A recession may be brewing, but history reminds us: long-term investors still come out ahead.
KEY TAKEAWAYS
MY HOT TAKES
Miss the forest, miss success. There is no doubt that we are in a market regime like no other. Markets have natural cycles as do economies. If we look over a 5-year period that has been without any out-of-the-ordinary news, we would see stocks rise, pull back, fall, rise again, fade, inch higher, etc. We could search and search for news for why a stock may have ripped or dipped on any given day only to find… nothing notable. Believe me, I have done this time and again. But then there are periods which are marked with extraordinary events causing mayhem for investors. Some examples would be the COVID pandemic, the Global Financial Crisis, Black Monday (1987), Savings & Loan Crisis (late 80s), Dot-Com Bubble Burst (2002), and 9/11 Terror Attacks (2001), to name just a few that I have encountered in my years in the biz.
All of these events included sharp declines in the markets and some were marked by a recession. Black Monday saw the S&P 500 fall by -20.5% in one day! I am sure that you remember the market declines in February and March of 2020 at the start of the COVID pandemic. But do you remember that US GDP fell by some -19%, the sharpest decline on record? Those were clearly not “natural” events, and markets reacted in the extreme. That is just the macro level stuff. Imagine how many surprise earnings misses that happened that caused stocks to falter. I have lost count. 🤔
My regular followers know that I like to do this from time to time; if you bought the S&P 500 at the highs just before Black Monday and held tight through yesterday, you would have earned 2,091% on your investment. Now, I know that holding an investment for almost 40 years is unrealistic, and I also know that you couldn’t buy the S&P 500 in 1987 because the SPY ETF didn’t arrive onto the scene until 1992, but hopefully you get the picture.
Included in that long-long-long-term investment return would be the 2018 trade war and the current trade war, which incidentally, has not gotten an official name yet. It hasn’t gotten a name yet, because… well, we are still right in the middle of it. This one is marked with more uncertainty than I can remember. Even during the COVID crisis, we could track the spread of the virus and project impacts. No. This current one is unique to all others. A healthy economy existed with a once-in-a-lifetime emergence of productivity-jolting technology. AI shifted markets into high gear with staggering momentum. The US elected a pro-business President that would remove the yokes of regulation and shower businesses and consumers with growth incentives. That promise amounted to a turbo boost to an already turbo-boosted market! 🚀
But that would all change within days of the President’s inauguration when he announced higher than expected tariffs on Canada and Mexico– China was tariffed as well, but at a lower rate. That was just the beginning. I won’t go into the details that followed, but let’s just say it was 0 to 100 in seconds, taking the world and Wall Street by complete surprise. By the end of so-called “Liberation Day” (January 20th), markets were gripped with panic. Trump would not back down, doubling, even tripling down (is that even a thing). The Trump Bump became the Trump Dump and the eye-watering AI rally was assassinated.
Things are looking up, however. The President has delayed some tariffs, changed others, and is in talks with “lots” of countries. China and the US are making overtures of reconciliation through odd, but real backchannels. There is no doubt that this will get resolved. But when and how much damage it will leave in its wake is anyone's guess at this point. For investors that remains the big challenge. You, see there are very real tariffs that are in force, and dare I remind you, US COMPANIES ARE PAYING THOSE TAXES RIGHT NOW.
Never mind the unknowns, these are knowns, and we are learning from some companies exactly how much those costs will amount to. In a less exact way, the economy is showing real signs of weakness. This past Wednesday’s surprise GDP decline, though it was mostly caused by net exports, showed a surprise decline in consumption which is always bad. Consumer and corporate confidence is fading fast with companies slowing investment. Now, 40% of blue chip economists are anticipating a recession in the next year; that is doubled from this past February. But that could all change if the President can get some trade wins and indeed Congress can pass tax legislation by July 4th (administration deadline). But we are not there yet. Markets appeared to have stabilized a bit, but volatility still overhangs the markets. While volatility can throw off some big positive moves, it can also throw off negative ones. So, to the big question. What should investors do, knowing all this?
Yesterday, I co-hosted Yahoo! Finance’s live Catalysts show with Madison Mills. I will post videos once I get all the links. One segment of our show featured Markets and Data Editor Jared Blikre who broke down 16 years of Amazon’s post-earnings data, perfectly timed, because Amazon announced Q1 earnings after the closing bell. You can watch Jared’s segment here. Don’t have 4 minutes? I will show you his “money” slide. Take a look and follow me to the finish.
Focusing on the blue bars, what this chart shows you is that the longer you hold the stock beyond earnings the greater your expected returns. Think about it, regardless of how the earnings came in, Amazon on average lost almost -1% in the day after earnings. But if you just blindly held the stock for a week, your prospects looked up. In fact your expected returns increased with the duration of the holding period. Take a step back. What does this chart tell you? That’s right, long-term wins! You have heard that from me countless times.
Now to the results. Here is a summary:
That all looks pretty fine to me. The company had a slight miss on AWS revenues and it slightly lowered guidance due to tariff and economic uncertainty. From an overall perspective, is this a company that is not consistent with a very positive growth thesis? This morning, Amazon shares are lower by -0.82% in the premarket–pretty close to Jared’s chart. ☝️ Do you have your answer as what to do with your Amazon stock?
YESTERDAY’S MARKETS
Stocks gained yesterday, propped up by strong earnings from Microsoft and Meta after Wednesday’s close. Jobless claims jumped and ISM Manufacturing PMIs declined further. 10-year and 2-year Treasury note yields were unchanged.
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