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Ten Questions on Tariffs, the Economy, Markets, and Our Outlook


Ok, tariffs happened. But now what is the big question—for policy, the economy, and obviously, markets. Here are Carson Investment Research’s answer to 10 key questions.

One: What tariffs went into effect?
At 12:01am on March 4th, new tariffs on Canada, Mexico, and China went into effect. These included:

• 25% tariffs on all Canadian goods, with the exception of Canadian energy imports (which will be tariffed at 10%)
• 25% tariffs on all Mexican goods
• 10% tariffs on all Chinese goods, which will be in addition to the 10% tariffs that went into effect a month ago

The tariff orders exempt “de minimis” goods (goods/packages with a value below $800), since the US doesn’t have systems in place to process these. This exception didn’t originally apply to the initial 10% round of tariffs on Chinese goods, but US customs and USPS struggled to implement these on small packages, and the exemption was restored. Note that this is one way a lot of Chinese goods making their way into the US have avoided tariffs (since 2018).

These tariffs are big deal – Canada, Mexico, and China make up about 43% of US goods imports, and 41% of US exports.



The tariffs on China alone are twice as large as those imposed during President Trump’s first term. The new tariffs will raise the average effective tariff rate that the US imposes on imports from about 2% to near 10%, which is something we haven’t seen since the 1930s and ‘40s. The US is once again putting a self-imposed economic blockade around itself.



Two: Are there more tariffs to come, and will other countries retaliate?
Short answer: yes (to both questions). President Trump has plenty more planned. These include national security-based tariffs on steel, aluminum, and even lumber and agricultural imports (the US imports $200 billion in food products). Plus, reciprocal tariffs on every country, which would match the tariff rate other countries impose on US goods. It’s going to take a while before several of these come through. For example, the reciprocal tariffs are going to be very hard to navigate and implement for US agencies (think of how many trade partners the US has, and all of them may impose different rates for different goods).

Retaliatory actions are already in the works. Canada imposed 25% tariffs on $20.5 billion in US goods but haven’t specified the products yet. They plan to extend that list to $85 billion of goods over the next few weeks. Mexico is set to respond by this weekend. China was a lot quicker out of the gate, announcing retaliatory tariffs minutes after Trump’s latest tariffs were imposed. Amongst other measures, they’re imposing broad tariffs on food imported from the US, which is targeted to hit the export-oriented US agricultural industry. US farmers will likely face the brunt of a long-drawn out trade war. Back in 2018, the Trump administration gave out subsidies to blunt the impact, but it may not be as easy this time around with the deficit already running high.

Here’s a useful chart from Bloomberg showing the list of tariffs, and potential retaliatory actions.



Three: Weren’t Tariff Threats Supposed to be a “negotiating ploy”?
That was the expectation, but we have tariffs now. The White House has said that Canada, Mexico, and China need to do a lot more to stop the flow of illicit drugs into the US. Canada and Mexico promised to act and that was why the tariffs were postponed by a month. But Trump clearly believes their efforts are lagging, and didn’t want to wait longer (or perhaps risk being seen as crying wolf). At the same time, it’s not clear what exact quantifiable metrics these countries need to meet. Trump’s also unhappy about trade imbalances—a long-held belief of his is that these countries are taking advantage of Americans by selling us a lot of goods.

All this may get resolved in eventual negotiations, though correcting for trade imbalances is going to be tricky. For example, once you exclude oil, the US actually exports more goods to Canada than it imports. Note that the US is the largest energy producer in the world, but it needs Canadian “heavy crude oil” for its refineries (different from the mostly “light, sweet, crude” produced in the US). It’s hard to see how Canada will rebalance its trade with the US. China is also unlikely to take concrete measures to reduce its reliance on manufacturing and exports. In fact, imposing tariffs on Mexico but not Southeast Asian countries works to China’s benefit, as a lot of Chinese companies route exports through Southeast Asia.

Anyway, for now, it’s all action and not much talk. The trade war is here, and it may last a while. Even if we get a roll back of tariffs, the threat is going to loom over the global economy.



