Last week was no fun. It was a big downer.
Major indexes were down between 9% (S&P 500 index) and almost 10% (NASDAQ and Russell 2000 indexes) last week as the stock market continues its tariff tantrum. The only market components up last week were United States Treasury instruments and the volatility index (which more than doubled last week). Even gold, which had been on a tear to the upside, succumbed to the selling pressure last week.
Institutions are selling stocks (called distribution) at a pace not seen since the COVID crisis. Even during the bear (downtending) market in 2022, we did not see the kind of selling pressure we saw on Thursday and Friday. That smacks of a genuine concern about the tariff’s effects on corporate earnings. In the age of algos and high-speed traders, markets move faster than ever.
Earlier this year, I wrote that stock valuations were at record highs and that the rubber band was getting stretched thin after two years of 20%+ gains in the S&P 500 index.
When analysts announce that corporate earnings are coming down due to tariffs, institutions sell the stocks to bring down stock market valuations to a fairer value. Legendary investor Warren Buffet was in the news late last year and early this year because of his cash stockpile. He’s probably waiting for an opportunity like we see in today’s deflated markets.
The only thing that stopped the selling on Friday afternoon was the closing bell.
Unfortunately, as I write this on Sunday night, a vacuum of positive news on the tariff front has sellers picking up where they left off at Friday’s close (in the thinly traded overnight futures markets). So Monday morning’s open is already not looking too good.
GIVE ME THE BAD NEWS FIRST
More Country Responses: Friday’s sell-off began pre-market when China announced retaliatory tariffs of 34%, equal to our newly imposed tariffs on China. Other countries have made rumblings about not sitting still and will announce retaliatory tariffs of their own. We haven’t heard from the Eurozone, but I’m betting they’re preparing a backlash of their own.
CEO Optimism at Lows: Because of the lack of clarity on tariffs and their impact on their companies, most CEOs have not figured out what to expect for their companies, employees, and operations. If tariffs are to be absorbed, employees will undoubtedly have to be laid off, and perhaps locations or offices will be closed to maintain decent profit margins. Of course, this can be a precursor to a recession. The coming second-quarter earnings calls will be very telling.
Technical Support Areas May Not Hold: Just because prior institutional support in certain price areas of the markets has held before doesn’t guarantee it will hold up again. Sure, we may bounce at upcoming support points, but how long and to what amplitude? Markets that have declined as they did on Thursday and Friday don’t just turn around on a dime, so further weakness should be expected.
Slowing Growth: The Institute for Supply Management (ISM) Manufacturing Purchasing Managers Index (PMI) fell into contraction territory (< 50%) last month at 49%, while the leading New Orders component dropped to a 22-month low, and the Prices Paid Index leapt seven percentage points, warning of increasing price pressures.
Last week, the ISM Services report indicated slowing growth and increasing prices, with four fewer industries reporting growth than during the previous two months. A continued downward trend would be problematic for the broader economy, as services contribute the majority of GDP.
Job Market Wobbles: Challenger Job Cuts rose 60% in March, a 205% increase from one year ago. This marks the highest level for the series outside of the COVID recession. Cuts in government, technology, and retail jobs lead to these numbers.
Friday’s Monthly Employment Situation Report from the Bureau of Labor Statistics, though better than expected with 228,000 jobs created in March, also showed the unemployment rate ticking up to 4.2% (from 4.1%). Nonfarm payrolls increased more than expected, partly due to workers’ return following a strike. A continued increase in the unemployment rate would indicate serious trouble for the U.S. economy.
WHERE’S THE GOOD NEWS?
Potential Dealmaking: Signs that Vietnam and a few other countries want to negotiate lower tariffs are positive and could spark a rally. Suppose the Trump administration becomes overwhelmed with requests for meetings from countries to renegotiate tariffs. In that case, the President may hit the pause button on tariffs to allow enough time for the players to come to the table.
We’re Oversold: Markets are grossly oversold after last week’s barrage of selling, and the rubber band is therefore stretched to the downside. We only need one bit of good news to see a 200-400 point rally in the S&P 500 index. Markets this oversold tend to see a violent bounce (some call it a face ripping rally), though I doubt we’ll see another “V” bottom like we saw post-COVID.
Lower Interest Rates: The betting markets have increased the odds of up to four rate cuts this year by the Federal Reserve, up from one or two expected last month. Stock markets love lower rates and tend to rally on this news. In addition, the yield on the 10-year Treasury Bill is back under 4%, which helps lower government interest costs on its massive debt load, not to mention consumers’ debt load.
