Stock Talk - Stocks Just Dropped 10%—Here’s Why the Weak Start to 2025 Might Be an Opportunity

Starting point is 00:00:00 Investors, we're back to business. This week, we're back to the charts and data series. Most will come in a quick rapid fire without lots of discussion, but most of them say the same thing. While uncomfortable and near historically quick, the recent minus 10% decline in the SP 500 has not yet said the bull market for U.S. equities is over. Recall of the average decline in any year is a little over minus 13% and historically rapid declines of minus 10% have been followed by good gains in the next 6 to 12 months. First chart, 75 years of data from the folks at creative planning showing max entry year losses in the S&P 500 verse year-end returns. You'll note that the average loss in the year is over 13.5% while the average year-ending gain is still positive 11.6% up.

Starting point is 00:00:49 As many times as our team tries to message this, I'm compelled to do it again. Investors, there is no free lunch in the stock markets except for historic compounding over decades. you can't get higher returns on the stock market without sitting through periods of high volatility. 2022 was a great case in point to the downside in higher growth stocks versus dividend names, while the following years, a 2023 and 2024 showcased the higher compounding of growth stocks versus those dividend names. This year to date, the markets have reverted back to slower growth, higher dividend names outperforming, and higher growth names pretty much underperforming pretty dramatically. Great date from Ben Carlson on the drawdowns in the SEP 500 over the last

Starting point is 00:01:34 75 years. Investors, this is the 39th greater than 10% decline, and there would be considerably more if the data didn't use closing high and low prices, but instead used intraday low and high levels. Next, the data from Seth Golden shows historically swift and fast down moves have been followed by very profitable investment returns over the next three, six, and 12 months. The current 10-year chart in the SP 500, which into December 6, 2024 and early 2025, had compounded at a little over 11.5% per year. Please note that this includes around 15 drops of more than minus 10%, including the minus 35% COVID crash and the 2022 earnings and GDP recession that took the S&P 500 down minus 25% in nominal terms,

Starting point is 00:02:22 minus 35% when adjusted for their 10% inflation spike that year. Take a look at the shorter-term daily chart of the S&P 500 for the three years. As you can see, this is the third time the S&P 500 has dropped almost exactly minus 10%. The second time, the index has broken its 200-day moving average since the market bottom down minus 25% in October of 2022. While our team had forecast a sloppy choppy mess for the first few quarters of 2025, netting next to no gain, the first six to nine months, and our team was wary of a messy first quarter presidential term, as they are typically down before they're up, we definitely didn't forecast it historically swift and sharp minus 10% down move. This move has been largely attributable from the Trump administration

Starting point is 00:03:08 focusing almost entirely on using a stick on the issues of tariffs, immigration, doge, and even regulation skipping their previous 2017-curred approach, where they focused on lower taxes and deregulation. Lower friction items that shareholders love. For what it's worth, this move down looks quite similar to the near exact move in the first quarter of 2018 post-Trump tax passage when the administration flipped the script to focus on tariffs, immigration, the border wall, and other less friendly shareholder and consumer initiatives. Here's a chart from that time period back in the first half of 2018 and Trump 1.0 when the focus was frictional policies. A quick drop of over minus 10, 10% in the first quarter of 2018, and then a subsequent positive 15% rally back to a new all-time

Starting point is 00:03:58 high into early fourth quarter of that year, then another drop as the Fed stayed too hawkish for too long into Christmas of 2018. Here's a series of good news chart, first on seasonality patterns in the stock markets. Historically, mid-March ends one of the worst four-week periods of the trading year. Here's another Ben-Charlson chart showing March 12th is historically the average average low for the year over the last 20 years. Investors so far in 2025, Thursday, March 13th, my return to the office from vacation, S&P 550, has been the closing low for the year. As I said last week, historically, there's been something very coincidental about the market's going

Starting point is 00:04:39 down hard when I'm on a plane vacation. Dr. Copper is another chart. It's perking up and close to breaking out of a massive four-year base at 488 per contract. While emerging, market economies and their demand have driven the incremental demand for copper for decades now. When this commodity moves higher, many often cite it when things turn more bullish for the U.S. economy. Why isn't anyone talking about this right now? Our sell-side strategists for are now sending caution alarms turning negatives just as Dr. Copper is saying he should be looking more optimistically after declining most of the second half of 2024 in front of the presidential election. Another factor, liquidity in the U.S. is starting to rise. Following other,

Starting point is 00:05:21 countries higher broader money supply growth as measured by M2 is starting to reaccelerate to almost positive 4% year over a year take a look at the upturn in a chart from manual blay another chart the US dollar or DXY index has topped and is trending lower not higher same with market priced interest rates both trends are better not worse for earnings and valuations in the second half of this year take a look at the dollar chart now take a look at the real-time two-year inflation break-even interest rate looking to have peaked and it's rolling over. Now, investors, take a look at the real-time, real interest rate charts,

Starting point is 00:05:58 saying it's troughed and turning up. And finally, investors, take a look at the market sentiment as defined by AAI sentiment. We've discussed this survey many times over the last seven years as a great contrary indicator. At or nearing market tops when FOMO, that's fear of missing out has kicked in, most retail investors are bullish,

Starting point is 00:06:19 and no one is bearish. At market lows, quite the reverse. Most retail investors answer this call bearishly, and it has been historically a good time to add to market investments. Also take a look at the updated net score from AAI Bulls first bears. I'll give you a few seconds to process this one. Investors, yes, you're seeing that chart correctly. This reading has only been this low two other times in history.