Four: Will prices go up due to tariffs?
All else equal, yes, prices will go up. But it’s going to vary a lot depending on several factors, including retaliatory tariffs and currency movements. The White House expects the dollar to appreciate, alleviating some of the pressure of higher prices. However, a stronger dollar is a double-edged sword as we wrote in our 2025 Outlook. Yes, it makes imports cheaper (perhaps offsetting some impact of higher tariffs) but it also makes US exports more expensive (on top of facing retaliatory tariffs) and that hurts US producers. The dollar index rose about 10% from the end of last September through mid-January. But the dollar has pulled back by about 4% since then and is close to where it was on election day, negating the expectation that the price impact of new tariffs will be mitigated by an appreciating dollar.



The impact on prices is also going to vary depending on the type of product. The Budget Lab estimates larger prices increases on items like computers and electronics (+10.6%), apparel (+7.5%), autos (+6.1%), fresh produce like fruits and vegetables (+2.9%), and wood products (+2.9%). This accounts for higher import prices as well as substitution effects (if Americans switch to higher priced goods made in the US).



Companies may also choose to eat higher input costs instead of passing them onto the end consumer, though this will imply shrinking margins. This is what happened in 2018 – 2019, but during the recent bout of high inflation (in 2021 – 2022), companies passed down costs and margins even expanded. So, we may be in a regime where companies believe they can actually pass down costs to consumers without impacting demand for their goods (or their margins).

Note that a one-time price increase does not imply inflation will rise. Higher inflation would mean that prices continue rising month after month, and unless tariffs continuously ratchet higher, we’re unlikely to see that. This is not to say that even a one-time price increase will not hurt consumers and businesses. Think of it like a one-time increase in the sales tax.


Five: Will the Federal Reserve cut interest rates to alleviate any pain from tariffs?
Unlikely. The Federal Reserve (Fed) has currently paused on further rate cuts, and tariff uncertainty is likely to keep them on pause for longer. Fed Chair Powell has repeatedly highlighted the uncertainty around tariff policy as one of the reasons behind the pause. They’re going to want to see what tariffs are being implemented, the goods on which they’re imposed, the duration of tariffs, and ultimately model out the impact (or even see it in the data).

At the same time, the Fed did cut rates back in 2019 when they thought elevated rates were hurting economic growth. Rates are clearly elevated now—even Powell has acknowledged that they are “meaningfully restrictive”—and that’s hurting cyclical areas of the economy like housing. The latest manufacturing data indicates that raw materials prices are rising and companies are worried about volatility and uncertainty due to tariffs.

All this means that the Fed could act sooner if the economy is seen to be faltering, with the unemployment rate starting to rise well above its current rate of 4.0. We still expect the Fed to cut 2 – 3 times in 2025, but likely in the second half if there’s no deterioration in the labor market and disinflation continues. Markets are currently pricing in a Fed funds rate of 3.66% by the end of 2025, implying close to 3 rate cuts before year end, though the first one is not expected before June. A month ago, markets were pricing in just 1 cut—there’s been a big shift since then as economic data has come in on the weaker side. Meanwhile, Fed members are expecting to cut rates twice in 2025.



As we’ve pointed out for some time now, inflation is no longer a problem, and elevated rates are hitting key parts of the economy. So, the Fed should probably cut rates sooner rather than later, instead of waiting for worse data. Fed rate cuts prompted by bad news, like a higher unemployment rate, is not what you want to be hoping for. We tend to believe that bad news is bad news, and once the unemployment rate starts to go up, it’s likely to continue going up. There’s no such thing as a “mild recession” or a “little disturbance.” It’s folly to hope for one, believing you can turn it around when it happens.

Six: Will we see stagflation as a result of tariffs?
A colleague of mine pointed out that google trends has shown a jump in searches for the word “stagflation”. Stagflation is an economic environment when you have 1) high unemployment and 2) high inflation. We have neither right now. The likelihood of stagflation is really low.

The unemployment rate is currently at 4%, near historical lows. Labor market indicators suggest that layoffs remain low, despite announced cuts in federal government jobs.

With respect to inflation, tariffs will likely increase prices in a one-time shift, but sustained inflation is unlikely. For sustained inflation, one of the first places you want to look at is oil prices. The last time we had stagflation was in the 1970s, and the inflation spikes of 1973 – 1974 and 1979 – 1980 were both accompanied by energy shocks. Even more recently in 2022, the big surge in inflation came amid higher energy prices that shot up after Russia’s invasion of Ukraine in February 2022. Right now, oil prices are trending in the opposite direction, especially on the back of recent news that OPEC (+Russia) is going to step up production. WTI crude prices are near the bottom end of the range we’ve seen over the last two and half years.



