Dear Friend and Clients, We've fielded many calls within the past two weeks in regard to the weakness in the markets. Clients are understandably looking for reasons why the market is selling off and want to understand how their portfolio might hold up with the volatility. We're happy to share datapoints and thoughts as to why the market has officially entered correction (10% pullback from high) territory.
Three weeks ago, the market hit an all-time high; this was the 5th quickest correction in history taking less than a month. The uncertainty is creating volatility which is at risk of creating panic. Dips, corrections, and pullbacks are normal and to be expected. However, despite the current conditions, we are actually quite bullish and continue to monitor the hard data. If you have any specific questions or thoughts you'd like to share, don't hesitate to reach out. |
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Best regards, Brad Banken, Investment Advisor Representative Allison Banken, COO |
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Uncertainty Let's look in terms of ‘soft data’ which is sentiment/survey driven. The University of Michigan, The Conference Board, CNN Greed & Fear, and American Association of Individual Investors (AAII) all have had surveys that dropped off within the last three weeks. - U of M dropped 10% on household concerns about an inflation wave
- Inflation component increased the most since May 2021
- Consumers year ahead inflation was 4.3%, up from 3.3% last month
- The Conference Board had household confidence drop by the most since 2021
- AAII weekly survey tallied the third highest number of bears since 2008
- CNN Fear and Greed notched into “extreme fear” territory
In terms of hard data, there are many indicators that are put out by the government. We use these indicators mostly to determine where employment and earnings are going. We also feel it is important to read between the lines to understand how the metrics are calculated. - Atalanta FED GDP is now being modeled at (2.8%) for Q1, down from +3%. This change is driven by an import surge in Q4 ahead as people were expecting tariffs.
- Weather has been horrible (cold and rainy) which is being cited for some of the weakness in retailers (remember 70% of GDP comes from the consumer). There is no upside to companies setting a high bar in terms of guiding for earnings for the year. With that said, the qualitative commentary on post earnings conference calls has generally cited a more cautious consumer.
- The average American doesn't fully understand the complexities of tariffs which leads to uncertainty. Uncertainty can lead to cautious spending, trading down (buying the cheaper option), and panic selling within the market. There is risk that the soft data (sentiment) eventually turns into hard data (economy and earnings).
Despite the recent hard and soft data points; there are some things that could also calm the market including tax reductions, interest rate cuts, and softening of trade rhetoric. |
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Historical Perspective This is the fastest 10% correction since 1950. Since 1950 we've had 23 corrections over 10%+. This has been the 5th fastest with 20 days from a record high to drawdown, heavily focused in tech and momentum names. The small group of stocks that led the market the past two years are now showing vulnerability are and the ‘first to go’ in a pullback. Some industry terms used to describe market selloffs are: - Dips - are typically considered around a 3% loss; these happen on average of 7.2x a year.
- Pullbacks - are usually referenced when the market is down ~5%, they happen on average 3.4x a year.
- Corrections - are more significant and the term is used when the market is down about 10-20%; the market is down 10% roughly once a year and 15-20% corrections happen .5x per year.
- Bear Market - This is referenced when the market is down 20%
It can be hard to keep emotions in check, but 10% corrections should be expected. This is why we place importance on individual household balance sheet and cash flow. If you plan correctly, align your accounts with your investing goals, you should not have to sell when you're not prepared to. We'll illustrate some of the soft data with charts below: |
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AAII Bearish Sentiment: At 60%, it is the sixth highest bearish reading in history (1990 recession, Iraq’s invasion of Kuwait, just after the Great Financial Crisis and near the bottom of the September 2022 bear market). This was when the market was down ~3% as well. |
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The Consumer Confidence Index (CCI): This was the largest monthly drop since August 2021. Expectations from consumers anticipating a recession within the coming year rose to a 9 month high. |
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University of Michigan 1 yr and 5-10 yr inflation expectations: The 5 yr inflation expectations were 3.5% or the highest since 1995, been 30 years. |
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Atlanta Fed GDP Now forecast for Q1: from 4% to (2.8%) all within a month!!! GDP is a LARGE number, to move that big of number by that much, that quick….need to read between the lines. Remember the US GDP has only had two negative quarters in the last ten years, both were in Q1/Q2 of 2020 during COVID. |
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Historical Performance & Effects of Political Elections It is clear sentiment has gotten to be negative in a short period of time. The biggest perceived risks continue to be trade wars causing a global recession and tariff induced inflation causing the fed to hike. Historically, what political party is in power can impact the market in the short term, but over the longer term it is not as relevant. The below graphics will address both of points. |
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We have been through many different presidents and administrations, the 7-10% average return includes all policy transitions. |
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In the first two months of the year, the S&P 500 has followed its typical pattern for the post-election cycle. Was the quick turn to negative sentiment possibly influenced by political affiliation? |
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February and March historically are not the best months, especially post election years. |
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You need to be in the market in order to see the historical returns which include the good days and the bad. Since 1993 if you were to only own the S&P on days after up days, you would have made 44%. If you only owned the market on the day after down days, you’d be up 851%! |
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From 1928 to now: *94% of years had a 5%+ pullback
*64% of years had a 10%+ pullback *40% of years had a 15%+ pullback *26% of yeard had a 20%+ pullback Remember despite these, the average is 7% to 10% a year. Conversely, here's a look at the worse drawdowns each year. |
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Now we will add the annual returns despite these pullbacks: |
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The Market Has A Pullback, What Next? The market likes to take the stairs on the way up, and the elevator on the way down. How does the market react after 5% pullbacks historically? -Average time to recovery from a 5-10% pullback is 3 months -Average time to recovery from 10-20% pullback is 8 months -Average time to recovery from 20%+ mild recessions (1957, 1960, 1980, 1981, 1991) is one to two years (not as statistically significant given not many datapoints) 10% corrections have happened in 20 of the last 35 years with an average downdraw of 14%, despite that the S&P500 returned 11% per year during those 35 years. The S&P 500 has dropped 10% within 20 trading sessions—a pace historically associated with sharp rebounds. - Past instances of such rapid corrections have been triggered by macro shocks, including the COVID-19 crash, trade wars, and financial crises.
