With the stock market experiencing gyrations that haven’t been seen in, well, months, investors are fretting about the future of their portfolios and the prospects of a recession triggered by Donald Trump’s will-he-or-won’t-he follow through with his tariff threats.
This isn’t the place to come for advice on how to trade the stock market. When I scan the market prognostications coming to me via email and the investment websites I regularly visit, I find that they fall into two equally balanced categories: Those counseling, “Don’t worry, be happy”; and those forecasting a cataclysmic crash, or at least a recession bulking large on the horizon.
Since that’s what I usually hear whether the market is on a bull tear or a slump, I am reminded of the observation that William Goldman, the Oscar-winning screenwriter of “The Princess Bride” and “Butch Cassidy and the Sundance Kid,” made about Hollywood: “Nobody knows anything.”
That said, it may be useful to place the most recent stock market action in perspective. We can start with volatility of recent days and weeks.
On Monday, Mar. 10, the Dow Jones industrial average fell 890 points, or 2.8%; the broader Standard & Poor’s 500 index fell by 2.7% and the Nasdaq composite index, which tracks tech stocks, fell 4%. The day before, Trump had refused to rule out that his economic policies might produce a recession.
The market’s sentiment was sour all week. On Thursday, the S&P 500 entered “correction” territory — a 10% drop from its recent high, which in this case had been recorded Feb. 19. The pullback inspired some market commentators to dust off an antique market indicator known as the Dow Theory. That indicator posits that any move in the Dow Industrials must be matched by a similar move in the Dow transportation index.
Both were falling last week, “deepening fears of a broader market correction,” wrote James Gordon of the Daily Mail.
Yet whether the Dow Theory is relevant to today’s economy is questionable. It was coined at the turn of the last century, when industrial output was in heavy machinery and physical goods that had to be shipped by the railroad companies dominating the transportation sector.
Today, more than one-third of the 30 companies in the Dow industrials deal in finance, insurance or high-tech and don’t make products that need to be physically transported.
In any event, Friday brought a relief rally, with the Dow rising 674.62 points, or 1.7%, the S&P 500 rising 2.1% and the Nasdaq rising 2.6%. That wasn’t enough to erase the full week’s losses, but it was followed by another surge Monday, when the Dow rose by 353.44 points, or 0.85%, the S&P by 0.64% and the Nasdaq by 0.31%.
None of this means that the downdraft that has pared the Dow by 1.65%, the S&P by 3.5% and the Nasdaq by 7.8% so far this year won’t resume or get worse. But it points to the inadequacy of tracking the stock market by short-term moves.
Market commentators typically advise investors to hang tough during periods of volatility like this one. That has been sound advice historically, though isn’t equally sound for everyone.
It works better for those with more distant horizons, such as households at the start of or midway into their earning years, which have more time to capture the long-term growth in stock prices and to recover from the inevitable periodic downturns.
For those in or near retirement, the environment may look more worrisome. A 65-year-old who was counting on a stock portfolio to see him or her into an impending retirement in 2023 had to confront a stock market pullback of nearly one-fifth in 2022 — enough to force many such households to reconsider their retirement options.
Politicians who try to reassure voters and investors about a market downturn often sound as though they’re sugarcoating the downside of their own policies, but that doesn’t always mean they’re wrong. Trump’s Treasury secretary, Scott Bessent, walked into that buzzsaw Sunday on NBC’s “Meet the Press,” when he declared, “Corrections are healthy. They’re normal. What’s not healthy is straight up, that you get these euphoric markets. That’s how you get a financial crisis.”
Axios reported that with these remarks, Bessent, a veteran Wall Street executive, “broke with orthodoxy.” Actually, his view of corrections was entirely consistent with Wall Street orthodoxy. His implication that “euphoric markets” invariably produce financial crises, however, is questionable — markets can sustain their euphoria for years without provoking anything like a crisis.
Former Fed Chair Alan Greenspan warned of the stock market’s “irrational exuberance” in 1996, but even despite the pricking of the dot-com bubble in 2000, a financial crisis didn’t occur until 2008, a full 12 years after Greenspan’s remark — and it was triggered by an overheated housing market, not the stock market. Anyway, Bessent’s remark has been viewed as a tone-deaf defense of Trump’s unpopular economic policies.
The same phenomenon greeted President Nixon’s declaration in May 1970 that “if I had any money I’d be buying stocks right now.” Coming as it did in the teeth of a 17-month bear market (the longest and steepest since World War II) and during a recession that had started the previous December, it looked as if he was trying to rescue his reputation as a steward of the U.S. economy. But he was prescient: The market turned in positive returns in seven of the next 10 years, and embarked on a record-breaking bull run that may not yet have run its course.
As I wrote recently, a propos of whether White House insiders might be playing the market by front-running Trump’s announcements his plans to impose, or withdraw, tariffs, it’s dangerous to attribute stock market moves to news developments. That may be true especially given Trump’s tendency to announce policies that don’t get implemented.
My favorite stock market commentator, asset manager Barry Ritholtz, urges his followers to “tune out the noise, turn off the TV, and avoid the trolling, wild gesticulations, and chaos” produced by Trump. “Instead, focus on what is truly happening.”
The tariffs on Canadian and Mexican goods are a moving target, and mostly haven’t been implemented, Ritholtz points out. Elon Musk’s claims for mass layoffs and sharp budget cutting by his DOGE operation have been wildly overstated.
Among the policies likeliest to actually happen, in Ritholz’s view, are an extension of the tax cuts Trump signed in 2017, which favored corporations and the wealthy, and a Federal Trade Commission that looks kindlier on big mergers than did Biden’s FTC.
It’s fair to expect that Trump’s policies will have an effect on economic growth, including in California. A favorite insight by economists and business leaders is that what he’s done so far is inject “uncertainty” into economic planning.
Of course, the future is always uncertain. Back in 2010, when Republicans complained that the “uncertainty” produced by Barack Obama’s developing plans for tax, healthcare and financial reforms had business leaders sheltering in terror under their beds, I observed that the U.S. spent three decades facing the threat of nuclear annihilation from the Soviet Union. That was uncertainty, and it hovered over the most prosperous period in our history.
We may be at the peak uncertainty stage of the current Trump term. Referring to the dithering over tariffs, the U.S. Chamber of Commerce quotes a member fretting that “the threats and uncertainty have made it hard to make business decisions.” Earlier this month, Clement Bohr of the UCLA Anderson economic forecast noted that “at this level of uncertainty, firms stop hiring. They’re going to wait it out.”
That suggests that the waiting period will last only until the picture of Trump’s policies becomes clearer (assuming that it will in time). The stock market, after all, is a mechanism to gauge future expectations. No one can be sure, however, how far it is looking ahead — only that it generally looks further ahead than tomorrow.
Almost everyone with a stock or bond portfolio has a different mental picture of what they want to accomplish with their investments, if not how to get there. How much risk are you willing to take? What do you want the money for? How long is your investment horizon?
J.P. Morgan was impatient with acquaintances who wished to compress all these considerations into a single all-purpose maxim. Told by a friend that he was so worried about his stocks that he couldn’t sleep at night. He asked, what should he do? Morgan’s reply may be apocryphal, but it encompasses the truism that investors should divorce their emotional response to the markets from the cold analysis that should underlie investment decisions, if possible.
According to the story, Morgan replied, “Sell down to the sleeping point.”
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