Markets aren’t expecting stagflation either. If they were, we would see expected Fed policy rates move higher, as the Fed looked to combat higher inflation. Instead, they’ve been moving lower amid expectations of weaker than expected growth (as I wrote under question #5).



Seven: Will there be a (deflationary) recession?
A more pertinent question rather than whether we’ll have stagflation. Right now, we don’t believe we’ll see a deflationary recession, i.e. one where the unemployment rate spikes, and consumption slows down a lot (leading to lower prices).

Consumption did slow in January, a lot. But this is likely due to the fires in California and unseasonably cold weather across the South. We expect a rebound in February and March. In fact, we saw February auto sales rise 1.8% to 16 million vehicles (seasonally adjusted annualized rate), higher than at any point between June 2021 and September 2024.

Income growth is still running strong and remains faster than inflation. Over the last three months, employee compensation (across all workers in the economy) rose at an annualized pace of 5.7%, even as headline inflation (as measured by the Fed’s preferred Personal Consumption Expenditures inflation metric) rose 2.9%. Disposable income was up even more, rising 6.7%, though that was due to the one-off effect of Social Security benefits being adjusted higher by 2.8% for inflation.



In short, inflation-adjusted incomes continue to rise and that should support consumption. Of course, as I noted above, cyclical areas of the economy are struggling, and that could be the difference between 2.5 – 3% GDP growth and 1.5 – 2% GDP growth.

Ultimately, the labor market is key because that is where income growth comes from (including employment gains, wage growth, and hours worked). Right now, it’s in a fairly healthy place, even though hiring has slowed a lot. It’s a good labor market if you already have a job, but a tough one if you’re out of work and looking for a job. The good news is that the Fed’s bias is towards cutting rates rather than increasing them (despite tariffs). They look ready to step in to protect the labor market if there’s any deterioration, and that’s a big positive.



Eight: Will markets crash?
We believe the bull market is still young and has ways left to go. However, we could see significant volatility—something we expected when we wrote our 2025 Outlook over three months ago. The S&P 500 is down 6.0% from the February 19th peak, which has many investors quite worried, but volatility is the toll we pay to invest. That’s right, even some of the best years on record have seen some scary moments, making 2025 not all that different from any year in history.

Focusing specifically on the past two years, stocks gained more than 20% both times, but it wasn’t easy. Remember March 2023 and the Regional Bank crisis? The S&P 500 had a 7.8% mild correction then and then a 10% correction into late October, yet still managed to rally and gain more than 20%. Then last year we again saw mild corrections two separate times, with the big one being the 8.5% mild correction in August 2024 during the yen carry trade unwind drama. Yet again, stocks gained more than 20% for the year.

Looking into the data more, the average year historically has seen more than seven different 3% dips, more than three separate 5% mild corrections, and a 10% correction once a year. Going out more shows a bear market happens about once every three-and-a-half years. The bottom line is the headlines might be scary and uncertainty is rampant, but every year sees scary headlines and volatility, which should help put the tariff worries in perspective.

As long as we avoid a recession that hits the profit outlook, we should be able to avoid a sustained bear market. And our base case is still no recession.



Nine: Can markets turn around after early year weakness?
We have seen weakness to start this year, and the S&P 500 has given up all its gains since election day (from November 5th through March 4th, 2025). The story has been worse for the most cyclical parts of the market, like small cap stocks. The S&P 500 Index is up just 0.4% since election day, while the small cap Russell 2000 index is down 7.6%.

Although this weak start to 2025 hasn’t been fun, it isn’t really a big surprise. Post election years tend to be quite weak early, with a negative year-to-date return as of early March typical. Sound familiar? Not to mention, we found that the first few months after a year with a 20% gain were historically choppy and weak as well. The good news is after these early year slumps we’ve seen the rest of the year improve and we expect that to happen once again.



Ten: Has our Outlook changed?
Perhaps the most important question. We titled our 2025 Outlook “Animal Spirits.” As we wrote there, we chose the title more for the potential for a rise in animal spirits than the conviction it would happen. With all the data that’s come in over the last two months, along with the fact that significant tariffs have now been implemented (at levels unprecedented since the end of WWII), the possibility of a rise in animal spirits is likely hanging by a thread. We did expect tariffs to be a significant threat, along with a stronger dollar. But there were opportunities too, including potential rate cuts by the Fed and favorable tax policy from Congress. The problem is that the sequencing has gone the wrong way—the threats are manifesting already even as potential opportunities get pushed out to the back half of the year.

