“If they don’t scare you out, they wear you out.” – Peter Lynch
February was not a good month for investors in the American stock market with all the major indexes we track falling for the month. Large Cap outperformed the Small and Mid-Cap indexes, with both turning negative for the year. Global indexes faired better, with the MSCI EAFE and MSCI Emerging Markets indexes showing modest monthly returns. After a strong January, bonds continued higher as the CRB Commodity Index dropped a bit more than 1% in February.
All data as of 03/03/2025, Source: Wells Fargo Investment Institute. An index is not managed and not available for direct investment. Past performance is not a guarantee of future results. [Wells Fargo Investment Institute, Inc. is a registered investment advisor and wholly-owned subsidiary of Wells Fargo Bank, N.A., a bank affiliate of Wells Fargo & Company.]
Our February Commentary was primarily focused on a possible trade war and how to invest in an unsure market environment. We argued that the threatened 25% across-the-board tariffs on Mexican and Canadian goods was not the likely scenario, it was a possibility to be prepared for. We are at the start of what is likely a period of economic policy changes from the Federal Government. Since the end of 2024 we have staunchly believed that investors need to be prepared for a variety of policy moves.
We want to reiterate our belief that the stock market remains in a secular bull market(1) and investors need to get comfortable with uncertainty. Now may be a good time to review your holdings and asset allocation. However, in our opinion, the goal of such a review should be to make sure your investments are aligned with your long-term planning, not make a big “bet” on the direction of the market in the coming weeks or months. Put another way, we believe that speculation based on emotions or political bias has no place in a proper investment plan.
Is the Long-Term Trend Changing?
The short and fast answer to the question is that we don’t know. A lot is going on in an uncertain world. The stress has been apparent in recent stock market performance. Right now, in early March, the S&P 500 is sitting right at the 200-day moving average (DMA). At Magellan Financial, we view the 200 DMA as an important indicator of how we view the markets. Trading above the line is bullish. Below the line is bearish.
What we believe is happening right now is a test of the cyclical bull market. Chart #1 shows the two-plus-year bull market run that has only tested the 200 DMA in late 2023. Our expectation is that this test will play out in the next few weeks, maybe even the next few months. While government policies should influence where the S&P 500 is heading, other financial markets will also impact stock market performance.
Chart #1: www.stockcharts.com Data 03/05/23 – 03/05/25 as of 03/05/25. An index is not managed and not available for direct investment. MA 50 = 50-day moving average MA 200= 200-day moving average. Past performance is not a guarantee of future results.
Number one in our book is bond yields. The direction of US Government Bond yields can significantly influence the stock market as they serve as a benchmark for the risk-free rate of return.(2) Higher interest rates increase corporate borrowing costs and can squeeze profit margins, potentially damaging stock performance. Conversely, falling interest rates make borrowing cheaper, potentially boosting corporate earnings. From a market flow-of-funds perspective, higher bond yields make bonds a more attractive investment, leading some investors to shift from equities to the relative safety of bonds. Thus, fluctuations in bond yields can create ripple effects across the stock market.
At the end of February, the 10-year Treasury bond was down from the January peak of 4.80% to close out February at 4.23%. A move higher could be negative for the stock market, while a move below 4.15% could potentially boost equities.
Chart #2: www.stockcharts.com Data 06/07/24 – 03/05/25 as of 03/05/25. An index is not managed and not available for direct investment. MA 50 = 50-day moving average MA 200= 200-day moving average. Past performance is not a guarantee of future results.
Number two, and maybe just as important as bond yields, is the US Dollar. As we stated above, bond yields play a role in how some investors make asset allocation decisions (more stocks or more bonds) and help Corporate America’s cost of doing business. The strength of the US Dollar affects US-based companies in three ways. To start, costs associated with any operations outside our borders will move higher or lower with the relative value of the dollar. The higher the value of the dollar, the more expensive it is to operate. Overseas sales and profits, when converted back to the dollar, will also move higher or lower with dollar strength. The lower the value of the dollar, the greater the profit when converted from a foreign currency back to the dollar. Finally, US exports are more competitive in a weaker dollar environment than if the dollar was stronger.
At the start of March, the US Dollar Index started to weaken. We believe that this is a potential positive for the stock market in the short term. If this trend continues, with the index moving back toward 100 or breaking below the bottom of the trading range, even better.
