Good morning friends,

Markets are experiencing a pullback, and despite the S&P 500 being just 5% off all-time highs, investor sentiment has rarely been this weak. The AAII Bull-Bear Sentiment (A measure of how investors feel about the stock market) hit -41.2, with over 60% of investors bearish, levels not seen since early 2009—a time when the market was in a deep bear market, not near record highs like today. Historically, sentiment this negative has often signaled buying opportunities, not reasons to panic.

Why Are Markets Down?

While some may blame interest rate expectations or earnings, the main culprit appears to be trade tensions. New tariffs went into effect today, reigniting fears of a trade war. This is the type of pullback that can reverse quickly, sometimes on a single headline or tweet. Contrast this with Federal Reserve policy changes, which typically take months to shift and have a much longer-lasting market impact.

Perspective: How This Bull Market Compares to History

The current bull market began in October 2022 and is now 28 months old. Historically, bull markets have lasted an average of 5.5 years, with an average gain of 191.6%. By comparison, this bull market has gained 71.3%, making it shorter and shallower than the historical average. While pullbacks are normal, history suggests there could still be significant upside ahead.

First Quarter Volatility is Normal in Presidential Terms

The first quarter of a new presidential term tends to be volatile, but historically, markets improve as the year progresses. Investors should keep this in mind before overreacting to short-term market moves.

Better Inflation Data & Fed Rate Cuts on the Horizon

Despite the current weakness, inflation data has improved, and markets are now pricing in three rate cuts from the Fed in 2025. Lower interest rates could be a strong catalyst for stocks, especially given how the market has historically responded to easing monetary policy.

The Takeaway: Fear Often Creates Opportunity

With sentiment this bearish, history suggests it may be a good time to lean in rather than out. Weak sentiment combined with a still-young bull market, improving inflation, and potential rate cuts make this an environment where selective stock picking—rather than broad diversification—may be the best approach.

If you’d like to discuss how we’re positioning portfolios in this environment, let’s talk.

Regards,

JC