism surged to a record spread over pessimism immediately following the November election. Unfortunately this began to fall into year-end. Each subsequent month showed declines, ultimately by March hitting the Conference Board’s lowest level for its survey of investors since late 2022. This tracked with declining consumer and business confidence, although when parsed for political affiliation it was clear that republicans were more optimistic than democrats and independents. Still, the rapidly changing outlook spurred market analysts to further adjust their economic forecasts as Q1 progressed and recession/stagflation fears were discussed. This kicked into high gear during February, sending major indexes into a correction. There were brief rallies along the way and the final day of the quarter saw stocks climb out of a whole to finish strongly, but the overall tone was still negative.

Most domestic stock sectors ended the quarter in oversold territory except for Energy, which was a standout performer, rising nearly 8% over Q1. Consumer Staples ended the quarter up about 2%. Healthcare and Utilities stocks also fared decently, but the Tech and Communication Services sectors make up about 39% of the S&P 500 and fell by about 11% and 1% for the quarter, respectively. Negatives easily weighed down the positives.

It was a different story overseas, however. As political anxiety stretched beyond borders, a global defense reshuffling spurred markets in Europe. Germany proposed spending over one trillion euros on infrastructure and defense, reportedly related to concerns about its alliance with the US. Germany doesn’t like to borrow but has been in a recession so perhaps the German government needed a good excuse to juice up its economy. Whatever the reason, news of dramatic spending plans helped the typical European index rise during Q1 from around 7-13%, depending on its composition. Since these are only proposals, time will tell the lasting impact on markets. Emerging markets were generally higher as well with the typical index up nearly 5% for the quarter.

Q1 saw some signs of life in the US bond market. Longer-term bonds did better than shorter-term and inflation-protected bonds performed best, but most parts of the bond market rose about 2% or more over the quarter. Many investors had been looking elsewhere for safety and income since 2022 but finally felt safe piling into bonds as inflation showed signs of stabilizing and the Federal Reserve offered a reasonable outlook for rate changes this year. This more positive view toward bonds helped push the yield on the 10yr Treasury note, a key market and economic benchmark, to about 4.25% as Q1 ended after peaking at around 4.8% in January. Cash equivalents like money market mutual funds still offered around a 4% annualized return throughout the quarter and, while they technically underperformed bonds, are still a good place to store short-term reserves for the time being.

There’s no way to sugarcoat that this is a concerning time for a lot of people. While it’s far beyond the scope of this note to offer much about the broader societal themes being discussed so much lately, I can offer a reminder about the counter-intuitive nature of long-term investing. According to my research partners at Bespoke Investment Group, the S&P 500 has been higher six and twelve months later seven out of eight times that investor confidence has reached such a low point. While there’s no guarantee that will happen this time, investor anxiety and fear is usually a contrarian indicator. It’s uncomfortable to go against the grain but it is absolutely something we have to deal with periodically as long-term investors. As always, please don’t hesitate to ask questions.

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The news flow is rapid again this week with markets focused on tariff policy, earnings valuations, and (especially yesterday) the independence of the Federal Reserve. Any of those topics can and do take up lots of time so in the spirit of brevity let’s spend a few minutes looking at valuations – maybe that’s the simplest one.

Most publicly-traded companies offer quarterly reports to market participants explaining how their business has been doing and what their outlook is for the coming quarters. The data is supposed to be accurate and executives typically have a conference call with analysts and journalists to explain the numbers and answer questions. Analysts compare what they learn against their own assumptions and try to determine a fair price to pay for a share of the company’s stock. This valuation process is imprecise and a moving target but is also a foundational part of the stock market.

You can imagine how important assumptions about the economy and markets are for these calculations, and how much harder it is to do this sort of analysis as the range of potential outcomes widens. Still, the process is helpful to get a sense of how decision makers handle uncertainty in the real world.

A good example of this is United Airlines. The company made news (at least in my industry) last week when it gave market analysts a bimodal set of earnings per share expectations for this year, a baseline scenario where the economy slows but remains stable and United earns around $11.50 to $13.50 per share (maybe call it a pre-Liberation Day outlook) and a recessionary scenario where the company earns $7 to $9 per share.