Nearby Technical Support: The market indexes are approaching long-term areas where institutions have been willing to buy and support them in the past. At a minimum, it should be an area where we see a robust bounce, if not a one —to three-week rally. Seasonally, April is a positive month for the stock market.
Opportunities abound: You’re getting to buy some of the market’s best stocks at price levels we haven’t seen in years. Some stocks have lost 30%-50% of their value over the last few months. It’s better than a sale at Target Stores!
Still Up Almost 30%: Though the S&P 500 is down 17% from February’s all-time high, we’re still about 30% higher than where we traded at the start of the bull market in October 2022. This puts us back to levels where we traded in April 2024, about a year ago, so essentially, we’ve given back the last year of gains (no, it’s never fun, but no one said the stock market was a one-way ticket upward).
Quantitative Studies: When studying past periods when we had such intense selloffs as we saw on Thursday and Friday, markets tended to be higher 1-12 months out almost every time. While the past is not prologue, in this business of typically 50/50 odds, higher probabilities are the best tool to guide you on what’s more likely than not to happen.
Lower Energy Prices: Oil supplies and recession fears are helping to bring down the price of oil and related energy products. Most recessions are associated with oil price spikes, a nail in the coffin of consumer spending after a long good run. Lower oil prices leave more money in consumers’ pockets for other discretionary spending, which tends to stave off recessions.
WHAT TO DO NOW?
As discussed in Where’s the “Markets in Turmoil” Special published last Thursday, it’s not about what you know in this market. It’s about how you behave or react to what’s happening.
I can’t pretend to know how exactly you’re feeling, but believe me, I’m carrying the weight of an untold number of families’ retirement life savings on my shoulders, so I understand your worry and pressure about what’s happening to your nest egg. As alluring as it sounds, the temptation to sell here and wait for a better time to invest is much harder to pull off than you think. I still know people who left the markets after the 2007-2009 financial crisis and can’t pull the trigger on stocks more than fifteen years later. If you’re truly worried, call your advisor and talk to her or him about the best way to reduce your overall risk.
Even though it’s OK to nibble a little here and there on stocks, it feels too early to go all in and yet too late to sell. While we finally saw signs of panic on Friday, Monday may bring in the laggard sellers who watched the Sunday news shows or logged on to their 401(k) over the weekend. Plus, we can expect some margin call selling for those unable to cover their leveraged positions on Friday.
People and the media casually use the word “crash” when they refer to markets. When I think of a crash, I still remember where I was and how I felt in October 1987, when the markets crashed 20%+ in one day. Sure, a 10% market decline in one week is dramatic, and it hurts, but is it a crash when we’re still up almost 30% from the last bear market bottom?
We have not seen a single-day market decline of 20% or more since the 1987 crash. Following the 22.6% drop in the Dow Jones Industrial Average (DJIA) on October 19, 1987 (Black Monday), market-wide circuit breakers were introduced to prevent such extreme losses. These rules halt trading if the S&P 500 index drops by 7%, 13%, or 20% in a single day.
Since then, the largest single-day percentage declines occurred during the COVID-19 market crash in March 2020, with the DJIA falling almost 13% and the S&P 500 dropping nearly 12%, both well below the 20% threshold.
BUY, SELL OR HOLD?
Ultimately, your retirement and investment future may be defined by:
A. The patience and discipline you exercise today by holding on and waiting for a better day to sell, or;
B. Your fear of the market going lower causes you to be one of the many architects of a coming market capitulation low that the rest of us enjoy, and you have to chase it at higher prices (if you still have the nerve to rejoin us).
As the trade war unfolds, I expect volatility to continue, but a sharp rally can’t be ruled out if key import taxes are renegotiated and adjusted.
While the tariffs announced on April 2nd were greater than markets had priced in, the effect of these levies has yet to be seen, and it will be essential to monitor the increasing recession warning flags in the coming months.
Finally, many who read my stuff know one of my favorite quotes from Peter Lynch, the renowned investor and former manager of the Fidelity Magellan Fund:
“The secret to making money in stocks is not to get scared out of them.”
Now you too know the secret.
Sam H. Fawaz is the President of YDream Financial Services, Inc., a fee-only investment advisory and financial planning firm serving the entire United States. If you would like to review your current investment portfolio or discuss any other tax or financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fiduciary financial planning firm that always puts your interests first, with no products to sell. If you are not a client, an initial consultation is complimentary, and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client and their financial plan and investment objectives are different.
Source: InvesTech Research
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