Greetings from SOUND Wealth Management Group (SWMG)! We hope this Note finds
you well! As we continue to find the 2025 investment universe [stocks, bonds, and cash (by
way of purchasing power)] in the constant crosshairs of the pessimistic pundits of the financial
news media, we hope to provide some color on what we have observed over the past few
months and decades, and use this to share our medium to long-term outlook, and see how
much of these recent events are just a ”show about nothing…”.
As of the composition of this note, the ‘market’ (S&P 500) is 19 trading days from an all-time
high (2/19/2025), and since, has had a precipitous drop into market correction territory. It
should be noted that this decline was the 5th most rapid of all-time (See Chart 7). Before we
go into the reason and viewpoints for the coming months, we would like to share what we
believe to be very important historical analytics. Chart 1 highlights that since 1942 the market
averages a 5-10% correction about 3 times per calendar year, yet averages high single digit
returns over long-term market cycles.
Chart 1; Source First Trust Advisors
If this current decline is/has reached its bottom (we have reason to believe we have or are
very close) then this recent decline is part and parcel of the almost routine market pullbacks
of up to 10% per year.
The recent declines appear to have stemmed from elevated uncertainty around domestic
policy; tariffs that change in hours, inflation data, Fiscal and Monetary policy etc.; think
you could correctly determine how the market will react to these within a trading day…
think again Mojumbo. This speculation has created instability in public markets, but at some
point, the risks get priced in and a decerning eye can spot the long-term opportunities, and
companies will adapt. All the aforementioned elements of the recent market sell-off are
nothing new – tariffs have existed for centuries, inflation ebbs and flows, the Fed is balancing
rates and inflation, and the Treasury is monitoring money supply - but the velocity of these
changes have. This new pace can be to the benefit or detriment to an investor depending on
how reactive they may find themselves…
We have been monitoring the recent talks of tariffs and have been calculating the net impact
to the respective and ancillary industries (if taken at face value), but also calculating the
offsetting benefits that may come from these changes to direct or unrelated businesses (such
as capital flows). We are finding that the perceived fear of investment is far greater than the
actual risks implied by these trade negotiations. Without having to go into the specifics of
each industry, we will cite market behavior as a historically reliable source of these beliefs.
As you might expect, we analyze a significant amount of macro data over a week; when
markets become more challenged, we look to how and why investors historically behave.
Some macro factors include: the Fear/Greed Index, Put/Call Ratio, Interest Rates, Relative
Performance, Volatility Index, and Individual Investor Ratio (among other things) to see when
there is too much belief in downside risk versus the upside potential.
Below Chart 2 find a chart of the COBE Market Volatility Inx (“The VIX”).
Chart 2; Source: SWMG, ThomsonOne
In a very simplistic explanation, we look at the relative strength of the “VIX” to see how
expensive it is for an investor to protect a portfolio from a market drop (by buying put options
on the S&P 500). When these puts get to a relatively overbought level, it demonstrates that
investors are paying too much for protection – like over insuring your home; the insurance
company is only going to pay you what it’s worth; and there are no guarantees they will pay
that amount, but there is Karma Kramer. This also shows in the recent spike in the put-to-call
ratio (which is commonly the indication that a market turn around is near, Chart 3).
Chart 3; Source: SWMG, Bloomberg
Another simplistic indicator is the Fear/Greed Index (Chart 4).
Chart 4; Source: CNN
This index reached extreme fear levels not seen since August 8, 2024. This most recent date
printed a market bottom for that period and lead to a 20% increase in the market (trough to
peak) in the ensuing 6 months.
Chart 5 Shows the “Bulls to Bears” AAII ratio in the retail investor community – highlighting
there is a significant bias to be bearish in the least sophisticated part of the market
(institutional investors pay attention to the contrarian view of these ratios – being bullish when
others are fearful).
Chart 5; Source: AAII.com
Taking the contrarian view – when coupled with conviction of these indicators – has proven
to be a good harbinger for market bottoms. See Chart 6, since the 1987 market crash there
have been 11 instances where this ratio reached -40/+60 Bulls/Bears. You will note that
the forward 3M, 6M, and 12M returns have a 70%, 90%, and 90% respective positive
market return with an average of +22.3% increase after 12 months. These figures include the
Financial Crisis of 2008-2009 and, interestingly, the CoVID-19 global shut-down did not
even register as this bearish.
