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“In a volatile situation our brains tend to overweight the most recent events, because the older evidence could be outdated and less useful,” says Alicia Izquierdo, a neuroscientist at the University of California, Los Angeles.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

Have questions? Ask us. We can help.

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.

Have questions? Ask us. We can help.

It’s been a wild several weeks in the markets and elsewhere. News flow has been fast and furious and doesn’t seem to be slowing anytime soon. This impacts stock and bond prices, as you’re no doubt aware, with major stock indexes down year-to-date, while bonds have picked up a little slack. Investor mood has gotten pretty dark. The “R word” is being discussed again and if the economy does dip its toe into the red maybe it goes down as the first “r” caused by everyone just needing to take a breather.

As always, I’ve been monitoring portfolios that I manage for clients and making tweaks where needed. Sometimes this has meant adding to stocks on weakness, but it’s always based on trying to ensure that your investments are of good quality and are in the proper proportions for your situation.

I could go on but instead I’ll flip the script this week with a personal story if you’ll indulge me.

A year ago I participated in a race down the coast of Florida from Tampa Bay to Key Largo, a distance of nearly 300 miles depending on your route. This race, the Everglades Challenge, has been going on for many years and is for small boats without motors. Think of sailboats that one or two people can drag along a beach, or kayaks that can be paddled.

The rules are pretty straightforward. Start from the beach and sail or paddle to Key Largo while passing through three checkpoints. No outside support is allowed, so you’re carrying all of your food, safety gear, and enough water to get you to the next checkpoint. You have eight days to complete the distance and many participants treat the event as intended: a challenge. But for others, including yours truly, it’s a race.

Of course it’s a race and why not? People like to test themselves against the elements and others to see what sort of stuff they’re made of. That sentiment and the desire to say yes to new experiences got me into the race last year and maybe the wildest four days of my life. A year later and ready for round two? Why not, let’s do it.

First let me back up a bit. Some of you know that I like to run ultramarathons, sometimes on roads but mostly on trails. I wanted to diversify a bit so I got into paddling, first standup paddleboards then outrigger canoes and most recently kayaks. I seem to be wired for “ultra” and that easily extended to the paddling realm.

Along the way I met an experienced ultrapaddler who showed me the ropes and, in many ways, taught me everything I know about paddling. He had done the EC, as it’s known, eight times and had several fast finishes including a record as a solo paddler. One goal eluded him, however, the blazing fast tandem record of 2 days and 20 hours (set by a team including an ex-special forces guy if I understand the lore correctly).

It took a different partner and I nearly four days to complete the EC last year, which was pretty good mind you. But cutting that down to maybe 2.5 days? Yikes, that sounded like an audacious goal! One of the issues with a race like this is the ever-changing conditions you have to deal with. Wind direction and speed. Tidal shifts. Darkness. Sleep deprivation. Hydration and nutrition. Manatees (that may sound funny but they can cause some issues in shallow water). Seemingly vast distances to cover by human power alone. And those are just some of the known issues.

After some consideration I said yes to the goal and we started training. We paddled a fancy 22’ racing kayak through the cold, the rain, the swells, the night, all to prepare to give this year’s EC our very best, not knowing what conditions we’d ultimately face.

As the calendar ticked down to the race start on March 1^st we anxiously watched the weather reports. We’re basically heading south for most of the race so expectations of a north wind seemed auspicious. Sure enough on race morning we were able to fly off the start with semi-wild grins on our faces. How long would it last?

Our goal was to finish well under the prior record if possible. This meant keeping an overall pace of at least 5 mph after accounting for required checkpoint stops at 60, 160, and 215 miles, or simply getting out to stretch. So we planned to stop as little as possible.

Fortunately the north wind stayed with us for most of the first 24 hours. We took nothing for granted, assuming the wind could die or, worse, change directions, at any time. Maybe we spent an hour out of the boat between the first checkpoint, quick stretches, and having to bail water after getting swamped while riding waves half a mile offshore because we didn’t have our spray skirts on. This persistence allowed us to cover over 120 miles during the first 24 hours, slightly better than the math said was possible. We thanked the weather gods many times that day.

But the good conditions continued. The second evening found us at the second checkpoint in Chokoloskee, a small “town” after Marco Island and the last outpost as we progressed to the Everglades. The time was about 6pm and we’d covered nearly 160 miles at that point. Apparently this was a blazing fast arrival time. We wanted to get in and out quickly but an updated weather forecast seemed ominous and slowed our departure.

Our beloved breeze from the north was expected to build through the night and get nasty, potentially turning our overnight 40-mile run in the open Gulf into a string of opportunities to flip. We had almost no moon, the air temperature was cool, and there wouldn’t be many places to hide based on our intended route. Flipping a kayak in open water is always possible but was definitely something we hoped to avoid. In what would prove a theme for most of our race, our persistence and insistence on not taking anything for granted paid off. The north wind picked up but the conditions were fine overall.

