Why Is the Market Down?The single biggest reason the market is down is uncertainty. Essentially, the thinking goes like this: There is a ton of perceived uncertainty on numerous core aspects of the economy and people’s lives. Tariff and trade policy is totally unknown and headlines are volatile, major government institutions (USAID, Department of Education, Consumer Financial Protection Bureau) are being gutted or outright closed and administration officials are openly acknowledging the possibility of a recession.
All that has led to a collapse in investor and consumer confidence and markets are afraid all this uncertainty will cause a dramatic reduction in consumer and business spending and that will cause an economic slowdown or, worse, a recession. Combine that with elevated earnings and a lot of bullish optimism, and you’ve got the recipe for a correction, which we saw in the S&P 500 as it dropped 10% from the February all-time highs.
Why Have Markets Bounced?There are a few reasons for the bounce. First, the White House has stopped issuing daily tariff threats and also largely been quiet on trade over the past week, which has allowed the market to catch its breath. Second, economic data has held up reasonably well and we’re not seeing the type of collapse in activity people feared at the start of March. Economic data is still “ok.” Third, stocks became short-term oversold and were due for a technical bounce, and that’s what we’ve had.
Does this Bounce Mean the Correction is Over?No, probably not. The core reason for the pullback is uncertainty over future tariff and trade policy combined with the dramatic headlines of the reshaping of the federal government, and neither are over. Until trade and tariff policy are known and consistent and we get a break from the dramatic overhaul of the Federal government, we should expect continued volatile markets and be aware that this pullback likely isn’t over.
So Does That Mean the Bull Market Is Over?No, not at all. Despite the parade of analysts on the financial media warning of a further decline (many of whom were enthusiastically bullish to start the year), the reality is it’s much too early to say the bull market is over right now and for several reasons. First, it’s not a guarantee that trade and tariff threats are a net negative for the economy. I know most people think that, but it’s not clear yet because we don’t know what actual tariffs will last. It remains possible this entire tariff drama actually lowers global tariffs on the U.S. Second, the economy remains resilient. Employment is strong and while political chaos will likely slow growth in the meantime, it doesn’t mean there’s a recession coming. As long as employment is strong, the chance of a recession will stay relatively low. Third, taking a longer view, there are economic positives looming in the future with tax-cut extensions and de-regulation, which should boost growth later in the year.
How Should Investors Think About this Market?We have gone from a market priced to perfection when the S&P 500 was above 6,000 to a market more appropriately priced for uncertainty. And as long as there is this uncertainty, we should expect volatile markets, but the outlook is not yet negative enough to warrant raising material amounts of cash or getting substantially defensive because 1) Markets are at a more reasonable valuation and 2) There remains a viable option where many of these policies could be an economic positive in the medium and long term, and exiting now could result in missing ultimate upside.
That said, as investors we should all be expecting more volatility and acknowledge the possibility of a further decline and be comfortable with our exposure and risk tolerance because another Market decline from here on bad policy is possible.
What Comes Next?April 2nd, the day U.S. reciprocal tariffs are announced, will be a very important day as we will (hopefully) get a fuller view of the administration’s trade policies and, from there, begin to determine the outlook for stocks and other assets.
Please read my reoccurring Thursday commentaries. I am on the fourth key to the markets this year of 5 keys. I think when this series is complete, you will know why I do not believe this is the time to get out of the market, but a time to add more cash while the market is down. Keep the faith, this too will pass.
"This material is provided for general information and is subject to change without notice. Every effort has been made to compile this material from reliable sources however no warranty can be made as to its accuracy or completeness. The information does not represent, warrant or imply that services, strategies or methods of analysis offered can or will predict future results, identify market tops or bottoms or insulate investors from losses. Past performance is not a guarantee of future results. Investors should always consult their financial advisor before acting on any information contained in this newsletter. The information provided is for illustrative purposes only. The opinions expressed are those of the author(s) and not necessarily those of Geneos Wealth Management, Inc.