Chart #3: www.stockcharts.com Data 03/08/22 – 03/05/25 as of 03/05/25. An index is not managed and not available for direct investment. MA 50 = 50-day moving average MA 200= 200-day moving average. Past performance is not a guarantee of future results.
Market Correction or Another Fake-Out?
In our opinion, the stock market entered March at a crossroad of uncertainty. The years 2023 and 2024 were very good for stock market investors as the S&P 500 was up more than 20% in both years with historically low volatility. Recency bias, however, has allowed many of us to forget about the volatility and negative returns in 2022.
There are good economic reasons for the strong stock market performance. According to the Bureau of Economic Analysis (BEA), the fourth quarter US GDP grew at an annual rate of 2.3%, which was solid but slower than the full year rate of 2.8%. In the quarter, consumer spending rose 4.2%, with more spending on durable goods, clothing, and services.(3) With 3.0% inflation,(4) nominal GDP for the year was 5.8%. Given that company earnings are reported in nominal terms, that 5.8% growth rate was very helpful to S&P 500 earnings.
This year appears to be going in a different direction. Uncertainty around trade policy and the cost of goods has made it hard for business leaders to make decisions for their companies. This is true for small, local businesses as well as the largest multinational corporations. According to the University of Michigan’s Survey of Consumers, Inflation expectations have jumped to 4.3% as consumer sentiment deteriorated by nearly 10%.(5)
Given the two years of relatively calm market conditions and what appears to be a slowing economy with deteriorating consumer sentiment, we believe conditions are ripe for a normal stock market correction at some point in 2025. Could it be now? Sure. Is it happening right now? Too early to tell.
Chart #4: Wells Fargo Investment Institute: Market Charts – Turning data into knowledge Past performance is not a guarantee of future results.
Final Thoughts
Investing may feel straightforward when markets are steadily climbing, but it becomes far more challenging during periods of volatility. One of the most common mistakes investors make is abandoning their investment plan, especially when the idea of shifting some or all of your equity exposure to cash or bonds feels reassuring.
Consider this scenario: you’ve gone through the planning process and it has been carefully determined that your ideal asset allocation is 60% stocks and 40% bonds. As markets turn volatile and stock prices drop, you decide to reduce your equity exposure to 20% and hold 40% in cash, with the intention of reinvesting once the market “feels better,” In this context, “feels better” often equates to a calmer, rising stock market. However, this decision means you’ve begun trying to time the market, driven by emotional reaction rather than strategic planning.
Market timing is not only unpredictable, but for non-professional investors, it can also take significant time and attention. Additionally, there are potential downsides, such as transaction costs and, for taxable accounts, the impact of realized gains on your overall returns. A more reliable strategy is to stay committed to a long-term, disciplined investment approach, rooted in diversification and aligned with your financial goals and needs.
If you would like to discuss your current strategy, or how to build such a strategy, Contact Our Team Of Financial Advisors Today!
Sources:
1 For our analysis here, it is helpful to understand the different types of market trends. Is it a little wonky? Yes. But, it is also important. An in depth review of what constitutes cyclical and secular market trends can be found at: Secular Market: Definition Vs. Cyclical, How It Works and Example
2 What Is the Risk-Free Rate of Return, and Does It Really Exist?
On behalf of Magellan Financial, we would like to thank you for taking the time out of your busy day to take in our thoughts and opinions. If you found this helpful, please forward it to others. If you have any questions on the materials presented, would like to be added to our email list, or would like our help with your investments, we can be contacted at 610-437-5650 or via email.
Wells Fargo Advisors Financial Network did not assist in the preparation of this report, and its accuracy and completeness are not guaranteed. The opinions expressed in this report are those of the author(s) and are not necessarily those of Wells Fargo Advisors Financial Network or its affiliates. The material has been prepared or is distributed solely for information purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Additional information is available upon request.
Wells Fargo Investment Institute, Inc. is a registered investment adviser and wholly-owned subsidiary of Wells Fargo Bank, N.A., a bank affiliate of Wells Fargo & Company.
Wells Fargo Advisors Financial Network does not provide legal or tax advice.
Asset allocation and diversification are investment methods used to help manage risk. They do not guarantee investment returns or eliminate risk of loss including in a declining market.All investing involves risks including the possible loss of principal invested. Past performance is not a guarantee of future results.
Index returns are not fund returns. An index is unmanaged and not available for investment.
Dow Jones Industrial Average: The Dow Jones Industrial Average is a price-weighted index of 30 “blue-chip” industrial U.S. stocks.