While it’s prudent and necessary to plan for multiple outcomes as a business, it’s rare for companies to give markets such a wide range of potential earnings based on divergent scenarios. The range might typically be 50 cents, for example, and they usually don’t game out two distinct paths for analysts. They did so because “a single consensus no longer exists” for the direction of our economy. Think about that. Currently United stock is priced by the market for earnings growth in the stable economy range and higher in 2026. Is that fair based on current risks to the outlook? Which outlook are we even talking about?

That’s not to pick on United; I fly them frequently and I also like the stock. Instead, it’s a good example of how people in boardrooms are planning, and have to plan, amid a ton of uncertainty. Extrapolate that across the thousands of companies that make up the stock market. It helps explain why stocks rebounded from recent lows but not all the way back to highs from mid-February and seem to be tapering off in recent days. Companies everywhere are settling in for a grind that may not be entirely priced into stocks right now. And investors are trying to absorb that as the news keeps changing.

Here are some notes on this valuation issue from JPMorgan yesterday morning. I’ll try to summarize at the end.

Markets are forward looking, but earnings estimates don’t have to be. Currently, consensus is projecting 1Q25 and FY25 year-over-year EPS growth of 7.1% and 10.0%, respectively. Relative to 10-year medians of 4.4% and 3.1%, both estimates are strong. Unfortunately, they’re based on economic assumptions that no longer hold. Tariffs will slow growth, increase inflation and undermine confidence. Weaker demand will hurt revenues, higher costs will hurt margins and reduced profitability will hurt buybacks. Even if the administration changes its mind, the longer uncertainty remains, the longer spending slumps, and the greater the hit to growth. Equity analysts aren’t immune to this uncertainty. Rather than bouncing estimates around with tariffs, current numbers are effectively pre-policy. As this week’s chart shows, downward revisions to 2025 EPS estimates aren’t any larger than normal. Since January, consensus has dropped 2.5% compared to the 10-year average of 2.6%. As policy clarifies, there’s a risk EPS estimates could hit the ground hard, catapulting valuations. Early impacts of tariffs are showing up in other ways. Retail sales spiked 1.4% in March, the largest m/m increase in over two years, driven by 5.3% growth in auto sales as consumers front-run tariffs. Moreover, 44 companies have reported earnings so far, and tariffs have been mentioned 239 times. Many management teams, however, are pausing guidance until policy clarifies. For now, the range of outcomes is wide, and the impacts are difficult to predict. Companies’ ability to hold the line will depend on their individual supply chains, pricing power and balance sheets, to name a few. In times like these, first principles are paramount: quality, diversification and a long-term perspective.

In other words, the stock market may still not have found a bottom assuming a recessionary scenario.

Assuming so, it’s entirely reasonably to ask whether we should sell everything, hang out in cash for some months, and come back when the waters are calmer. That could work and make you feel better in the near term. The problem is determining when to get back in – that’s the far harder question. Markets tend to stay volatile for a while and rise amid the volatility, often unexpectedly. If you waited until things were “calm” you’d likely miss most or all of the upswing, locking in your losses and making it that much harder to recover from this downturn.

Instead, focus on the structure of your portfolio. Rebalance from cash into stocks as prices fall. This can be new cash you add each pay period to your retirement accounts at work. Or it could be cash within your portfolio. Cash can also come from selling bonds since short- and medium-term bonds have held up well in recent months.

And remember that you can rebalance within your stock allocation as well. Maybe it’s taking from foreign stocks and giving to US small cap or maybe a favorite sector fund that’s of good quality but has been getting its teeth kicked in lately. You’ll only know perfect timing in hindsight, so look to your portfolio as a guide for what to rebalance and when instead of whatever the talking heads are saying on your screens.

Those are examples of investing processes that we have control over, the first principles thinking referenced by JPMorgan. Triple down on that during bad markets to set yourself up for success later.

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It can be difficult to know what to write about when the markets get crazy. I’ve gone through maybe a dozen variations on this simple post. I don’t want to bore you by endlessly repeating myself and, while there’s been lots of “news”, there haven’t been many major developments in the last few days to clarify a way forward for the economy and markets.

So how about a quick update on where we stand and any changes to the outlook.

