Last week Great Adventure in Jackson imploded Kingda Ka. It was my favorite roller coaster at the park. It was the tallest coaster in the world at 456 feet and its signature design was a steep incline followed by what felt like a straight vertical drop that maxed at 128 miles per hour… kinda feels like the stock market this year, no? America is the largest economy in the world and the 2025 stock market so far has been a series of steep rises and sudden falls that sure didn’t stop last week.
Before we dive into 2025, I want to take you back in time, a time when things were incredibly unsettling. There was a war overseas that was threatening to turn global. There was incredible political tension punctuated by the fact that we didn’t know who or what policies would be in charge the following year. There was significant economic uncertainty around interest rates and inflation. I’m taking you back all the way to January of 2024. After a solid start last year, we saw a pullback of 5% in April followed by an 8% sell off between July and August. When the dust settled the S&P settled for a 23% return. All in a year’s work.
I think it’s times like these when it’s important to revisit historical numbers. On average, there is a “pullback” (5% decline or greater) in the S&P 500 twice a year. There is a “correction” (defined as a 10% decline or greater) once every 18 months and bear markets (defined as 20% decline or greater) every six years.
We didn’t see a full correction last year so we are due. Even in positive years, the swings can be volatile as evidenced by this great chart from JP Morgan
I see two main reasons for this volatility. First, what doesn’t the market like? Uncertainty. Right now, the biggest talking point is tariffs. Are they good? Are they bad? If you want a more in depth look at tariffs as written by economists, you can find that here. It’s pointless to discuss this further in the blog because it turns into political mudslinging. As you know at this point, I’d rather eat brussel sprouts than talk about politics (Side note on brussel sprouts. The typical argument I get is that if I make it with bacon they are so good. Well duh, bacon is awesome. But if you are making your brussel sprouts with bacon it’s because the brussel sprouts alone taste terrible, just admit it). So, as tariffs create uncertainty, so too do portfolios get repositioned in an effort to look forward on what parts of the market will suffer and what parts will reap rewards. Profits are being taken, particularly in the tech sector, which leads me to reason #2.
The market was a little expensive quite frankly. The forward P/E ratio as of March 6th was 21.1., which is a little more than 1 standard deviation above the average. Across the board, valuations were running a little high. This becomes clearer when Nvidia reports earnings that equate to year-over-year revenue growth of 78% and profit growth of 71%....and yet shares slide. When that’s not good enough then it’s time for a correction.
So how does that get fixed? I’ll start with the good news. 94% of reporting is done for the S&P from last quarter and profits are strong. Collectively, 4th quarter earnings were up 14.8% compared to the prior twelve-month reporting. Additionally, 76.4% of the S&P beat analysts’ Earnings Per Share projections. It’s very possible this is an orderly market selloff to take profits where there may be potential weakness and reset for the next bull market. If the majority of the S&P is as strong as it looks, then that leads to growth in earnings which brings P/E back in line. What’s the bad news? In order to take profits, you have to sell. Hence the decline. But with that, share pricing moves back in line. Looking at this from a macro level, and I said this to a lot of you from the beginning of the year, there is no way to move this current agenda forward without some pain at the beginning. The market has to reset, the money has to flow to and through private companies as it moves away from the Federal Government. That won’t happen in a straight line, but quite frankly, the market never does.
If you’re a younger investor or still have a long investment horizon this is a great time to continue adding money to your portfolios. You are getting all of the tech sector, including the Magnificent 7, at a significant discount from where they were trading just 3 months ago. Keep plugging way. If you’re in retirement or in the red zone, it’s certainly a little unnerving. One thing I would point out though, unlike in 2022, the safety measures we have built in to your portfolio are doing their part. The US Bond market is up 1.75% YTD. Alternative investments such as market neutral strategies have also provided positive returns. Finally, the Dow, which has significantly lagged the S&P and NASDAQ for years is positive for the year. Maybe there is still hope for those dividend paying value companies.
Rides like Kingda Ka are my favorite to get on due to their extreme nature … I just don’t like when they last too long. As we get closer to St. Patty’s, here’s to a week in the green.
As always, call me or email me with any questions and feel free to share this with anyone who might benefit.