The short answer to the question about our outlook is no, it hasn’t changed in a broad sense. We don’t expect a recession, and we still expect stocks to gain in 2025. But these things are not binary, and there are a range of possible outcomes. Risks have increased and we’re in the business of managing risk within the portfolios we manage. The policy outlook is murky, with the Fed on pause at least until the summer and the threat of tariffs holding back animal spirits for now. Congress is yet to really get moving on tax policy legislation, but early indications suggest that some preferred policies, like no taxes on tips, no taxes on social security income, and a lower corporate tax rate, may not come to pass.

Ultimately, what matters is how our views, and any changes, translate to portfolio actions. So here are some actions we’ve taken over the last month within our tactical portfolios:

• Maintained our equity overweight (given our still positive outlook), but reduced the size of the overweight for the first time in over two years
• Reduced exposure to areas of the market that tend to exhibit more volatility, including small-cap and mid-cap stocks
• Increased exposure to more defensive, low volatility stocks in the US, barbelled with allocations to stocks exhibiting momentum (including financials)
• Increased allocations to both Treasuries, particularly inflation-protected securities, as well as ultra-short term securities
• Maintained the allocation to managed futures to hedge against unexpected inflation shocks and gold (which we’ve held for close to two years now as a crisis hedge)

Our longer-term outlook hasn’t changed, and we haven’t made significant changes in our strategic portfolios. Big picture, we’re still overweight equities and underweight bonds.

We continue to monitor the macroeconomic data closely and evaluate both opportunities and threats on the policy side as well. If the facts change, we’ll update our views (and portfolios).

 

German (EWG) Stock Surge
Wed, Mar 5, 2025

The S&P 500 (SPY) had a solid session Wednesday with a 1% gain, but that still leaves it down 1.87% week-to-date. Meanwhile, across the pond in Europe, German equities are surging. Germany has unrolled significant fiscal changes this week which we discussed at length in last night's Closer in addition to a more succinct explanation in today's Morning Lineup. To put it lightly, investors appear to love the news. The MSCI Germany ETF (EWG) has surged this week with a 6.8% gain week-to-date. As shown below, that is a historically large 3-day run for the ETF/country. In fact, it is the largest three-day gain since November 2022 and ranks just shy of the 99th percentile across all three-day moves in the ETF's history. Relative to what has transpired in the US, things get even more historic. The three-day performance of EWG has outpaced SPY by 8.69 percentage points. Going back through the nearly 30 years of price history, only two periods saw wider performance spreads: around the COVID Crash lows five years ago and at the start of 1999.

 

Trump Tariff Turmoil Post-Election Year Plunge

Following up on Tuesday’s post with a deeper look from our member’s webinar yesterday into post-election year performance under new republican administration. Looks like President Trump is taking a page out of our 2025 Stock Trader’s Almanac 4-year cycle playbook. Updated chart highlights detail of the republican admins from table on page 28.

 

The Most Oversold Country in the World
Thu, Mar 6, 2025

In a post yesterday, we discussed the historic surge in German equities, which is even more historic when framed relative to US equity performance. We further discussed the topic of international stock outperformance concerning valuations in today's Chart of the Day. In the matrix below, we show the performance of 22 country ETFs since the US election in November, year to date in 2025, and month to date in February. We also show each ETF's distance from 52-week highs and where they currently trade relative to their 50-DMAs.

On average, developed markets have massively outperformed since the election and year to date. Whereas the former are up an average of 5.5% since November, emerging markets have averaged a nearly 5% decline. More recently, looking in the young month of March, developed markets are again collectively outperforming but by a much smaller margin. The single best performer and the only one currently trading at a 52-week high is Germany (EWG). EWG has risen an impressive 7% since the end of last week, bringing it deeply into overbought territory. However, that isn't even the most overbought country ETF. Hong Kong (EWH) is trading over 3 standard deviations above its 50-DMA for the country's most overbought reading since October. Meanwhile, all the way at the other end of the spectrum by pretty much each measure is the US (SPY). The S&P 500 has now erased close to all its post-election gains after falling the most of any country month-to-date. As such, it is also the single most oversold country ETF on this list.

 

Since 1990, the S&P 500 is up 9.8% on average per year.