Yesterday was another wild ride in the stock market. After opening lower by at least 2%, stocks surged several percentage points on apparently fake news about the Trump administration pausing tariff implementation. Social media and legacy media jumped on the “news” before the whole story unwound within maybe half an hour. Ultimately, the S&P 500 settled a bit and closed down about half a percent on the day and the NASDAQ actually closed up a smidgeon. The stock market’s “fear gauge”, the CBOE Volatility Index, hit 60 during the day, a level not seen since the Financial Crisis and during Covid. Talk about a jumpy market environment!

Still, the S&P 500 is down about 11% since the major tariff plan was announced last week and 13% or so this year. According to my research partners at Bespoke Investment Group the average loss around the world since “Liberation Day” has been 10%. Foreign markets have generally been doing better this year but many have caught up with our losses. Countries like Norway, China, and Italy are down 13% to 15% during the last few days, while others like France and India are down 5% to 6%.

Higher quality bonds, such as US Treasuries, are still positive this year although the primary intermediate term benchmark, the Bloomberg US Aggregate Bond Index, also swung around before closing down over a percent yesterday. And higher risk areas of the bond market have been getting hammered along with stocks.

As I type the US markets have opened higher by 3% or so. Apparently this is driven by a number of countries making noise about bargaining with the Trump Administration for lower tariffs. It’s also driven by short-term technical factors like every stock index being extremely oversold. Whatever the cause, it’s great to break a losing streak and maybe (hopefully!) create some positive momentum.

That said, only time will tell how all this plays out. Maybe stocks correct back quickly but I doubt it – the overall outlook is too uncertain. Along these lines I was on a call with a market analyst yesterday afternoon and here are some notes:

Tariffs tend to be a regressive tax, so the average consumer was already showing declining sentiment and now they’ll be facing higher prices from tariffs, assuming the tariff plan is implemented.

Uncertainty for business leaders is incredibly high and it is reasonable to expect that businesses and consumers pullback on spending in the near-term.

This is true both here and abroad, with recession risk rising substantially in much of the western world. A recession here at home is probable, perhaps this quarter. It could be short and shallow but length and severity obviously depend on how the tariff situation plays out.

The Fed is currently expected to lower rates this summer by half a percent, maybe more, presumably to help stimulate a slowing economy.

I agree with pretty much everything the analyst said because his matter-of-fact and gloomy assumptions are reasonable.

Tradition holds that during uncertain times financial planners are supposed to offer balanced and reasonable comments about staying the course, we’re in this for the long haul, and so forth. While these concepts sometimes seem like platitudes, processes like diversification and rebalancing do work if given enough time and can serve as a touchstone in this era of rapid-fire news and information.

If I’m responsible for managing your portfolio you’ve heard from me in recent days about rebalancing. That’s an important and counterintuitive process where we sell what’s been doing well to buy more of good quality investments that have been doing poorly. I have percentage thresholds around investments to help monitor this within a client’s portfolio. Many of these haven’t been triggered yet but I’m watching daily and will rebalance as needed. This is part of what I mean when I talk about sticking to our plan. Let me know about near-term cash needs because I can often blend generating cash into the rebalancing process.

If you’re managing your own portfolio, try hard to analyze objectively. If you own good quality investments you can tweak the balance but be extremely careful about making major changes based on headlines that can change with a single tweet. Markets can move very fast and we were reminded of this yesterday. Trying to “trade” this kind of market environment is a fool’s errand.

Okay, that’s enough rambling for today. Have a good week!

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There’s been a lot going on over the past month or two. So much that it seems like a part-time job keeping up with it all. I’m guessing you may feel the same way. Some are excited and energized by the variety of news while others are unsettled, and that’s putting it mildly. Much of the news isn’t directly related to the markets but the cumulative weight of it impacts investor mood and we’ve been seeing this play out in stock and bond prices.

As of last Thursday the S&P 500 index had fallen about 10% from its recent peak barely a month ago, a technical correction. The tech-heavy NASDAQ index fell nearly 14% in the same timeframe. That may feel like a lot because it happened so quickly, but we’ve experienced deeper short-term declines before during Covid and the Financial Crisis, for example.