I remember this section fondly from my first EC last year. This is where I first experienced bioluminescence and calm and balmy conditions that carried me through the night. This year was more intense but we had a great time. We watched a rocket trace the sky. The night was so dark that the stars looked like diamond dust on a black canvas.

Sleep deprivation was starting to take its toll, however. For me, the stars started presenting as wisteria vines dangling from celestial trees. It was hard to tell where the dark water stopped and the black sky began. We were still functional but cracks were beginning to show. We stumbled into three sandbars in the middle of nowhere. I was finding it difficult to keep my paddle strokes in time with my partner’s (he was up front steering via foot pedals). Our goal for this leg was Ponce De Leon Bay, a main entrance into the Everglades at about 200 miles into the race. We’d planned to enter by about 8:30am, the 48hr mark. Impossible to miss by day, we were so far ahead of schedule that as we approached the bay at maybe 3am, we wondered if we passed it and were now heading around the cape of Florida.

This was one of those times where trust is critical. We trusted each other but we began to mistrust our technology. We had some earlier issues with our GPS but had a backup and our track was clear. We simply needed to reset our minds and not overthink our plan. Plan the work and work the plan, so to speak. Ironically, after covering so much distance so quickly it came down to simply not getting there yet. A short while later we left the lumpy but not unfriendly Gulf and paddled into the Everglades.

The Everglades. Last year I mentioned in my post how I felt almost let down because all I saw during the day was mangroves and headwinds. This year the dark night obscured the massive mangrove forests. We didn’t stop to point our lights into the darkness surrounding us – probably a good idea! I’m sure I was imagining those crocodile heads floating on the water as we passed.

Sunrise found us still in the Everglades (it’s so huge – maps don’t do it justice) but rapidly approaching our final checkpoint at another far-flung outpost, Flamingo. It was maybe 9:30am and my partner, after all the hours steering and working the GPS simply had to rest. We were both hallucinating but his were more pronounced and daytime seemed to amplify them, which isn’t good. We agreed he’d sleep for an hour while I cleaned up the kayak which badly needed it.

At this point we were nearly there. Roughly 30 miles remained but this is when the weather gods reminded us of that oldy but goody: ain’t nothing free. We had to travel east across Florida Bay from Flamingo to get to Key Largo and that’s exactly where the wind was now coming from at about 20mph.

Rounding that corner and heading east into the wind was certainly a challenge, and perhaps it was a fitting end to our race. What might have taken us 6-7 hours in good conditions took nearly 11. We’d head from one string of mangrove islands to the next for shelter, take a bite and a drink, and then repeat without leaving the boat. Endlessly.

We were both exhausted. Fortunately my partner getting some sleep helped keep us on our GPS track. Florida Bay is very shallow for long stretches and narrow channels are marked but confusing – navigation isn’t as simple as “just head East and you’ll get there”. In addition to the headwind we were also fighting the tide, so finding any deeper water, even a few feet deep, was critical to maintaining speed.

My hallucinations were gaining control. We could have ended up in Cuba if I were navigating. I was disassociating from my activity. At times I saw myself in sort of a split screen where whole thoughts and dialogues took place while I hammered away with my paddle. For a time I wasn’t entirely sure what we were doing. Were we on another training paddle? Wait, who is this guy in front of me? Was he the one who taught me about all this paddling stuff, or wasn’t it Kenny Chesney? At one point I “woke up” to a burning lower back. My paddle stroke rotation had rubbed my back raw and it was on fire. At the next mangrove island I fiddled with my back pad but it was really no use. My skin was aflame but the only thing to do was to throw some Vaseline on it and try to lean forward while paddling. We had to get home and crying about it wouldn’t get us there any faster. Still… ouch!

The bay spread before us as the water depth increased and the sun set. Unfortunately the wind strengthened and drove waves into us head-on for the next couple of hours as we clawed our way toward tiny lights growing in the distance.

As soon as the sun went down my hallucinations seemed to turn on fully formed. Geometric shapes lined hillsides of translucent water that seemed like snow and smoke. I found it harder to keep my paddle strokes in time. For a while I felt like I had no paddle but used my hands to match my partner’s strokes. I may have been out of sync but I was working harder than ever, feeling the pull of each stroke like those ice climbers who race up frozen waterfalls, except that we climbed for hours not minutes.

Eventually we made it to the Keys and the calm that comes from being done. We felt exhausted but elated finishing the race at 9:22pm after 2 days and 13 hours of paddling, covering roughly 260 miles from Saturday morning to Monday evening. This was hours ahead of our ideal time, and hours more ahead of the tandem record. The next paddlers took about two days longer to finish and more took longer still. Also, apparently I’m the only paddler to have completed the race without sleeping – sort of a dubious distinction given the last few hours of the race.