S&P 500 Index: The S&P 500 Index consists of 500 stocks chosen for market size, liquidity, and industry group representation. It is a market value weighted index with each stock’s weight in the Index proportionate to its market value.
S&P Midcap 400 Index: The S&P Midcap 400 Index is a capitalization-weighted index measuring the performance of the mid-range sector of the U.S. stock market, and represents approximately 7% of the total market value of U.S. equities. Companies in the Index fall between the S&P 500 Index and the S&P SmallCap 600 Index in size: between $1-4 billion.
S&P Small-Cap 600 Index: The S&P SmallCap 600 Index consists of 600 domestic stocks chosen for market size, liquidity (bid-asked spread, ownership, share turnover and number of no trade days) and industry group representation. It is a market value-weighted index (stock price times the number of shares outstanding), with each stock’s weight in the index proportionate to its market value.
MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, reviewed, or produced by MSCI.
MSCI World Index: The MSCI World Index is a free float-adjusted market capitalization index that is designed to measure global developed market equity performance.
MSCI EAFE® Index: The MSCI EAFE Index is designed to represent the performance of large and mid-cap securities across 21 developed markets, including countries in Europe, Australasia and the Far East, excluding the U.S. and Canada.
MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance of emerging markets.
The CRB (Commodity Research Bureau) Index measures the overall direction of commodity sectors. The CRB was designed to isolate and reveal the directional movement of prices in overall commodities trades.
Bloomberg Barclays U.S. Aggregate Bond Index: Bloomberg Barclays U.S. Aggregate Bond Index is a broad-based measure of the investment grade, US dollar-denominated, fixed-rate taxable bond market.
NASDAQ Composite Index: The NASDAQ Composite Index measures the market value of all domestic and foreign common stocks, representing a wide array of more than 5,000 companies, listed on the NASDAQ Stock Market.
Russell 2000® Index: The Russell 2000® Index measures the performance of the 2,000 smallest companies in the Russell 3000® Index, which represents.
U.S. Dollar Index (USDX) measures the value of the U.S. dollar relative to majority of its most significant trading partners. The index is similar to other trade-weighted indexes, which also use the exchange rates from the same major currencies.
Technical analysis is only one form of analysis. Investors should also consider the merits of Fundamental and Quantitative analysis when making investment decision. Technical analysis is based on the study of historical price movements and past trend patterns. There is no assurance that these movements or trends can or will be duplicated in the future.
Stocks offer long-term growth potential, but may fluctuate more and provide less current income than other investments. An investment in the stock market should be made with an understanding of the risks associated with common stocks, including market fluctuations.
Investing in foreign securities presents certain risks not associated with domestic investments, such as currency fluctuation, political and economic instability, and different accounting standards. This may result in greater share price volatility.
Investments in fixed-income securities are subject to market, interest rate, credit and other risks. Bond prices fluctuate inversely to changes in interest rates. Therefore, a general rise in interest rates can result in the decline of the bond’s price. Credit risk is the risk that the issuer will default on payments of interest and/or principal. The risk is heightened in lower rate bonds. If sold prior to maturity, fixed income securities are subject to market risk. All fixed income investments may be worth less than their original cost upon redemption or maturity.
Investing in commodities is not suitable for all investors. The commodities markets are considered speculative, carry substantial risks, and have experienced periods of extreme volatility. Investments in commodities may be affected by changes in overall market movements, commodity index volatility, changes in interest rates or factors affecting a particular industry or commodity. Exposure to the commodities markets may subject an investment to greater share price volatility than an investment in traditional equity or debt securities. The prices of various commodities may fluctuate based on numerous factors including changes in supply and demand relationships, weather and acts of nature, agricultural conditions, international trade conditions, fiscal monetary and exchange control programs, domestic and foreign political and economic events and policies, and changes in interest rates or sectors affecting a particular industry or commodity. Products that invest in commodities may employ more complex strategies which may expose investors to additional risks, including futures roll yield risk.
Robert I. Cahill, Partner
Rob.Cahill@wfafinet.
Jonathan D. Soden, Managing Partner
Jon.Soden@wfafinet.com
Cassandra Queen, CFP®,ChFC®, Senior Wealth Planner
Cassandra.Queen@wfafinet.com
Susan C Schupp, MBA, Senior Wealth Planner
Susan.Shupp@wfafinet.com