- Following similar swift declines, historical data suggests:
- One month later: The market was higher 5 out of 6 times
- Six months later: The market was higher 6 out of 6 times
- Twelve months later: The market was higher 6 out of 6 times
- The current market correction is largely attributed to tariff uncertainty, yet historical precedents indicate a strong probability of recovery over the medium term.
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All of the previously referenced data is in terms of investing in the S&P 500. We have written about how the S&P 500 had become very concentrated in mega cap and tech. The Nasdaq 100 and the Mag 7 past two-year outperformance has driven the overall market returns. |
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As of Feb 20th, it was the second largest stretch of trading above its 200d MA going back to 1986…we were due? |
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Looking Ahead Reading between the lines historically, we were overdue for a pullback. We spoke about this in our last note, but did not expect it this quickly! Dips, pullbacks, corrections and recessions are part of investing. Risk is not rewarded in a linear fashion. I realize this reads counter to the current narrative and media sound bites, but I might be the most bullish I have been on a two+ year horizon. In terms of the near term, the tariffs can always be repealed as quickly as they were put in place and believe inflation is significantly lower than being reported (may have room to absorb tariff impact). The Fed could always cut sooner or deeper than expected. These factors in addition to many structural and cyclical trends that were laid out in our last note, in our opinion, give support to a bullish stance. With that that said I acknowledge the next few months could be quite volatile and it remains to be seen how significant this correction is. The unorthodox/chaotic timing and implementation of tariffs have created uncertainty and volatility (two things the market does not like). Looking forward, I would imagine you could see selling of dividend/income/value-based ETFs or stocks in order to buy the dip in growth, especially small caps. We acknowledge that the soft data is quite bearish and could lead to softer hard data, but how much of this is now priced in? Currently, the hard data is quite positive, and we continue to think inflation is a lot lower than government reports as we laid out in our last note. There are many iconic quotes from the investing greats such as Buffet's “be fearful when others are greedy, and greedy when others are fearful” to Lynches “time in the market beats timing the market” that we go back to in times like these. It is not easy to see accounts sell off, but hopefully this note helped explain why and helped remind us that dips, pullbacks, corrections are to be expected. |
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“The intelligent investor realizes that stocks become more risky, not less, as their prices rise, and less risky, not more, as their prices fall." - Sir Benjamin Graham |
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60 Upper Kingtown Road
Pittstown, NJ 08867, United States |
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The opinions and forecasts expressed are strictly those of Brad Banken's and may not actually come to pass.
Investment advisory services offered through Investment Advisor Representatives of Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Each company is independently responsible for the products and services they provide. Representatives of Cambridge Investment Research, Inc. do not provide tax or legal advice in their roles as registered representatives. Oak Stream Investment Advisors LLC and Cambridge are separate entities. Securities offered through Cambridge Investment Research, Inc., a Broker/Dealer, Member FINRA,SIPC. The information in this e-mail is confidential and is intended solely for the addressee. If you are not the intended addressee and have received this e-mail in error, please reply to the sender and inform them of this fact. We cannot accept trade orders through e-mail. Important letters, e-mail fax messages should be confirmed by calling 630-302-3145. This e-mail service may be monitored every day, or after normal business hours. Brad Banken, Investment Advisor Representative, is registered in the following states: NJ |
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60 Upper Kingtown Road
Pittstown, NJ 08867, United States |
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