 

The Nasdaq 25 Years Later
Mon, Mar 10, 2025

Twenty-five years ago, the fun of the Dot Com boom came to an end. Roughly beginning in December 1994 with the release of the first internet browser, Netscape, the Nasdaq would go on to rally just under 600% through the closing high set on March 10, 2000. After that high, the index declined with persistent losses as it didn't find a bottom until over two and a half years later in October 2002. By then, the index was down 77.8% from its high, and it wasn't until 2015 that the Nasdaq eventually reclaimed those prior highs. Fast forward to today, even though the Nasdaq has once again pulled back from its most recent highs, the index is now up 250% since that Dot Com peak and is up almost 1,500% since the 2002 low.



A quarter century later, the Nasdaq is once again in the midst of a new technical revolution with the emergence of AI. Additionally, while on March 10, 2000, the Nasdaq hadn't quite started to roll over, today it is in a significant drawdown having fallen 13% from the December 16 high. In the chart below, we show the drawdowns in the Nasdaq in the year after the 2000 high versus the current drawdown so far since the December peak. As shown, the pullback off of the Dot Com high was much more rapid that what has been seen lately. For the comparable number of trading days, the Nasdaq was already closing in on a 40% decline in 2000 versus only a 13% drop currently. Additionally, this latest drop has seen the Nasdaq actually trade sideways for about a month before things really started to fall off a cliff in the past couple of weeks.



While the move off of the recent high doesn't exactly line up with the Dot Com era, using a different starting point shows a much greater correlation. Below we show the performance of the Nasdaq in the three and five years following the releases of Netscape and ChatGPT. As shown, the two lines have tracked one another remarkably well including this latest pullback.

 

March Madness Sets Up Ides of March Washout Bounce

Stormy March markets have battered stocks lower in the first half of the month in recent years. Named after Mars, the Roman god of war, the third month of the year often serves as a battleground for bulls and bears. Julius Caesar may not have heeded the famous warning to “beware the Ides of March,” but perhaps the bears should take heed this year, at least for a bounce.

Several key technical levels have been breached which unfortunately brings support around the September lows and last March’s highs in the 5300-5400 area into play. But a near term bounce is setting up for later this week or early next, though it will need some sort of catalyst from President Trump, the Fed, Congress, rates, inflation or geopolitics to trigger it.

 

Big Swings for Small Business
Tue, Mar 11, 2025

This morning's release of small business sentiment from the NFIB showed another month-over-month decline in the headline Optimism Index. The politically sensitive survey has shown that the headline index has managed to remain well above pre-Election levels, though the past two months have marked a dramatic drop. The index was at a high 105.1 in December thanks to a record increase after the election. In the two months since then, the index is down 4.4 points, which, as shown in the second chart below, makes February the 10th largest 2-month decline on record.



In the table below we show the readings for each category of the report including the 10 inputs to the optimism index in addition to the eight other indices. As shown, the latest drop has brought the index down from an 85th percentile reading to a 66th percentile reading. Breadth was notably weak with only three inputs rising month-over-month while the rest fell. Other categories were mixed with three increases, three declines, and two unchanged readings.



As previously noted, historically the NFIB survey has been sensitive to politics. The survey has shown small businesses to be more optimistic when Republicans are in power whereas sentiment has been weaker when Democrats are in power. As we discussed in today's Morning Lineup, some categories like labor indicators appear less sensitive. Expanding on this, below we have constructed indices within the report that are centered around observed or actual changes to the businesses (which in theory could be less politically sensitive) and expectations or plans (which would be more sensitive).

As shown, both indices got a boost after the election although plans and expectations saw a significantly larger jump, meaning small businesses' hopes were perhaps ahead of what was actually happening within their firms. Just as fast as it rose, that expectations index has pulled back sharply in the past couple of months. As a result, expectations continue to outpace actuals, although to a smaller degree than at the end of 2024.



In addition to the various categories of the report, the NFIB also has an Economic Policy Uncertainty index. This index tends to rise the most during election years, and given we are only a few months out from the election, this index has remained near historically elevated levels. As shown in the second chart below, the move over the past several months has been extremely volatile. The move in the past two months is similar in size to the two-month period leading up to last fall's election. Prior to that, the only moves of this size were observed in the summer of 2022 and in early 2016 before that.



