Hope you are all doing well. The U.S. stock market’s positive Monday momentum failed to hold, and sell-offs on Thursday and Friday left the major indexes down overall for the fifth week in a row. The NASDAQ dropped 3.2%, the S&P 500 fell 2.1%, and the Dow retreated 0.9%. The NASDAQ entered a correction on Thursday. The index closed more than 10% below its record high set about five months earlier. The Dow followed suit on Friday. The S&P 500 slipped closer to the 10% correction threshold, ending the week 8.7% below the record level achieved in late January. If you have the resolve to buy or have been waiting to reallocate more into stocks, this is a good time to do that. Market drops are uncomfortable, and it’s always hard to see the light at the end of the tunnel. If you are fully invested, the best thing to do is to stay the course. Nothing fundamental has changed regarding the longer-term outlook for stocks. In the short term, expect it to get worse before it gets better. I will not be surprised if we see a capitulation sell-off (down 1,000-plus points intraday) at some point in the next ten days. However, stay invested because when it turns many times, it goes up just as fast or even faster than the drop. There have been times we get a sell-off like that, and the market bounces back even within the same trading session. Major League Baseball’s opening day was this week, so I have broken down this update using Yogi Berra quotes.
“It gets late early out here.” – Yogi Berra
The recent surge in oil and natural gas prices continued to provide a lift for energy stocks, which were up more than 6% for the week. I think at this point, the opportunity to make money in this sector is rapidly disappearing. Don’t chase returns in the energy sector. If you were looking to overweight specific sectors, I think there are better opportunities. I still think tech stocks, utility stocks, and defense stocks, all of which have been down the past month, present the most upside in the longer term. The U.S ceasefire on Iranian energy infrastructure and ongoing peace talks are being met with skepticism. It’s impossible to know how close we are to the end of this conflict. I remain optimistic that it will end in the next month or so. When it does, I expect the market to bounce back rather quickly. The same investors who have rotated into energy stocks will likely rotate out, causing the sector to drop.
“You’ve got to be very careful if you don’t know where you are going, because you might not get there.” – Yogi Berra
Prices of U.S. government bonds fell for the fourth week in a row. The move in bonds is consistent with the narrative that the conditions have the Federal Reserve operating aimlessly without a plan. There is a tension between the public’s desire for predictable, long-term policy and the Fed’s preference for adjusting to economic data as it evolves. The oil spikes present a problem for all central banks in that it likely pushes inflation higher in the short term. At this point, there is no way to assess what damage to the oil market and inflation will cause in the long term. A wait-and-see approach is the correct approach. The Fed has purposefully avoided signaling potential rate hikes in response to higher near-term inflation. In fact, most members are still forecasting a rate cut this year in updated economic projections.
“It ain’t over till it’s over.” – Yogi Berra
Meta lost a landmark social media addiction verdict ($375 million in New Mexico, plus damages in California). This caused the stock to drop significantly. If you own Meta, stay invested. It is likely to be successful on appeal based on Section 230 liability shields, which protect platforms from content liability. The appeal will center on whether design features are content-related or independent. Meta believes that the allegation related to social media addiction is ultimately associated with third-party content made available on its platforms. I think the higher courts will agree. Many are driven by fear by comparing it to the tobacco lawsuits. In those cases, tobacco was pretty clearly the cause of the harm. I think Meta will ultimately show that the platform design did not directly cause specific mental health injuries.
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