Summary
The Benefit of Not Blinking Chartered Financial Analysts (CFAs) and other finance professionals are required to take tests to earn their designations. CFAs, who have to pass three levels of testing, know that during the level two or level three exam they will encounter a question that goes something like this: ‘You are a financial advisor managing money for a couple in their mid-40s. During a time of market turbulence, they come into your office demanding that you ‘do something’ to save their portfolio, which has taken a sizable hit. What should you change to safeguard their assets from further losses?’ The answer is plainly not ‘do nothing.’ But it is also not ‘tear up the existing plan and start over.’ And it is definitely not ‘sell everything and go to cash until the market calms down.’ Financial advisors in these circumstances are expected to review their client’s long-term financial goals to see if anything fundamental has changed that would require an update to elements of the plan. These potential changes could include return objectives, risk parameters, a need for income, and life events (births, college, retirement, etc.). Once the review is complete, any needed tweaks are made while the general outline of the financial plan remains in place. Investors are said to be risk-tolerant in the realm of gains and risk-averse in the realm of losses. Prospect theory, as proposed by Daniel Kahneman and Amos Tversky, posits that individuals evaluate potential gains and losses from the reference point of their current state. Losses are seen as more significant than equivalent gains. That can lead to irrational decision-making, particularly when the market is tanking. The problem with giving in to fear is that it leads to selling out of the market at exactly the wrong time. Its’s bad enough that you’ve suffered the losses; now you are not positioned to benefit from the recovery, which can be as rapid to the upside as it was to the downside. A study from J.P. Morgan Asset Management surveyed the first two decades of this century and showed that if you were out of the market on the 10 best stock market days over that period, your returns would be cut in half. In short, trying to market-time your way to stock-market outperformance rarely works and is more likely to hurt your long-term total return. A Big, Beautiful Bounce-Back The market experienced an extraordinary round trip over the month of April and the first two weeks of May. In advance of these six weeks of turbulence, the S&P 500 was gradually working down from late-February levels that were close to all-time highs. From a close of 6,144 on 2/20/25, the S&P 500 slid down in a pattern of descending highs and lower lows to 5,521 in mid-March. The index bounced to the 5,770s late in March and was in the 5,670s when the president announced his ‘Liberation Day’ tariffs on 4/2/25. The shockingly high ‘list price’ tariffs for dozens of countries have not been reflective of tariffs that have actually been levied. But the headline numbers were enough to send the stock market pitching lower. On 4/8/25, the S&P 500 bottomed in the 4,980s. After a bounce to the 5,450s, the index made a higher low in the 5,150s on 4/21/25. Although the higher low pulled the index back from the bear-market brink, the index at that level was still down 12% for the year to date and firmly in correction territory. The stock market has climbed fairly steadily from that interim low, galvanized by a few events seen as favorable to investors. The administration’s trade advisors announced a reduction to 10% in the tariff imposed on Chinese goods (30% with a fentanyl penalty); and China reciprocated with a reduction to 10% on U.S. imports. The president’s trip to the Middle East featured multiple billion-dollar deals focused on AI data centers — creating a market for AI chips and infrastructure that can no longer be shipped to China but now have found a home. And the ‘One Big, Beautiful’ bill began to work through committee on its way to a full House vote. The bill encompasses everything from raising the debt ceiling to renewing income tax rates from the Tax Cuts & Jobs Act of 2017, which are set to expire. As much as investors have been encouraged by the business- and consumer-friendly provisions of the bill, the market has also benefited from the shift in focus. After three frankly exhausting months of trade talk, the haggling and horse-trading for this bill pushed the tariff narrative out of the headlines. The trade truce with China and change in focus enabled the stock market to not just surge, but to erase all of the ‘Liberation Day’ losses. Argus Chief Technical Strategist Mark Arbeter, CMT, pointed out that since the April 21 higher-low, the S&P 500 has risen on 16 of 19 trading days; and the three daily loss days were inconsequential. The ‘steady and persistent rally’ pushed the S&P 500 to within 3% of its all-time high from February 2025 and the Nasdaq Composite to within 5% of its all-time high from December 2024. The downside of such a strong short-term rally is that it has created some near-term technical imbalances. The five-day put-call ratio is at its ‘most over-heated’ level since July 2023, just before a July-through-August pullback. Various measures, such as up versus down volume, are flashing overbought signals. The latest consumer-sentiment survey from University of Michigan shows many participants believing that stocks will move lower again. Still, getting the market back to break-even or just above for the year resets investor perceptions and expectations while dispelling some of the gloom. The Sector Map at mid-May 2025 The first quarter of 2025 was dominated by the transition from the Biden presidency to the Trump second presidency. In broad terms, stocks edged higher in the final month of the Biden presidency; surged on Inauguration Day into mid-February on prospects for rapid de-regulation and a more business-friendly climate; and slid lower in March as investors realized that President Trump was serious about his tariff idea. During the second half of 2024, the market rotated away from the popular AI trade and toward a range of long-out-of-favor sectors with defensive, cyclical, inflation-protection, and rate-sensitive characteristics. That tendency became even more pronounced in 1Q25. The leading sector in 1Q25 was Energy (IYE), up 8.2%. Other winning sectors in the first quarter included Utilities (IDU), up 5.4%; Healthcare (IYH), up 4.5%; and Consumer Staples (XLP), up 3.9%. On the downside, Information Technology (IYW) declined 12.0% in 1Q25; Consumer Discretionary (XLY) was also down 12.0%. Communication Services relatively outperformed the other two growth sectors, but still declined in mid-single-digits, dragged down by GOOGL. Across the past six weeks, the market first fell down and then pulled itself back up to year-opening levels. But the sector map in mid-2Q25 looks different than what was in place after the first quarter. The top of the leaderboard is again dominated by growth sectors. Information Technology is up 14% in the second quarter of 2025 t
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