Uncertainty.  The word that Wall Street hates to hear.  It’s because consumers usually pull back during uncertainty in the economy.  And currently, we have multiple uncertainties… tariffs, government layoffs, Federal spending cuts, etc.  And it matters – big time!  Consumer spending accounts for almost 70% of the GDP!!!  But how much is hype and/or hysteria.  If one “looks under the sheets,” the consumer is still spending.  Credit card purchases, airline traffic, household balance sheets are all up.  And unemployment and jobless claims are trending sideways.  Of course, this can all change and probably will.  Wall Street has increased its chance of a recession from 20% to 35%.  But note – the markets have sold off 10% already… on the possibility of a recession.  And in a typical recession the markets sell off 20 – 25% (broad brush statement).  So, a third to half of a recession (which I don’t think we are going to have – more later) is already priced in the market.  But this is very normal.  See the chart below.

CHART 1

Note that the “average” annual correction is 14.1%.  But if one wants equity like returns, they must accept equity like risk (i.e. volatility).  Looking at 2023, it also corrected 10% but ended up 24%.  But some have a problem with risk and return…can’t seem to grasp the concept.  But that’s another story for another time.

 

On tariffs, I am still in the camp that this is a “process,” with negotiations ongoing – maybe for multiple months.  What we see now is not the final result.  And the Bond market appears to think that way also.  They seem to be the “adults in the room.”  We have always said, “If you want to see what the stock market will do, watch the bond market.”  Note – the global bond market is much larger than the global stock market!  Bond yields have been trading in a very narrow range, showing composure in the face of stock market chaos.  Note the Federal Reserve doesn’t see a recession, but John Q. Public does.  Over reaction?  Maybe, but maybe not.  This has a way to go to play out and it could end badly… or perceive to be going badly.  Remember, in mid to late 2022 – 90% plus of economists (and 99% of the media) predicted a recession?  It never happened, but it put the stock market in a bear market.  Probably won’t happen again – but it could!

 

It appears that the Feds Stock Valuation Model is rather comfortable here.

CHART 2

 

Another point to ponder is the sentiment ratios, which I show here often.

CHART 3

The Warren Buffet’s of the world buy when everybody is selling, and vice versa.  It follows the logic that if you are bearish, you most likely have already sold… and have only two options – 1) do nothing, or 2) buy.  And right now, we have almost all-time record low bulls.  Compare it to late 2022… as the market bottomed and started its massive rally.  Just for grins, note when euphoria was high in early 4th quarter , it was probably a good time to sell.  Oh well.

 

So why no recession?  In a word – profits.  Corporate profits and earnings are growing.  See the chart from J.P. Morgan below:

CHART 4

After a 11% earnings growth for 2024, they are looking for a 14% growth this year, and 12% next year – with growing profit margins.  And for those of you who think the Magnificent 7 rally is over, see the profit margins for the “7” and the “other 493.”

CHART 5

 

On a side note, to strengthen our point, copper (the metal with a PhD, Dr. Copper) is making all- time highs.  It is used globally for manufacturing.  Generally speaking, when copper rises, world economies are rising.

 

To sum this up, we are looking for a choppy market with upside – most coming in the second half of 2025.  We have reduced our year-end goal of 7000 on the S&P 500 to 6500, which is still 16% higher than the end of the 1st quarter (5611).  Stock market valuations have come back down from being expensive and excessive to “only” just high.  The growth story is still intact.  Value stocks are now attractive, and mid-cap and small-cap stocks are getting more attractive.  Diversify, diversify, diversify!

 

- John Osborn, PhD, CFP®, CFS, ChFC, BCS, AIF

Quote of the Day:

"Bull markets are born in pessimism, grown in skepticism, mature on optimism and die on euphoria.  The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell.” – Sir John Templeton

Our Website Just Got a Refresh!

Explore our newly redesigned site—now easier to navigate, with updated resources to help you plan for the future.

Past performance is not a guarantee of future results. Indices mentioned are unmanaged and cannot be invested into directly. Diversification and asset allocation strategies do not assure profit or protect against loss.  These are the opinions of John W. Osborn and not necessarily those of Cambridge. The views expressed herein are for informational/educational purposes only and should not be construed or acted upon as individualized investment advice. Investing involves risk. Depending on the types of investments, there may be varying degrees of risk. Investors should be prepared to bear loss, including total loss of principal.