03 Mar 3rd March 2025
Index Movement Last Week
| S&P500 | -1.0% |
| Nasdaq | -3.4% |
| Aussie All Ords | -2.0% |
This is quite the market sell off.
The average stock is down much more than the narrowly-tracked indices, if my portfolio is any guide.
Investors have turned cautious because of newfound doubts about the economy. They cite cautionary language from Walmart, a drop in consumer sentiment, and predictions by the consumer that inflation will heat up (from various surveys). I’m not so convinced that consumers are great inflation forecasters. But I am guessing this is as much about jitters about 1) chaotic policy making in Washington, D.C. where employees are now even sent random emails threatening them with job loss, and 2) worries about geopolitical risk and 3) the unknown impact of tariffs.
You can see how big money is treating this by comparing two S&P sectors.
Consumer Staples consists of what we need every day. It is made up of things like Walmart, Coca-Cola and Proctor & Gamble. It is considered a defensive sector. You buy this when you are worried about an economic slowdown. Blue line below.
Consumer Discretionary is luxury items that we only buy when we have excess cash. It consists of things like Tesla, Nike and Booking.com (Holidays). You buy this when you see economic expansion coming. White line below
It is easy to look at this and say big money is betting on a economic slowdown and if that comes to pass at a time when stocks are a little bit pricey (I don’t think they are overvalued) then we could have a decent drop.
The only kind of slowdown we need to worry about is a recession. A general slowdown does not lead to 30%+ stock price falls. Only recessions do that. But we could go somewhere between 10% and 20% and still be uncomfortable to live through.
And then, at the end of last week, the Atlanta Fed worried everyone with their GDP forecast for Q1. It was sitting at +2.3% but got revised down to -1.5%
But I also know this indicator changes frequently and becomes closer to the actual result as we get near the actual result. Therefore, I am not worried at this stage.
The move by big money from Discretionary to Staples is just because big money has a very short term view. They have to perform every quarter so constantly make changes.
The big advantage we have over big money is that we can be patient. We don’t have to report results to our boss every quarter and we can sit things out, even use their short term movements to our advantage. It is our only real way of outperforming them.
Talking of advantage, I know lots of you out there are Tesla fans. You probably know I am not. But for those who like it, it is now down 40% from it’s highs.
Sidenote – Tesla happens to be the second largest weighting in the Consumer Discretionary sector.
But the real question is – what do we do from here?
The high of the year so far came on February 20th. The question I have is, can we get back up there, or will that end up being the high of the year?
So I took a look at data since 1980 and in what month the high of the year occured. Turns out a high in February has only happened once. History is telling us there is a very low probability the February 2025 high will end up being the high for the year.
Most of the time, 72% in fact, the high occurs in the last quarter. That is because stocks have a tendancy to rise and the longer you give them the more likely they are to rise.
What this means is we are likely to see another, higher high at some point this year.
Therefore, this current round of selling will end at some point and stocks will rally. That makes today a time to buy, not sell.
But, it also would not be a surprise to see more selling throughout March.
If you are long now, stay long.
If you have cash in the bank, there is an argument to using some now to start buying, but I wouldn’t fully load up. Rather buy more at the end of every week if that week is a down week.
Warning
Stock values can go down as well as up. It is possible to lose 100% of your investment in a stock. Any advice given by Capital 19 is general advice only and does not take your personal circumstances into account and might not be suitable for you.