When I was young, I used to have recurring nightmares about a large tidal wave sweeping over the beach and my family and me. (Armchair psychoanalysts have at it!) The dreams probably had something to do with my vacation habit of falling asleep outside on the beach deck chairs when my cousin and I talked far too long into the night and hearing the crashing waves as I slept. So, when the movie “The Perfect Storm” came in 2000 based on Sebastian Junger’s book, I was fascinated by the great wave the crew met which swamped their ship.
There’s no question that the word Storm comes to mind to describe our past month in the market. According to Bloomberg, going into this week, April has been the 3rd most volatile month of the stock market on record.1 From April 1st to the lows on April 8th, the ETF SPY (which tracks the S&P 500) fell 15.7%. It then rose in a shocking launch trajectory in one day on April 9th, up 10.5%. Over the next two weeks the S&P 500 fell back 7.9%, before re-ascending 9.1% in the last week to the month closing price of $554.54. That is absolute volatility. (Absolut Volatility should be a new flavor of vodka, and it should probably be one that turns your stomach). We just happen to be ending this month with, somehow, a total loss in the S&P 500 for the month of down just 0.5%! So, is this much ado about nothing?
Some would take this as yet another lesson to stay invested no matter what storm the market is working its way through. I would agree with that completely, though your individual actions should have everything to do with your risk tolerance, time horizon and financial situation.
It’s fair to wonder where exactly we are in the storm if we are the proverbial ship caught in its clutches. We got a big piece of news concerning that today in the form of 1st Quarter Gross Domestic Product (GDP). It fell by 0.3%2, which isn’t a staggering number, but it IS down. Technically we need one more quarter that’s negative to call it a recession, plus of course, the NBER, National Bureau of Economic Research, to agree to call it a recession which they chose not to do in early 2022 after 2 consecutive quarters of negative GDP growth.
There are already signs of slowdown everywhere whether you are of the mind to attribute that to tariffs or whether you think the data now can’t possibly reflect that yet. Many market pundits believed going into the political crazy season last Fall that whoever won The White House would also lose by inheriting a difficult situation with an impossibly highly valued market and lessening growth prospects. It’s hard to swallow this pill but let me administer it to you anyway: because of falling 2025 earnings on the S&P 500, the S&P 500 now is valued at more than twice its growth rate and is more expensive on that basis than it was prior to the begin of the market decline3! We have to remember that price to earnings or P/E has a slash between the letters, signifying a ratio. The second component is earnings, so it is more than possible for prices to decline while earnings decline more, thereby resulting in a relatively higher valuation.
We’re starting to see some bad macro numbers materialize. The Dallas Fed Manufacturing index is down to -35.8 vs. -14.2% estimated, shipments down to -5.5 (where it was +6.1 prior) and prices paid up to +48.4 versus +37.7 prior.
Translation: we’re still in the storm. We are really optimistic, however, that trade deals, and some large ones at that, could be in the offing and may be done soon. We’re watching the potential one with India with great interest, even as war could be close to breaking out between India and Pakistan after 25 tourists and a guide were killed in attacks in Kashmir last Tuesday and Prime Minister Modi responding by giving authority for his military to strike in the disputed region4.
I want to be VERY clear we do not expect the next wave in the market to be as towering as the one that Captain Billy Tyne (George Clooney) and Bobby Shatford (Mark Wahlberg) faced in the movie. We’re not at all drawing that parallel and are much more optimistic for mid-to-long term than that calamitous take. But with the market back up closer to where it began April it does feel every bit like the moment of calm when the storm clouds parted temporarily in the movie and the sunlight shone on the faces of the sailors.
“Skip, we’re going to make it,” Bobby said, just before the darkness fell again and the clouds and winds of the storm returned.
“She’s not going to let us out,” Capt. Billy moaned before turning the wheel.
In reference to our current market storm, we’d agree with Capt. Billy for now. But we’d add a very important word – “yet”.
Our Investment Committee today continues to take a defensive position in our Extended Equity ETF Portfolio as we expect more volatility. [Wealth Members Only] After the recent run-up we’ve added a little “dry powder” in money market funds to the portfolio after we sold and took profit on a gold ETF which had soared in recent months, and we added some more defensive-minded sector ETFs as well. [End Wealth Members Only] The more defensive posture this year has served our clients well in less downside results than SPY, so you can reasonably conclude that our actively managed component of our “Stratactical” Extended ETF Strategy has fared well.
In case you are wondering, Ed coined the word “Stratactical” years ago to describe part Strategic (Buy and Hold Philosophy) and part Tactical (Trading around market trends) investing. It’s about a large core allocation that never changes flanked by an allocation that adjusts to global trends and opportunities. Please don’t hesitate to ask us if you are interested.
If you find yourself feeling trapped in a storm like Capt. Billy or Bobby anytime soon, give us a call and let’s figure out which way to steer. Because if you listen to us, we’ll change your financial world …
Sincerely,
The WTA Investment Committee
1@TheKobeissiLetter
2https://www.cbsnews.com/news/gdp-report-today-trump-tariffs-economy-first-quarter-2025/
3@MichaelMOTTCM