Elsewhere in the report, there were other mixed signals which could cause some uncertainty outside of politics. The higher prices index ticked up meaningfully with a 10-point jump resulting in the highest reading since May 2023. However, the percentage of firms reporting inflation as their single biggest problem has fallen massively to only 16% versus a recent high of 25% last summer.



For the cohort of businesses that reported lower earnings, inflation was the second most common response accounting for 10% of respondents. That is still well below the past few years' range, and plays second fiddle to sales volumes, which rose to 16% to match last October and November 2023 for the highest reading since March 2021.



Another big move in last month's report had to do with capex. While 'actual changes to capex' was flat on the month, credit availability rose another point to continue its massive improvement from the past few months.



Perhaps as a result of that greater ease for credit or perhaps to front run any potential tariff impact on the heavily exposed auto industry, we would also note that February saw a historic surge in the percentage of firms reporting capex spend on vehicles.

 

4th Worst Post Inaugural S&P 500 Performance since WWII



President Trump’s fast and furious pace of change to kick off his second term has created a great deal of uncertainty. Historically, the market has not performed well during periods of uncertainty. Monday, March 10, marked the seven weeks since Inauguration Day and as of the close S&P 500 was down 6.37%, its fourth worst post inaugural performance since 1945. Presidents Obama (2009), W. Bush (2001) and Ford (1974) suffered greater declines through the seventh week.

In the above table we have included the S&P 500’s performance every Inauguration Day since April 12, 1945, when Truman became President following the death of FDR. We also included November 1963, when Johnson took over after JFK was assassinated and Ford in August 1974, following Nixon’s resignation. We use the close on Inauguration Day or the day before when it landed on a holiday like this year. Republican Administrations are shaded in grey.

Seven weeks may be an odd data point to consider but it is consistent with the current time frame. Looking out to 12-Weeks After and 100-Days After, we see an improvement in S&P 500 performance with average, median and frequency of gains improving. Should the market find support, a rebound would be consistent with past post inaugural performance.

 

March Madness


“The stock market is the only place where things go on sale yet everyone runs out of the store screaming.” Old Wall Street saying

What is it about March that brings volatility? Yesterday was the worst day of the year for stocks and worries over tariffs and a growing trade war dominate the headlines. Now the truth is this early year weakness wasn’t a surprise, as we’ve discussed many times. I was on CNBC in mid-February and even said to expect a potential banana peel drop.

As we’ve discussed before, early year weakness in a post-election year isn’t abnormal. Early year weakness after a 20% year isn’t abnormal. And early year weakness the past 20 years hasn’t been abnormal either. No, no one should ever invest purely on the calendar, but March has had some nice lows over the years and as we show below, the past two decades it has been perfectly normal to see late February to early March weakness, but then a nice bounce.







We’ve Been Here Before
It is important for investors to remember what happened two years ago this month, as the 16th largest bank in the United States went under virtually overnight and many expected the Regional Bank Crisis to spark a new bear market, but it didn’t. The S&P 500 actually finished that month higher. Then five years ago we shut down our economy during a once-a-century pandemic. Stocks eventually fell 34% in five weeks, but then bottomed on March 23, 2020 and finished with a solid 16% gain in 2020. Then who could ever forget the Great Financial Crisis, which bottomed on March 9, 2009 after a down 56% generational bear market? The point is you might feel scared, frustrated, and confused now, but there have been many other times this has happened and many of them have taken place in this very month, but all were major lows as well. We got past those times and we will get past this one.



Putting Things in Perspective
Yesterday was a bad day, a very bad day, as the S&P 500 fell 2.7% for the worst day of the year so far. Last year saw a 3.0% down day and still had a great year, so this got me thinking how normal it is for a good year to have a bad day. Turns out, it is quite normal. I found 22 years the S&P 500 gained 20% for the full year and the worst day of the year was down 3.5% on average those years. Incredibly, 1997 had a worst day down nearly 7%, yet gained more than 30% for the year.



The average year since 1980 has averaged a 14% peak-to-trough correction on average. 2025 is up to 8.5% off the recent highs and as I’m typing this, and things could be worse by the time you read this, but it is again important to remember we haven’t had a 10% correction since late in 2023 and the odds we would go all of 2025 without one were likely slim. As you can see, double-digits corrections happen a good number of years, but still finishing higher for the year is common as well.