Chart 6; Source: FundStrat, Bloomberg
As mentioned, Chart 7 delineates the fastest 10% market corrections since 1950 – with the
current market rout registering in the top 5.
Chart 7: Source FundStrat
Chart 8 highlights the reasons for these top 5 corrections (including #2 as the Trump
Administration’s first round of global trade negotiations). You can note from this data that,
aside from the market reaction to CoVID-19, the market had a satistical100% win ratio (being
positive) after 1M, 3M, 6M, and 12M
Chart 8; Source: FundStrat
Going forward, we expect to see market volatility as a new Administration makes dramatic
changes to a very pro-domestic policy; it is a very pro-business cabinet. We believe this,
in the long-term, is a benefit to public markets as it is free-market model (Monetarist Vs.
Keynesian Economics).
We believe part of the recent actions are tied to longer-term goals that stimulate domestic
growth – such as lower interest rates. Since the Federal Reserve controls the short-end of the
yield curve, the Administration can use tools – such as monetary policies and market actions
to bring down the long-end. Tariffs and DOGE are such programs that may impact the nearterm
economy and view and, therefore bring down rates on the long end. Having lower
long-term rates helps consumers (mortgages, auto purchases), corporations (refinancing/
obtaining debt for capital expenditures), and the U.S. Government – the country has a lot of
debt, and a higher interest rate isn’t helping service these obligations.
The economy currently has several beneficial factors to protect a long-term slow down and or
further market routes… The recent market activity has increased the odds of multiple rate cuts
and sooner… early February saw a 10% probability of a rate cut in May (now 50%), and
the bond market was pricing in 1 cut for 2025 and is now pricing in 2.5 cuts. These numbers
inform us that the Fed will be accommodative, and they have room to be accommodative
(we are not at near 0% interest rate pre-Covid). Also, the Fed is less inclined to delay rate
movements – as they did with run-away inflation in 2021/2022). For an investor (thinking
long-term) to believe the market is in for a greater decline, they would also have to believe
that the Fed would not be accommodative going forward – we do not think this is likely.
There is currently approximately $7T in cash and cash equivalents in the economy that looks
for places to go. Some of these monies will find its way to paying down debt whereas others
will look for returns. With the Fed targeting a 2% inflation rate, the Federal Funds Rate has
only one implied direction – down. As rates decline and approach the base line of inflation
targets, investors look to increase risk to get a return above break-even – this becomes
cannon fodder for investment in the equities markets.
Another reason an investor would believe the markets have more pain ahead for the longterm
is that they have a belief that we are in a recession. We hear the ‘talking heads’ claim
that we should expect a growth slowdown and possibly a quarter or two of negative GDP.
Note that a recession is 2 quarters (6 months) of negative GDP (gross domestic product).
So, if they are correct, we are in the midst of a recession – as of right now, it feels like a show
about nothing. In the last 12 modern recessions, the average length has been 10.4 months
and based on the data (Chart 9) , the market has averaged a +3.81% during the recession;
recessions do not appear to be a bad time to be buying risk assets… By the time they are
declared, we are probably on our way out of a recession.
Chart 9: Source Guggenheim Investments
The market has certainly been dealt a long string of dramatic headline news to react to in
the past month, but we hazard to believe that (perhaps) the coming sets of news could be
primmed for some upside surprises… A resolve between Ukraine and Russia would certainly
be a welcoming event that may be in development.
An event that appears right around the corner is the April 2nd action on tariffs and reciprocal
tariffs. We have noticed a very interesting dichotomy… The most impacted nations of these
tariff talks are performing much better than the U.S. markets (Chart 10) – leading us to
believe that there is more likely a period of trade negotiation rather than an all-out trade war
(negotiations are likely happening now behind the scenes). Due to the imbalance of import/
export between the U.S. and these countries, China, Europe, Mexico, and Canada will get
a far worse end of the deal in the current and proposed re-negotiated trade deals – we
don’t want to see reneging on trades between radar detectors and motorcycle helmets. Their
economies will suffer more than the U.S. in a global recession, yet investors are indicating the
“market’ is pricing some resolve to negotiations and in-turn, a turn to the positive for the U.S.
equity markets. Interestingly, we have heard less about Mexico and China tariffs negotiations
in recent weeks – perhaps there is more mutual trade talks and could indicate that countries
do not want to be left out in finding common ground.
