Recent tariff uncertainty along with seemingly relentless selling in stocks over the past few weeks has (naturally) prompted many investors to start moving to the sidelines.
Is that a mistaken mindset? Let’s explore.
This scenario is especially timely as stocks faced additional early morning selling pressure from the soft February jobs report on Friday before sharply reversing in the afternoon. This jobs report reinforced a softer labor market trend, though it consequently increases the likelihood of the Federal Reserve cutting interest rates sooner and more frequently in 2025.
Of course, this environment would provide a level of downside protection (the “Fed put”) moving forward. Still, leading up to the jobs report, markets were clearly preparing for potential turbulence.
For instance, the ADP employment report earlier in the week showed just 77,000 jobs were added, which was a significant miss versus consensus the expectation of 148,000. Also, S&P 500* LinkUp data suggested weaker employment growth at just 95,000 jobs created:
This might reinforce a growth scare and cause initial negative reactions. But historical patterns suggests it sets up a positive scenario for stocks after the initial volatility. Softer jobs data increases the likelihood of the Fed stepping in to, acting as a bullish catalyst for equities.
While some may counter by pointing to January's inflation numbers, we at Cornerstone prefer forward-looking data like the Truflation US Inflation Index, which indicates significant easing:
Falling gasoline and vehicle prices lead this drop:
So, if this forward-looking data is further reflected in the next Personal Consumption Expenditures data, which is the Fed’s preferred inflation measure, it may be supportive of additional future rate cuts. Keep in mind the probability of a May Fed rate cut briefly rose to 45% and could jump significantly post the jobs report:
10 Best Days
An important philosophical tenet in times like these is investors must be mindful of the opportunity costs associated with selling due to fear. In essence, they’ll inevitably miss out on a few vital days during any recovery.
So, we want to highlight the rule of “10 best days.” It says that in any given year, the stock market makes most of its gains in just 10 trading days.
It seems surprising. But a few years ago, Bank of America analyzed the impact of missing the market’s best and worst days each decade going back to 1930:
If that isn’t striking enough, let’s view this information another way.
Since 1928, the S&P 500 gained 8% a year, on average. In that same time, if you excluded the 10 best days of each year, the S&P 500 would decline 13% per year, on average.
For a more current example, since 2015 the S&P 500 gained 12% a year, on average. Excluding the 10 best days every year, the index loses 10% per year, on average:
For those still not convinced of the importance of remaining invested through all market cycles and not allowing fear to drive your decisions, this next chart should help. It’s extraordinarily interesting that since 1995, half of the S&P 500’s best days actually occurred during bear markets:
Without the 10 best days, you lose.
Clearly, trying to tactically time market entries and exits is a losing proposition both recently and over time. The risk of missing even a portion of the most important 10 days of the year significantly outweighs the slim possibility of avoiding some volatile down days.
Multiple Catalysts Are Beginning to Take Shape
So where does that put us today?
There are a few market and economic downside risk mitigation factors already in place:
1.The term structure of the CBOE Volatility Index (VIX)# – dubbed the market’s fear gauge – inverted recently, which historically is a level of panic typically seen near a bottoming out:
2. A “Trump put” response on a weak jobs report.
3. A “Fed put” in response to a weak jobs report.
Yes, markets are oversold, and pessimism is high. But most miss the fact that multiple catalysts are beginning to take shape.
Let’s keep in mind the capitulation liquidity cycle we’ve covered before:
- News headlines appear suddenly
- Small amounts of selling cause volatility.
- Panicked investors sell.
- Market makers widen their spreads, and Wall Street wins.
We’re obviously in one of these cycles now. But history shows it’s best to not allow fear to take over.
Current buy/sell data shows extreme capitulation, which doesn’t tend to last long historically:
If you only focus on today, you'll miss what's coming tomorrow.
Time after time, there’s a repeatable pattern. Phase one is extreme buying. In phase two, buying slows. Sellers start to take over in the third phase. And in phase four, buyers are gone and sellers rule.
Phase four is capitulation and the reset into phase one always comes quicker than expected. We’d argue that many of those “10 best days” mentioned earlier come during the reset to phase one.
Don’t fall victim to fear or risk a violent reversal of money flow back into equities.
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*Past performance does not guarantee future results.
*Investing involves risk and you may incur a profit or loss regardless of strategy selected.
* The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market.
# The CBOE Volatility Index is a measure of the short-term volatility of the S&P 500 indexes, indicating how quickly market sentiment changes and the level of investor confidence or fear in the market.
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