What's Going on in the Markets March 9, 2025

The stock market experienced significant volatility this week, with the S&P 500 dropping 3.1%, its largest weekly decline since September, driven by concerns over tariffs and uneven economic data.

The S&P 500 index had its worst weekly loss since last September, as tariff headlines and uneven economic data are causing investors anxiety. The index lost 3.10% on the week, the tech-heavy NASDAQ lost 3.45%, and the small caps lost 4.3%. The S&P 500 index is 6.1% away from the last all-time intraday high made on February 19.

It’s helpful to remember that, on average, markets have two or three pullbacks from a peak measuring 5% or more each year, and you can expect a 10% pullback once every 11 months. This pullback feels worse than it is, perhaps due to the relatively smooth upward ride we enjoyed for most of 2024.

Despite universally bullish and euphoric forecasts by all the major brokerage firms entering 2025, the S&P 500 index is now down 1.9% year-to-date. On a more positive front, the domestic Dow Jones Industrial Average Index (30 stocks) is up 0.6%, international stock indexes are up—some double-digit percentages, and dividend-paying stocks and bonds of all kinds are also still up year-to-date. Got diversification?

Downside leadership in the form of institutional selling of stocks (distribution) intensified last week and could be worrisome for the intermediate-term uptrend (bull market) if it doesn’t subside soon. Towards that end, signs that the markets are oversold emerged last week, raising the possibility of a robust bounce back in the coming weeks.

A COMING RALLY?

Indeed, the market indexes closed up with a bounce on Friday, which is uncharacteristic of the markets lately. Recent Fridays reveal five down Fridays out of the last seven, with fears of potential weekend headlines bringing a down opening for the markets the following Monday.

While Friday’s rally is a good start, we need a strong follow-through rally day to mark the return of investors’ appetite for domestic stocks and lay the path for a sustainable bounce or rally.

So far this year, the markets have followed the script for higher volatility during the first year of a new presidential administration. A consolidation (i.e., “digestion” of significant gains by stocks) is expected following more than two years of double-digit gains since the uptrend started in October 2022. Momentum-driven artificial intelligence stocks have been hit the hardest in this pullback.

You can attribute some of this volatility to the tariff wars’ tit-for-tat action, the ongoing peace negotiations for Ukraine and the Middle East, or deteriorating economic data, but regardless of the news headlines, we knew 2025 would not be the smooth ride we experienced in 2024.

RECESSION AHEAD?

While a recession and a bear (downtrending) market usually go hand in hand, there’s not enough evidence to say we’re definitively heading for a recession. While some Gross Domestic Product (GDP) estimates indicate an unexpected contraction in the first quarter of 2025, the quarter isn’t over yet. And, to declare an “official” recession, there must be two quarters of negative GDP, so we won’t know until mid-year.

Bloomberg’s Recession Probability Forecast just edged up to 25% after residing at a very low 20% for much of January and February. Of course, the current projection is right at the average for the measure dating all the way back to 2009. The odds of a contraction stood at more than 50% for much of 2022 and 2023, yet two quarters of negative GDP growth never materialized.

CORPORATE EARNINGS STRONG

The latest quarterly corporate earnings have held up great, and while there may be some deceleration in profits in the second quarter of 2025, the back half of 2025 looks to have earnings re-accelerate.

The main concerns cited by CEOs in their earnings conference calls are the uncertainty about tariffs and the new administration's ever-fluid policies, which affect their planning for the future. Hence, their profit outlook was less ebullient than usual.

Certainly, earnings expectations will be tempered should the latest tariff skirmish be long-lived, but Corporate America is generally in good financial shape, and management teams have experience navigating prior levies.

There’s a saying in this business that “corporate profits are the mother’s milk of stocks.” If corporate earnings remain strong, that will lead to the return of strength in stocks.

ECONOMIC DATA MIXED

Jobs and housing data have lost some steam over the past several months, and they bear monitoring in the short term. While this slowdown could be an ominous sign, the economy may be experiencing what some call a “mid-cycle growth scare.”