Chart 10: Source: FundStrat
We are seeing a shift in the interpretation of this data based on political biases – is it salsa
or seltzer? The recent hard data is indicating inflation declining (this does not mean prices go
down; it means they increase at a slower pace than the recent months). As this inflation data
comes in, we are seeing 4% wage growth, a 4.1% unemployment rate, 2.8% inflation rate,
and a 2.3% GDP – an unbiased reader would construe these as good figures. However,
surveys are reveling this data is being interpreted based on political bias…
Chart 11 shows the recent University of Michigan survey on consumers’ beliefs on future
inflation based on political bias. Note that inflation has been on the decline since 2022.
You will notice that post-election 2024, the consumer’s political affiliation has swayed
their views on future inflation. Further, Chart 12 shows the “experts” bias. This highlights the
political affiliation by party contributions of members/staffers of the Federal Reserve. Like
the U-Michigan survey, those Federal Reserve staff that indicate a strong skew towards the
Democratic Party may have a bias of a future pessimistic views. In 2020, 97% of Fed staffer’s
political contributions and 92% in 2024 went to Democrats. The current Administration may
want this to influence the decline of long-term interest rates to stimulate capital consumption –
they may have to thread the needle to combat a pick-up in inflation; the current data does not
support this yet, only the bias – leading to a potentially self-inflicted bias recession.
Chart 11: Source: FundStrat, Bloomberg
Chart 12 Source: Opensecrets.org
Whether you are “far left,” “far right,” or anywhere in between, you can turn on the television
and find reasons to support a negative outlook in the economy. Many asset classes are vomiting
- vomiting is not a deal breaker. Like the last trade negotiations, rate cycles, and even recessions,
staying invested in diversified quality companies has yielded positive returns for long-term
investors. During market tumults, we at SWMG choose to watch Seinfeld re-runs (and the off-off-
Broadway show, “La Cocina”) and conduct good ole fashion bottom-up business analysis. With this
perspective, we see substantiated cases for a full equity recovery in the coming months and beyond
for the decades to come.
We hope this SOUND Note has given you a different perspective than the prevailing mainstream
financial reporting and that you found it valuable. We put a lot of time and research into these Notes
and we sincerely thank you for reading! We hope to always be a voice of reason and a sounding
board in a world of erratic and irrational markets. To that end, we welcome any conversations about
this Note and look forward to the conversation continuing. Thank you to our friend Dick H. for getting
us back to writing these notes.
Disclaimers:
For more information about Janney, please see Janney’s Relationship Summary (Form CRS) on www.janney.
com/crs which details all material facts about the scope and terms of our relationship with you and any
potential conflicts of interest.
This information contains forward looking statements about various economic trends and strategies. You are
cautioned that such forward looking statements are subject to significant business, economic, and competitive
uncertainties and actual results are subject to change at any time and are the opinions of the individual
strategist. Data taken from sources generally believed to be reliable, but no guarantee is given to its accuracy.
Views expressed are the current opinion of the author, but not necessarily those of Janney Montgomery Scott,
LLC. Past performance is not indicative of future results. Investing always involves risk, and you may incur a
profit or loss. No investment strategy can guarantee success. The author’s opinions are subject to change
without notice. Information provided is general in nature and is not a complete statement of all information
necessary for making an investment decision and is not a recommendation or a solicitation to buy or sell any
security.
The S&P 500 is an unmanaged index of 500 widely held stocks that are generally considered representative
of the U.S. stock market. Inclusion of this index is for illustrative purposes only. Keep in mind that individuals
cannot invest directly in any index, and index performance does not include costs or other fees, which will
affect actual investment performance. Individual results will vary.
§ Satirical References from Seinfeld, “The Pitch” September 1992.
