The S&P 500's recent decline began on February 20th, the day after the index recorded an all-time high. As I mentioned in last month’s note, we lacked confirmation of the market’s health, making us vulnerable to a pullback. The catalyst was the Trump administration’s rapid-fire policy initiatives, which are stress-testing the economy, which has been resilient so far, and raising fears of a recession.
Trump officials recently acknowledged that they expect their policies to cause short-term pain. The near-term outlook for the economy and stock market has soured rapidly over the past few weeks. Stock investors are confused. It is understandable why risk-off is the stock market’s current default option.
Corrections are caused by fears that the economy is falling into a recession. During these events, stock prices fall 10%-20%. But they can recover relatively quickly once those fears abate. During the bull market from 2009 through 2020, there were 66 “panic attacks,” which included a few corrections.
This market is challenging to navigate because the policies weighing on the market and stirring up this uncertainty can be changed at any moment. The current panic reminds me of the Pandemic. The advice back then was to ride it out. The selling ended up lasting only about a month. Investors saw something in March 2020 that allowed them to take a breath. This recovery began nine months before the announcement of the vaccine and just as the economy was shutting down. The market is forward-looking; back then, investors realized their worst-case fears were not likely, and the market began recovering its losses.
For those of you with cash needs or who must take the required minimum distributions, we calculated those amounts last year, and we left enough in cash or bonds to get us through 2025. We did this so we wouldn’t have to worry about selling during a possible market downturn.
When a long-standing trend is interrupted by a significant bout of volatility, whether based on geopolitics or such factors as tariffs, the market’s usual flow is interrupted. The current weight of evidence has not signaled the end of the bull market. It is difficult to say how long or deep this downturn could get, but I advise staying calm. I wouldn’t be surprised if this uncertainty persists through mid-year.
Each day provides a bit of a peek around the corner. If the weight of the evidence indicates changes are needed, I will reach out. For now, let’s sit tight, and if you want to discuss any of this in more detail, don’t hesitate to reach out.