The February ISM Manufacturing Purchasing Managers Index (PMI) ticked down to 50.3. However, the Prices Index increased significantly, and the Employment index dropped by 7.5 percentage points. This combination of stubbornly rising prices and falling employment indicates that the Federal Reserve’s battle with inflation is far from over.

The ISM Services PMI for February increased fractionally from 52.8 to 53.5. Like the Manufacturing PMI report, the Prices Index increased to 62.6, marking its third consecutive monthly reading above 60.

Respondents from both surveys expressed major concerns surrounding tariffs, government spending cuts, and heightened uncertainty ahead.

Friday’s February jobs report from the Bureau of Labor Statistics came in below expectations, while the unemployment rate ticked back up to 4.1% from 4.0% in January. Though the addition of 151,000 new jobs was better than many had feared, the recent government layoffs will likely not appear in the data until the coming months.

INFLATION AND INTEREST RATES

Inflation pressures are weighing on the market, as is their effect on short-term interest rates. Coming into 2025, we were expecting one or two short-term interest rate cuts by the Federal Reserve (the Fed). Lately, speculation about whether it would be zero or only one rate cut (or even a rate hike) has also weighed on the markets.

But given policy uncertainty, Fed Chairman Jerome Powell soothed the markets a bit on Friday with a speech in which he implied that the Fed would be ready to act should administrative policies cause an unexpected economic slowdown. In other words, two or more rate cuts might be on the table for 2025 should conditions deteriorate faster or worse than expected.

CHOPPY WITH POCKETS OF MARKET STRENGTH

Overall, while March stock markets have felt awful, seeing pockets of strength in overseas markets, bonds, value, and dividend stocks says that institutions aren’t really that bearish and selling anything that isn’t nailed down. Indeed, if you look at the equal-weighted S&P 500 index, it’s still up 0.45% year-to-date and has held up better than the cap-weighted S&P 500. Even the equal-weighted NASDAQ Index is flat year-to-date.

For our clients’ portfolios, we have been trimming profitable stock positions, adding to other new ones, and increasing our market hedges in case this market pullback proves stubbornly persistent. While the current weight of evidence has not signaled the end of the long-term bull (uptrending) market, there are indications that the current weakness and choppiness may persist in the short term.

To be clear, that doesn’t mean we feel that bearish forces are dominant, given that the proverbial bullish baton has been passed to other market segments, which are now flourishing in an environment where some air has been let out of the technology stock bubble.

DON’T LET THEM SCARE YOU

Regardless, anything can happen as we go forward, and we know that trips to the downside are always part of investing. Still, barring any unforeseen shocks, I don’t expect this pullback to unravel badly enough to wreck the long-term uptrend and plunge us into a new bear (downtrending) market. The quality and magnitude of the next market bounce will tell us whether this pullback phase is over.

A reminder that volatility is the price we pay to enjoy the outsized returns in the stock market. Sure, you could sell everything and get back in “when the water’s safe,” but good luck with timing that (much easier said than done!)

In fact, this might be the time to take advantage of the pullback to buy or add to positions that were too expensive just a few weeks ago—if not now, when? Disclaimer: This is not a recommendation to buy or sell any securities.

Remember, as legendary Fidelity Magellan Fund portfolio manager Peter Lynch once said, “The secret to making money in stocks is not getting scared out of them.”

And whatever you do, turn off the news and the media, whose only job is to keep your attention glued to their every word for as long as possible. They’ll scare you witless if you let ‘em.

Don’t let ‘em.

Sam H. Fawaz is the President of YDream Financial Services, Inc., a fee-only investment advisory and financial planning firm serving the entire United States. If you would like to review your current investment portfolio or discuss any other tax or financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fiduciary financial planning firm that always puts your interests first, with no products to sell. If you are not a client, an initial consultation is complimentary, and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client and their financial plan and investment objectives are different.

Source: InvesTech Research