Volatility Is the Toll We Pay to Invest
If you’ve read these missives before then you’ve probably heard us say that volatility is the toll we pay to invest. So 2025 won’t be the first year ever to go up each day and never have a scary headline, because that’s just not the way that markets work. This is officially the first 5% mild correction of 2025, something that even the best years tend to see, and no reason in itself to become pessimistic. In fact, we had two 5% mild corrections last year plus a 10% correction, and one mild correction in 2023, but both years gained more than 20% when all was said and done. And trust us, during each of those times the past two years fear was rampant on the weakness, just as we are seeing currently.

Could this weakness turn into a 10% correction? Given stocks are one bad day away, that is quite possible, but we do not expect things to get much worse and the odds of a full-blown bear market remain quite slim. As uncomfortable as this recent volatility feels, know that it is the toll we must pay to invest.



Thanks for reading and here’s to a little less madness this March!

 

Can Luck O’ the Irish Stem the Tide? S&P 500 Up 23 of Last 31 St. Patrick’s Days

Céad Míle Fáilte! After a challenging first half of March, the market could sure use some good luck to have any chance at a full-month gain. Saint Patrick’s Day is the only cultural event that perennially lands in March.

Since 1950, the S&P 500 posts an average gain of 0.27% on Saint Patrick’s Day (or the next trading day when it falls on a weekend), a gain of 0.07% the day after and the day before averages a 0.11% advance. More recently since 1994, Saint Patrick’s Day market performance has been improving. S&P 500 has been up 23 times in 31 years with an average gain of 0.70%.

In the ten years, since 1950, when St. Patrick’s Day falls on a Monday, like this year, S&P 500 has been green six times but posts an average loss of -0.01% due to a 3.01% drop in 1980. Fridays before have been somewhat weaker, up 5, down 5 but with an average gain of +0.04%. Tuesdays following the parades and revelry have been mixed, up 6 of 10 with an average loss of -0.08%.

 

Treasuries Playing Defense Again (for Now)


For the second consecutive decline of 5% or more in the S&P 500, long Treasuries have been playing defense, at least so far. Here “playing defense” means a return better than short Treasuries, although over short periods of time that’s usually near zero. I’m using long Treasuries here as a proxy for bonds, because they tend to play the strongest defense when bonds are working.



Is that a reason to “like” bonds again? It depends on what you mean by “like.” It’s not a reason to prefer bonds to stocks. In fact, over the course of the drawdown bonds have grown somewhat less attractive and stocks more attractive. And while we’ve downgraded our growth expectations and the likelihood of “animal spirits” giving the economy a boost, our baseline remains that strong income growth and the potential for a fiscal boost in the back half of the year makes a recession in 2025 unlikely. We would expect that to be a good environment for stocks (See Carson Global Market Strategist Sonu Varghese’s excellent commentary here and here.) The calendar also still looks generally supportive of equity gains over the rest of the year. (See Carson Chief Market Strategist Ryan Detrick’s always insightful thoughts here.)

There continues to be a lot of uncertainty around interest rates, as the Fed remains “higher for longer” amid the uncertain impact of policy, especially tariffs, on inflation. This doesn’t mean the Fed won’t cut, but only that outside a clear deterioration in economic conditions, the pace of rate cuts is expected to be slow and the point at which rate cuts stop will likely be higher than what we’ve seen starting with the Great Financial Crisis. Right now the market is pricing in three rate cuts over 2025 with the next cut coming at the June 17 – 18 FOMC meeting.

But bonds have two and a half things going for them that they didn’t have leading into the “bondmageddon” that started in August of 2020 and lasted until October of 2022:

-Starting yields are higher, and over time (roughly the average maturity of the bonds currently in the index), yields are a good forecaster of returns (see below). Think of it this way. As of yesterday, the yield on the Bloomberg Aggregate Bond Index was 4.65%. If yields don’t move, that’s your expected return over the next year and provides some cushion if yields press higher. Back in August 2020, the yield on the index was 1.05%. That means that bond yields need to rise enough to cause a 3.6% decline in bond prices before 2025 is on roughly an equal footing with 2020.



-Longer-term yields (10-year Treasuries and longer) are slightly above shorter-term yields. Not by much given recent yield declines, but before the Fed started cutting rates, shorter-term yields were more attractive.

