It’s official… the stock market is now ‘on sale’. Panic selling has set in with the VIX trading above 45 – something we have only seen 7 times over the past 25 years. For those who resisted chasing extreme valuations the past 12 months – your patience has been rewarded. Valuations have come down. In turn, the longer-term risk reward is now more attractive than what it was only a couple of months ago. But these are rare times. For e.g., it was the only third time this decade that the S&P 500 shed more than 10% in two days.
Asset Allocation
Actionable market insights delivered to your inbox weekly
Uncertainty Weighs
It doesn’t take much these days to knock investors off balance. This week it was Trump’s 25% on auto tariffs and a slightly hotter-than-expected inflation print. Tariffs are inflationary… a tax on the consumer. And with (services) inflation remaining stubborn… it gives the Fed very little wiggle room to cut rates. In combination with various geopolitical developments and aggressive government spending cuts from the Department of Government Efficiency (DOGE) – this has pushed policy uncertainty to its highest levels since late 2020.
Markets Hedge as Momentum Wanes
As an investor – it’s very important to know the rules. For example, if the rules are constantly influx – it leads to uncertainty. With heightened uncertainty – you pull back. That’s what faces investors. For example, consider the following: (i) direction of monetary policy (e.g., as Powell raised concerns on inflation); (ii) A torrent of policy shifts from the White House; and (iii) major disruption with artificial intelligence – as investors question return on capital invested. Uncertainty in each of these buckets makes it hard to commit to stocks with conviction.