March 14, 2025
Good morning,
It’s been another tough week (thus far) for U.S. equities, less so for the non-U.S kind. The U.S. equity centered correction continues. So far this week, the major U.S. equity indices are off another 4%-ish, and their non-U.S. counterparts are down about half that amount. The question of correction-or-worse (bear market) looms ever larger in investors’ minds. If anything, resignation toward “worse” is becoming a pervasive feeling.
In every meaningful drawdown resulting in corrections or bear markets, selling begets selling, and emotions spike. In the midst of a drawdown, having an analytical tool that removes emotion from the calculus is critical to successfully navigating the storm. After a month of selling, the only warning signals in the market’s message stem from investor confidence – not valuation or sentiment. The overall takeaway from a review of all signals comprising the market’s message is that fears are out of proportion with market performance to date. Investor worries are out of proportion with the fundamental drivers of price performance. That means signals based on recession probability, manufacturing, earnings growth, and credit spreads – fundamental factors have not wandered into warning territory.
Considering the negative sentiment (on the floor as previously mentioned), it’s not surprising that in a Google Trends evaluation of search terms, “recession” and “bear market” have been heading toward their highest levels since 2022. If the economic and market worries are justified, much more market weakness and contraction evidence may lie ahead. But the weight of the evidence says differently. What is much more likely is that we see widespread recognition that the fears have not been justified, in which case equities will start recovering from the extreme pessimism. That would be the message of a buy signal from the sentiment indicator we have been waiting for.
Be well,
Mike