“The key is to wait. Sometimes the hardest thing to do is to do nothing.” – David Tepper
Review
While the stock market has taken a significantly negative turn since the end of the first quarter, we first want to look back at what transpired over the first three months of the year. The market moved into the new year with a sense of economic optimism based on deregulation, the extension of current tax policy or even further tax cuts, and the hope that global conflicts and wars will come to a negotiated ending. January posted a solid 2.7% gain to start the year, and as an old market adage says, “As goes January, so goes the year.” Since World War II, if the S&P 500 rose in January, the market was higher 86% of the time for the full year, with an average increase of 16.2%. The market continued its upward momentum in the first half of February to a new all-time high for the S&P 500 on February 19th. But since that date, general economic weakness in the labor market, ongoing inflation concerns, declining consumer sentiment, and tariff fears all contributed to a weaker market in the second half of February through quarter end, leading to negative returns for the first quarter.
The S&P 500, Dow Jones Industrial Average, and NASDAQ all posted first quarter declines of 4.3%, 0.9%, and 10.3%, respectively. Big technology stocks generally suffered in Q1, shaken by the DeepSeek AI news the surfaced out of China in February calling into question the AI spending expected out of that sector. At the sector level, seven of the eleven broad industry sectors posted positive returns for Q1, with one sector, Industrials, just slightly negative. However, the remaining three sectors (Communication Services, Consumer Discretionary, and Technology) make up about 50% of the S&P 500 index, with all three posting significantly negative returns. Looking beyond US markets, international stocks generally outperformed domestic stocks with the MSCI EAFE index up over 8% during the first quarter.
From the all-time S&P 500 high reached on February 19th through the first quarter low reached on March 13th, the market experienced a 10% correction in just 16 trading days, which is the quickest move to correction territory in five years and the 11th quickest in the last half-century. The U.S. market’s last correction of 10% was in 2023, when the S&P 500 dropped 10.3% from the end of July into October. According to CFRA, even during the historic, nearly 11-year-long bull run for U.S. stocks from March 2009 to February 2020, the S&P 500 stumbled to five corrections. The rapid 10% drop we saw for the S&P 500 was just the 7th time we’ve seen a 10%+ drop from an all-time high in four weeks or less since 1952. And in all but one of the prior six instances, the S&P 500 made a new all-time high at some point in the next year, according to Bespoke Investment Group.
Market corrections of 10% happen on average about every 18 months. Furthermore, Carson Group chief markets strategist Ryan Detrick has noted that 10% corrections not only happen quite frequently but often end up being the main event instead of extending to a bear market, defined by a 20% drop from an all-time high. His analysis shows that since World War II, the S&P 500 has experienced 48 corrections. However, only 12 of those corrections have turned into bear markets, meaning 75% of the time, a correction doesn’t turn into a bear market. Market corrections seem to occur for a different reason every time, and they are never easy to endure, but the market recovers in time.
Outlook
An optimistic market tidbit to hold onto is that the market, on average, rebounds to a positive return in the subsequent quarter following a correction. According to Yahoo Finance, “For any quarter that the index has entered a correction, the next quarter has averaged a 2.3% gain since 1928. For each instance when the S&P 500 entered correction territory in the first quarter, the average gain in the second quarter since 1928 was 8.1% with positive returns two-thirds of the time.”
Additionally, investors are often rewarded for taking a contrarian perspective. According to the American Association of Individual Investors (AAII), individual investors are as bearish now as they normally are towards the end of much larger corrections or even bear markets, and more consumers expect the stock market to be lower than higher in the next year according to the Conference Board’s monthly survey. When sentiment gets this negative, it’s usually a good opportunity for long-term investors to purchase equities.
It is difficult for anyone to forecast what future growth and inflation will be for the domestic economy due to all of the possible changes on tariffs, immigration, and fiscal spending. In mid-March, the Federal Reserve revised down their initial forecast for real gross domestic product growth in 2025 to 1.7% from 2.1%. They also updated their projection for the unemployment rate to rise slightly to 4.4% from an earlier projected level of 4.3%. Currently, the Fed anticipates two Fed Funds rate cuts during the rest of the year. However, Jay Powell, Fed Chair, did not offer much clarity when he recently stated, “It’s really hard to know how this is going to work out. I don’t know anyone who has a lot of confidence in their forecast.”
The tariffs announced on April 2nd created a seemingly unprecedented amount of uncertainty for consumers and businesses. The Wall Street Journal wrote, “There will certainly be higher costs for American consumers and businesses. Tariffs are taxes, and when you tax something you get less of it. Car prices will rise by thousands of dollars, including those made in America. Mr. Trump is making a deliberate decision to transfer wealth from consumers to businesses and workers protected from competition behind high tariff walls.”
Sam Stovall, CFRA Chief Investment Strategist, stated the following after the significant sell off in the market: “As a result, dip buying investors can’t help but hark back to Baron Rothschild’s quote that ‘The time to buy is when there’s blood in the streets.’ Of course, after two successive calendar years in which the S&P 500 posted total returns of 25% or more each, a 10% giveback can hardly be called “a bloodbath.” However, with Federal Reserve Chair Powell acknowledging that the effect of tariffs on consumer confidence, economic growth, and inflation remain unknown, investors have reason to remain unnerved. We still project 2025 real GDP growth at or above 2.0% and think inflation will continue to ease through year end, giving the Fed reason to cut rates by 25 basis points in June and December. Also, with S&P 500 EPS growth likely to increase by more than 9% this year, we continue to see an upward trajectory to this market.”
The stock market can be very forgiving if you give it time. The four worst times to buy equities over the last forty years were in September 1987 (before the 1987 crash), March 2000 (before the dot-com peak), October 2007 (before the Financial Crisis peak), and February 2020 (before the COVID crash). Since each of those four ill-fated buy points, US stocks have still returned at least 7.7% on an annualized basis and have outperformed bonds over all four spans, according to Bespoke.
Sincerely,
Marietta Wealth Management, LLC
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