Starting point is 00:06:47 Near the lows in the first quarter of 2009 during the great financial crisis, and in the first quarter of 2020, near the lows in the COVID crisis. Both, of course, proved to be buying not selling opportunities. For what it's worth, a bullish reading of below 20% wasn't even reached in those prior times, but it has been in the first quarter of 2025. On the flip side, a bearish reading over 57% for three weeks straight, hasn't happened since 1990, back when what turned to be the historic 10-year rally, including the internet bubble, started. That bearish reading currently stands at over 59%.

Starting point is 00:07:22 Investors, if you're panicking now, all of these indicators, which have led rallies and stocks for this cycle, are saying the same thing. They are saying, don't panic here. There should be a better place and a time higher to sell in the coming three to five months in case your investment allocation dismissbacks with your risk tolerance. Are there other indicators saying it would be better to be buying here than to be selling? Yep, there are quite a lot of them. Volatility indicators are saying that much of the forced liquidation at hedge funds and in leverage

Starting point is 00:07:52 ETFs is over for now. And while there is uncertainty around the April 2nd Trump tariff announcement, there's always uncertainty in the economy and in the markets. Investors are repeat of the gloriously boring and straight line up 2017 under the first Trump presidency was a very unlikely scenario in our work. Even though I like to say it's the same people managing the same money, doing the same things, So many times we expect the same outcomes, we didn't expect the great scenario of 2017 to play out this year in 2025. The main reason was the fact that in 2017, the Trump administration focused on one and only one thing,

Starting point is 00:08:31 lowering taxes and getting that policy through Congress. Lower taxes equals lower friction on consumers and corporations, and their shareholders love that. The Republican GOP linear focus on taxes caused the S&P-Fricts. 500 to move upward in 2017 in a near, linear, and historically low volatility year. Trump 2.0. Out of the gate, it appears that Trump is going for a stick approach, mimicking 2018 and initially skipping the carrot of taxes and deregulation. They're taking on a myriad of policy changes in a rapid finer manner, immigration, tariffs, foreign policy changes, and government firings and downsizing by Doge, while potentially good for taxpayers and citizens over time in the

Starting point is 00:09:15 short term, what do they do? They all increase friction in the economy. They all increase costs in the economy in the short term. Your shareholders and financial markets hate added friction. Is this max friction? Is April 2nd Trump's so-called tariff liberation day, Max Payne? The data behind the scene says that that's highly likely, just as others panic and hike their recessionary odds. While all these policies in D.C. are anti-economic growth in the short term, real-time inflation expectations look to a peak, while real-time growth expectations have troffed, just as others say the reverse. While most of our real-time data series flashing troughs and bottoms, I'm actually more optimistic thinking about the next 12 months, even though markets are lower than where they were two

Starting point is 00:10:00 weeks ago. What if Trump is crazy like a fox? You don't have to like him or his policies as a voter, but investing isn't about politics. It's about outcomes. Investors, we've discussed this for the past year. soft landings in the economy don't guarantee no volatility. We saw a minus 11% sell-off in the soft landing that Allen Greenspan induced in 1996 in the midst of the internet buildout. Is this economic slowdown just caused by presidential terms in an AI cycle slowdown to be followed by an acceleration in the second half of 2025? Is this merely a halftime pause this time around? The Trump administration seems to be going for the early shock and awe taking on the tough policy issues first. Are the carrot policies coming in the second half of 2025 and

Starting point is 00:10:48 2006? The good news? We're oversold and historically speaking nearing what is normally a low in both economic growth expectations in the first quarter, a seasonal low in the stock markets, and yes, a seasonal high in inflation concerns. Investors know that regardless of the path for the economy and the financial markets over the next few months, the investment team at Oak Harvest will be here, crewing the ship, and adjusting our models where we can. We expect the first couple quarters at 2025 to be a very active year for active stock management. Until next week, have a blessed weekend. And remember, for you and the know from watching last week's video, mark your calendar down. My next real vacation isn't for another 11 to 12 months, maybe more.

Starting point is 00:11:31 And historically speaking, for whatever reason, that's been a good thing for stocks. All content contained with an Oak Harvest podcast expresses the views of the speaker and is for informational purposes only. It is based on information believed to be reliable when created, but any cited data, indicators, statistics, or other sources are not guaranteed. The views and opinions expressed herein may change without notice. Strategies and ideas discussed may not be right for you, and nothing in this podcast should be considered as personalized investment, tax or lease. legal advice, or an offer or solicitation to buy or sell securities. Indexes such as the S&P 500 are not available for direct investment and your investment results may differ when compared to an index.

Starting point is 00:12:20 Specific portfolio actions or strategies discussed will not apply to all client portfolios. Investing involves the risk of loss and past performance is not indicative of future results.

Stock Talk - Stocks Just Dropped 10%—Here’s Why the Weak Start to 2025 Might Be an Opportunity

There aren't comments yet for this episode. Click on any sentence in the transcript to leave a comment.