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Blaise Wyant

May 21, 2025

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Market Commentary, May 21, 2025

 Rally from a Bull Market Correction or Bear Trap

 

After a decline of about 20% between February19th and April 8th, the S&P is now effectively unchanged for the year. Have we just experienced a correction within a longer-term Bull Market or are we in the midst of a “Bear Trap,” a rally within a new Bear Market? I do in fact have a crystal ball on my desk, alas it is only charming decoration. However, unlike other two handed pundits, I promise you a confident answer to this question. 


The S&P has a draw down (drop, correction) of 10-15% almost every 12-18 months. At least historically, every decline has been followed by a recovery and a new market high. I believe we can count on this pattern repeating.


2023 and 2024 were unusually good years for the stock market. Sometimes you can toss out all the analytics and count on a return to the mean. The market senses that the gains are extended. Buyers begin to lose steam. Animal Spirits cool down. So, in February the market began to look tired. I have always thought that the market will do what it wants to do and use current events to justify it.


On April 2, the new US Government Executive announced it was “Liberation Day”. Indeed, many of us felt somewhat liberated from part of our savings that week. The size of the Tariffs being imposed sent the market on a dramatic decline. How these tariffs were calculated seemed to lack any real Economic intellectual rigor. It looked like someone in a hurry asked ChatGPT to produce a formula that might balance the US Trade Deficit. How else would you seriously expect Lesotho to buy $200 million worth of US goods? And what about those poor Penguins and Seals on Heard Island? I am guessing they are not big purchasers of anything.


Since “Liberation Day” the US trade team has retreated on most of the threats they made. Each time they backed down the S&P went up. Some of the largest market declines in history in April were followed by some of the largest gains.


So back to my original question. Have we gone through a Bull Market correction or was the recovery just a rally in a longer-term Bear Market? All we can do to answer this is to use history and statistics as a guide. History is more likely than not to repeat.


Bear Markets almost always precede recessions. Recession fears were certainly rising in mid-April. The consensus was that the US war on trade would be the catalyst. A few days ago, Goldman Sachs lowered their recession forecast to a 45% likelihood.


No doubt Economic Data will continue to be polluted by trade noise distortions. The fact remains that the US economy began 2025 in good shape. Unemployment is low, inflation is low. Corporate and Household balance sheets are in good shape. (Government debt continues to be a huge issue but not one which would trigger a cyclical recession). Corporate earnings expectations have been lowered, and the market is accepting that. Investors are looking beyond the current conditions and into 2026. Interest rates are low, and the Federal Reserve seems to be indicating that unless the war on trade worsens, they can see their way to lowering rates further. 


Late in 2024 and early in 2025 we advised clients to review their tolerance for risk and to reduce their equity exposure if that allocation was more than they are comfortable with. After two exceptional years it made sense to take some gains. We believe that is still a prudent strategy. Rebalancing your asset allocations is a normal risk management tool.
We did not and do not advise making dramatic changes to your allocations. That would be an attempt at market timing. Many investors have tried to time markets, but most have failed. At the risk of repeating some well-worn market data, Hartford Fund Management recently published an article which reminds us that if you missed the best ten trading sessions in the last 30 years your rate of return would have been cut in half. If you missed the best 30 days of the last 30 years your return would have been reduced by 83%. More recently, if you missed just the best 10 days of 2023/2024 your returns would have dropped from 22% average annually to 3 %. 


A Bear Market is a greater than 0% chance because a recession is a greater than a 0% chance. Looking at the historical data, however, the S&P more often than not resolves itself in a Bullish direction. We see the current market environment as a correction within a longer-term Bull Market and we will continue to remain invested in good quality companies. As usual reach out to us to review your   asset allocation, your goals and your personal comfort level for risk.

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