The following views and perspectives are formed by the work of the Applied Equity team in managing assets for investors.
"Wall Street suffers from a lack of humility. We know less than we think we do”1
But I’m no pessimist.“The present isn’t as bad as you think. And the future will be better than you anticipate.”2
The S&P 500 has compounded at 8.0% annually the past 25 years.3 I think there is a good chance the returns for the S&P 500 will be greater the next 25 years, despite all those macro forecasts of why the future is “murkier”.
You can't predict. But you can prepare."4
I do not recall anyone predicting President Trump would hit the "pause" button on tariffs on April 9th. All the discussions were around the inflationary/recessionary impacts of tariffs, scaring the living daylights out of me and nearly everyone else.Given the magnitude of the rally, sentiment should be ebullient.
But it's not.
AAII10 bulls to bears, Big Money poll, Hedge Fund positioning, Put/call ratios.
All are surprisingly tempered relative to such a move in equities.
Could the pain trade still be higher?
Could a true correction only occur when sentiment and price momentum are more aligned?
How can they all be right?
What's interesting is the correction forecasts usually point to the negative impact of tariffs as the likely cause.
That's classic "rear view mirror" advice. Stocks rarely react to the same news in the same way.
Investors got burned listening to the predictions that tariffs would derail the stock market.
Tariff news won't unnerve the market again, in my opinion.
Tariffs are now considered known risks.
“Most known risks are already priced into the market. The biggest negative market reactions occur when an unknown risk pops up and the market struggles with pricing it in.”11
Bottom line for me, either we don't see the seasonal summer swoon at all, or we get something completely unexpected that causes more than a 5-7% “mild summer correction.”
But make no mistake, this is not a call to get out of equities.
It's simply a suggestion that an opportunity might arise where incremental dollars invested might produce a higher return outcome than the long-term average. (That's a fancy way of saying, "buying into weakness.")
However, there's simply no such thing as a "no reason correction."
Inevitably, the “reason” is unexpected and will cause a whole host of scary commentary.
That alone will freeze investors from taking advantage of lower prices.
So, it's best to prepare (is your desktop sticky note updated??) and accept that surprises are unexpected, which will then raise the level of uncertainty.
Therein lies the opportunity!
“Uncertainty is the only certainty in investing--and the best returns come to those who embrace it.”12
So, what are we doing in our portfolios at Applied Equity?
Obviously, as a long only equity team, we stay invested.
However, we can modestly adjust the types of stocks to own.
The quality defensive stocks which were so popular at the lows are no longer the darlings.
They have been left behind in this roaring phase.