In the end this year’s EC was one for the record books and that, plus the experience itself, is something I’m proud of and won’t soon forget. Not a bad way to spend a long weekend.

- Brandon

Have questions? Ask us. We can help.

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!

Have questions? Ask us. We can help.

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!

Have questions? Ask us. We can help.

Good morning. I hope your week is going well. Before we get started I wanted to let you know that I’ll be skipping next week’s post as I’ll be out of the office on Monday and that’s when I usually write these.

The stock market dipped a bit last week in part due to news about falling consumer sentiment. I wanted to spend a few minutes looking at this because while sentiment news can move markets in the short-term, it also has broader implications for the economy and topics like inflation as well.

The University of Michigan is among the most prominent of many organizations that track this stuff. Last week they said sentiment fell 10% from January after January fell from December. Sentiment declined among all consumers surveyed, however there were notable differences between income, wealth levels, and political affiliation. Consumers mentioned tariffs as one their largest financial concerns, although those responses were mostly from Democrats and Independents apparently regardless of household income level. Republicans reported being concerned about these issues but much less than others and their general sentiment levels were unchanged from January.

Consumers also mentioned inflation as a key concern. Here as well Democrats and Independents said inflation is growing a problem while Republicans disagreed. All told, consumers who were surveyed expected inflation to keep rising to over 4% this year and that rising prices for durable goods like computers and cars would rise the most, driven primarily by potential tariffs. That’s a reaction to very recent news but how long these pessimistic feelings persist is an open question. Beyond that it’s incredibly difficult, if not impossible, to determine which side’s outlook is correct because their views seem so different.

Probably like you, I don’t have a clear answer for why this dichotomy exists, but it’s hard to ignore a chart like the one below that comes from my research partners at Bespoke Investment Group using University of Michigan data.

Here’s another chart, this time from University of Michigan itself showing consumer sentiment broken out by income, regardless of political affiliation.

And here’s another chart demonstrating how the more assets you have the less inflation seems to matter.

Here’s the story from the University of Michigan so you can read more if you like.

https://news.umich.edu/consumer-sentiment-drops-as-inflation-worries-escalate/

On the heels of the consumer sentiment news last week we also have the Wall Street Journal reporting that the top 10% of earners (households earning at least $250,000 per year) are fueling half of the consumption within our economy and perhaps a third of our gross domestic product. This is a record based on over three decades of data when spending from this group accounted for 36% of consumption.

The article didn’t mention political affiliations but focused on how households with assets like houses and exposure to the stock market did much better coming out of the pandemic than pretty much everyone else. That’s not necessarily new information but what’s new is breadth of its impact.

The following chart from the article shows that higher earning households were able to save more during the pandemic and these savings often bought more assets versus going directly into consumables. Government stimulus, Federal Reserve policy, and a variety of other catalysts helped these assets appreciate which lessened the impact of inflation for those holding the assets. It also boosted the wealth effect for these households which, in turn, helps boost their spending. It’s a virtuous cycle that unfortunately has driven the wedge deeper between those with assets and those without.

I’m posting a link to the article below and can send it to you from my account if you hit the paywall.

https://www.wsj.com/economy/consumers/us-economy-strength-rich-spending-2c34a571?mod=hp_lead_pos8

Okay, so what are the investment implications related to these news stories?

Consumer sentiment is considered a leading market indicator but it can also be a coincident indicator when consumers appear to react to news in real time, such as over the past month. It’s not a good predictor of a market crash but it’s a pretty good recession indicator and that makes sense. If consumers pull back meaningfully on their spending long enough for any reason, that causes ripples since our economy gets roughly 2/3rds of its business from them. But if a relatively small number of households can support half of our total spending and those consumers remain happy, maybe that could help drag the economy along while the rest stabilizes? None of this means we’re in for a recession or major market decline in the near-term, but it’s a warning sign to pay attention to for sure.

That said, try to avoid making major changes within your portfolio if you’re feeling nervous (which is a reasonable response, by the way!). Instead, rebalance your portfolio by selling some stock investments that have been doing well and use the proceeds to pay down/pay off debt that’s more expensive than, say, 4% per year. Other than that, you could make market gains real by paying for trips, gifting stock shares to family or charity, buying a vehicle, or completing overdue home maintenance. Or you could simply generate some extra cash for spending over the next year or two if you’re retired. In short, stock market returns have been good for a while so it’s prudent to take some off the top where appropriate and get some things accomplished. Just don’t let headlines push you too far away from your long-term plans. Otherwise, rebalance from stocks to bonds as appropriate and remember that if you’re still working and saving for retirement (or you’re not relying on your investments for retirement income), meaningful market dips along the way are buying opportunities.

Have questions? Ask us. We can help.