Historically, according to my research partners at Bespoke Investment Group, the declines of the past few weeks are about average in terms of market corrections and we usually see at least one correction per year. However, these declines can be demoralizing when they happen so quickly on top of all the other news we’re digesting right now, so it was good to see a bounce of 2+% on Friday and stocks closing up yesterday.

Here's a brief summary of the news specifically impacting markets.

Tariff concerns, inflation, and recession –

Inflation has continued to stabilize across the economy. Inflation expectations are ticking higher, however, largely due to uncertainties around the Trump Administration’s tariff policies. Which tariffs stick, how high they’ll go, and how long they’ll last is anyone’s guess, but fears about them are showing up in boardrooms and around kitchen tables throughout the economy. The rest of the economy is doing reasonably well so how much this impacts corporate and personal spending will take some time to play out. That’s not really new information but it underpins much of the uncertainty in the markets right now.

Treasury Secretary Bessent has suggested in recent weeks that the economy might go through a “detox” and that there’s no guarantee we won’t see a recession. I think he’s probably right and others agree. Google searches for “recession” spiked recently for the first time since 2022 when we experienced two quarters of negative GDP growth (the back-of-the-envelope recession definition). The market thinks the Fed might reduce short-term rates by this summer, perhaps in response to an economic slowdown. We’ll hear the Fed’s opinion on all this tomorrow, so that will be interesting as usual.

Declining consumer sentiment –

All this is impacting sentiment. This isn’t new information either but it’s developing. The University of Michigan has been reporting a worsening consumer mood so far this year and, while this is skewed based on political affiliation, each of the last few months is worse than the prior month on inflation expectations, current conditions, and unemployment expectations. This is only consumer opinion however, but was updated last week and helped fuel the stock selloff.

Stock market valuations –

Stock prices rose following Election Day after a solid couple of years. Many suggested that valuations were high and primed for a pullback. Valuations can stay elevated for some time and usually don’t cause market declines alone, but high prices can provide cover when investors get freaked out.

Bearish investor sentiment –

The American Association of Individual Investors regularly publishes data on investor sentiment and, as you can likely guess, it’s in the dumps. Last week the AAII said that over 55% of investors surveyed expressed bearish sentiment for the third week in a row. This gets us near to Covid and Financial Crisis levels, although not near the lows of those periods. Investor sentiment is typically a contrarian indicator and these readings seemed overblown. That probably helped buyers come back over the past few days – again, it’s a contrarian indicator.

Government shutdown –

As last week progressed we were looking at an increasing likelihood of a government shutdown happening over the weekend. That potential crisis also fueled the stock selloff but was averted at the last minute and helped stocks to surge on Friday. Like it or not and appreciate the details or not, we won’t have to worry about shutdown risk until at least September, so that’s something to cross off the list of uncertainties.

Social security –

While news about the SSA doesn’t directly impact stock and bond prices, it adds a negative layer to sentiment. Government officials have referred to the program as a Ponzi Scheme and there have been numerous articles lately explaining how fragile the payment system technology is. And this morning there’s news (or maybe just rumor) about a “plan” within the SSA to disrupt payments for certain recipients. Whether all this “news” is true or not, rumor or not, it’s understandable that current benefit recipients are stressed about it.

What to do about all this?

Stock market volatility is likely to remain high for a while; there’s just too much uncertainty. But that’s to be expected and something we have to deal with as long-term investors. And we have to deal with the rapidity of change as well.

Most balanced portfolios are about flat for the year because while stocks have fallen a bit (down about 3% ytd), bonds have picked up some of the slack (up about 2% ytd). Because the various asset classes and sectors in your portfolio probably aren’t that far out of balance, there may not be opportunities for large-scale rebalancing. But I’m still watching daily and will act accordingly for portfolios I’m responsible for managing. Otherwise, keep contributing to your retirement accounts if you’re still in savings-mode because volatility can be your friend by helping you to buy at a discount.

Regarding Social Security, we’ll have to wait and see what, if anything, untoward happens with the system. But I doubt it (as I knock on wood…). That said, I can test your plan to see how benefit reductions of X% might impact you and we can come up with contingency plans.

I may miss next week’s post as I’ll be travelling that day. Otherwise, have a great week!

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