Market Commentary

• Just when a bit of panic set into the minds of some investors, stocks turned seemingly on a dime and gained back all that was lost and then some.
• Our feel is that stocks are ahead of themselves, and we are looking to trim positions in overvalued markets and sectors.

Most market strategists don’t want to see the kind of market volatility the S&P 500 Index (SPX) has experienced over the past four months. Recall that in mid-February the index notched a new all-time record closing high (6,144). Then, just seven weeks later was briefly down 20% from that high, a threshold that many pundits traditionally would consider a bear market.

But just when a bit of panic set into the minds of some investors, stocks turned seemingly on a dime and in less than three months gained back all that was lost and then some, setting a new record high to close out last week’s trading (6,173). And, at least at the time of this writing, the SPX is continuing to climb into previously unseen territory at the start of this week.

So why the quick 4½ month round-trip roller-coaster ride from record high to bear market and back to another new record high? “Uncertainty” would be a good term to use if you want to generalize and sum up the move down to the recent lows. But that really doesn’t do the volatility we have seen justice. And how about the robust rally up to the recent highs? That’s harder to explain and not fully supported by the underlying fundamentals in our view. Market breadth in this recent rally has not been very broad, and earnings estimates overall are coming down.

We also believe the Wall Street consensus is overly optimistic on the tariff outlook and thus the growth rate in calendar-year 2025. It’s true that employment and the economy have held in better than many expected. The current 4.2% unemployment rate isn’t anything to worry about if history is an indicator. In fact, looking back to January 1961, Bloomberg data shows the average rate of U.S. unemployment to be 5.9%. That’s not a typo and a far cry above the current level. But as tariffs arrive in force, the economy slows, and the unemployment rate increases, consumer spending seems almost certain to continue to see further headwinds.

And let’s not forget about the upcoming tariff and budget deadlines. The July 9 (for most countries, including the European Union) and August 12 (China) deadlines likely are flexible, but some tariffs for at least some countries are likely to land on consumers. We also continue to have concerns about the deficits Congress is proposing in the federal budget and the necessary debt-ceiling increase. And Iran’s potential plans are keeping us guessing in the Middle East. The price of oil has come down to levels seen before Israel attacked but could quickly reverse if tensions rise again.

Our feel is that stocks are ahead of themselves, and as a result, we are looking to trim positions in markets and sectors that we find to be overvalued, particularly U.S. Small Cap Equities and the Industrials and Consumer Discretionary sectors in the SPX, which have done well in recent months. Investors could choose to hold those funds or reinvest in sectors more favorable in our work, which include Technology, Financials, Energy, Utilities, and Communications Services. But stocks are not cheap, and investors might also choose to hold those funds to reinvest if the downside volatility we expect develops. 

Each asset class has its own risk and return characteristics. The level of risk associated with a particular investment or asset class generally correlates with the level of return the investment or asset class might achieve. Stock markets, especially foreign markets, are volatile. Stock values may fluctuate in response to general economic and market conditions, the prospects of individual companies, and industry sectors. Small- and mid-cap stocks are generally more volatile, subject to greater risks and are less liquid than large company stocks. Sector investing can be more volatile than investments that are broadly diversified over numerous sectors of the economy and will increase a portfolio’s vulnerability to any single economic, political, or regulatory development affecting the sector. This can result in greater price volatility.

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