After two years of 20+% returns on the S&P 500 Index, we were pretty confident 2025 would be a more challenging investment environment. In our January note, we felt confident in projecting 2025 year-end total return estimates for the S&P 500 Index of 8-10% and despite February and March’s market volatility we still remain confident in this forecast.
In preparation for this month’s note, we reviewed first year market performance for the past twelve Presidents (1957-2023) and were delighted to see that the S&P 500 Index averaged a total return of 7.9% for that first year, which falls in line with our market assumptions.
Of those twelve Presidents, three (Nixon, Carter, and Reagan) experienced negative first-year market returns during their presidencies. Notably, each of their administrations were a change in party affiliation from the previous administration, shifting from Democrat to Republican or vice versa. This explains much of the turbulence the market is experiencing currently, given the stark differences in fiscal, monetary and trade policies of the Trump Administration versus the Biden Admin -keeping with previous historical norms.
As of market close last night (March 12th), the S&P 500 and Nasdaq indices officially entered correction territory with both indices being down over -10% and -13% respectively from their peak -just several months ago. This is the first correction markets have had since October of 2023. Sixteen months of low volatility bliss, maybe we were feeling a bit spoiled, which is why this correction may feel scarier than most.
Please keep in mind though, market corrections (pullbacks or dips of -10% from previous highs) are normal and healthy. You can think of it as a toll investors must pay on the road to attractive long-term returns. Historically, the stock market corrects once per year on average and has still achieved a 13% annualized return including dividends since 1980, making 2024 an outlier.
Today, markets are bouncing back nicely as many short-term indicators were showing markets are oversold -but the bounce could be short lived. Late last year, signs of Inflation started to bubble up again, threatening to unravel the progress the Federal Reserve has made over the last couple of years. As I mentioned in January, this meant that the majority of the interest rate cuts were off the table for this year. In addition, we are now seeing economic data surprises to the downside as opposed to last year where surprises to the upside were more prevalent. Indicating the economy is indeed slowing.
This data, in combination with the chaotic Tariff rollout, has turned consumer and investor sentiment negative and risk of recession is growing. It’s no secret the market does not like the prospect of Tariffs as they could be inflationary, could increase prices for consumers, reduce profit margins for companies, reduce company’s earnings per share, which in turn warrant lower stock prices.
Please know we understand that politics and investing intersect at times and we don’t express an opinion on whether tariffs are good or bad. What is problematic, is there is no clarity on the % charged, how long they will be in place, which countries are involved and if this is or is not just a negotiation tactic. There are two things the market hates, inflation, and policy uncertainty. On April 2nd, reciprocal tariffs are slated to go into effect against our overseas trading partners, so we do expect this volatility to persist into next month.
During times of heightened market volatility, it can be quite easy to make a portfolio mistake -even for professionals. This is not the time to make bold directional calls, be too cute with positioning, using excessive leverage or trying to time the market. There are three options available at all times, buy, sell, or wait for more information -we are being patient, waiting for clarity.
Tactically, in regard to portfolio management, we are in a position of power as we have more cash sitting idle in our allocations than ever before -this is intentional. As I have mentioned before, we have individual bonds maturing throughout the month in our actively managed allocations in increments of $15k, $25k and $50k. Normally, we would roll (purchase) another bond with the proceeds and add to the bond ladder.
We chose not to automatically roll the majority of bonds over for the last several months in anticipation of an equity side correction. This gives us the cash and flexibility to buy/add to the highest quality stocks and equity ETFs at large discounts to where they were trading just a few months prior. Technology has taken the brunt of the selling, and we have given up a small portion of our gains, but this opens up an attractive entry point for investors who have been waiting on the sidelines or have missed the previous move up adding a valuation floor under many of these names.
We are not selling our favorite Mega Cap Growth stocks (Apple, Microsoft, Amazon, Google, Meta, Netflix). Yes, in February and early March their valuations were expensive -we agree. Today, after the selloff, their average forward P/E is 24.98 -just above the S&P 500 forward P/E of 19.59. Given their fortress balance sheets, above market revenue growth and above market profit margins and competitive moats surrounding their businesses we are looking to add to these positions as well.
While we are not out of the woods by any means and are conscious of the laundry list of potential risks out there, we have no choice but to invest through it. We know volatility can be unsettling but remember, we are armed with a long-term time horizon, flexibility, and cash ready to take advantage of any future selloffs.
As always, we wish you and your family a great Friday evening, and a wonderful weekend!
Please reach out to us with any questions or comments you may have regarding your specific situation.
Jaran C. Day, Chief Investment Officer
Griffin Dalrymple, CFP®, Chief Strategy Officer
Past performance is not indicative of future performance.
The views expressed represent the opinion of Opinicus and are subject to change and are not intended as a forecast or guarantee of future results. This material is for informational purposes only. It does not constitute investment advice and is not intended as an endorsement of any specific investment. Statements of future expectations, estimates, projections, and other forward-looking statements are based on available information and Opinicus’s view as of the time of these statements. Market performance cited is not indicative of portfolio performance experienced by portfolios Opinicus manages. Accordingly, such statements are inherently speculative as they are based on assumptions that may involve known and unknown risks and uncertainties.