-And finally, bonds have been playing defense of late, but this one only counts ½ since it’s not going to play out in all scenarios. If we get a scenario where growth expectations slow meaningfully but inflation expectations rise, the correlation of stocks and bonds could rise, with bond declines accompanying stock declines. But slower growth is usually disinflationary, and if that outweighs any inflationary policy impact, then bonds can continue to play defense during a growth scare. These possibilities are captured nicely in the below chart from our Outlook 2025 with the current sell-off added for comparison.



So how to handle bond positioning? Since we are overweight equities, we remain biased toward higher quality bonds, preferring to take more equity-like risk in equities. That includes some exposure to Treasury inflation-protected securities (TIPS). Since we are underweight bonds, we are willing to run at a level of interest rate sensitivity somewhat above the Bloomberg US Aggregate Bond Index, which we use as a bond benchmark. But on a portfolio level that still leaves us below our multi-asset benchmarks in overall rate sensitivity. And we do look for ways to diversify stocks outside of just bonds (and diversify bonds!), including a tactical allocation to gold, incorporating trend-following strategies that can provide exposure to a wide range of assets, and even incorporating lower volatility stock exposure into our portfolios.

 

Houston, We Have a Correction. Now What?


“Everybody in the world is a long-term investor … until the market goes down.” Peter Lynch, famous fund manager

After another big down day on Thursday, stocks officially fell into a correction, with the S&P 500 down more than 10% from the February 19th peak. Although this hasn’t been fun, we can’t say it wasn’t totally unexpected, as late February to early March is one of the more seasonally weak times of the year, not to mention the first quarter of a post-election year is one of the weakest quarters in the four-year presidential cycle. Here’s a chart we’ve shared a lot that shows just this. Then factor in that the first quarter after a 20% gain tends to be weak and that the past 20 years the first quarter has been weak in general, and things were ripe for some volatility early in 2025.



We’ve been on record that at some point this year we’d probably see a 10% correction and here it is. No, I didn’t think it would happen this quickly, but always remember that stocks take the escalator up, but the elevator down.

Another popular chart we’ve shared a lot is how 10% corrections tend to happen once a year on average (shout out to Ned Davis Research for this data). Given we didn’t have a correction last year, you could say the odds favored having one this year.



Is This Normal?
Trust me, I get it. This doesn’t feel normal. We are in the middle of a seemingly escalating trade war with uncertainty dominating everything. Markets can take good news, they can even take bad news, but they hate uncertainty and we have a lot of it.

Still, over the past 46 years this is now the 24th year with at least one correction at some point during the year, meaning these corrections happen a lot. Of course, not all corrections become bear markets. I found 16 years stocks had a correction, but didn’t fall into a bear market that year (which is what we expect to happen this time), and stocks gained a solid 9.5% for the year and were higher for the year 10 times in those cases. Remember that since 1950 stocks are up 9.5% on average.



A little more color on the chart above. The average year sees a 14.0% peak-to-trough correction and the years that have fallen 10% at some point, but finished the year higher, ended up with a 17.5% average return for the year. With the S&P 500 down 6.1% for the year, there’s still time for it to get back to positive and maybe even by a large amount. Don’t give up hope just yet.

Could This Turn Into a Bear Market?
Of course anything is possible, but as of now we’d put the odds of this turning into a bear market (so down 20% from the February 19th peak) quite low. First off, we found there have been 48 corrections in history and only 12 of them turned into a bear market, so only 25% have gone on to move into bear market territory.



Another Bear Would Be Quite Rare Part 2
If this turned into another bear market it would set a new record and I guess this would be under the “records we don’t want” category.

The S&P 500 peaked on February 19, 2020 before the Covid bear market and then we had another bear market in 2022. We’ve never seen back-to-back bears so close (only 1.9 years apart), so could we really have a third bear so soon? If we did that would be three bear markets starting within five years of each other, breaking the previous record of nearly seven years between 1966 and 1973. Again, anything is possible, but I’d say another bear this soon after the previous two isn’t a likely scenario.



Here’s a tweet I did on how many bear markets we’ve seen per decade. Again, could we really have three bears in only half a decade?



What Are We Doing?
Remember, our team doesn’t just write or talk about what is happening, we manage real money for our Carson Partners. The majority of our models have done extremely well the past few years, mainly due to our large overweight to equities. We are still overweight equities now, but we’ve been making changes since late last year to help prepare for a year that was likely going to be a tad more volatile than the past two.

If you are all in the “Magnificent 7,” yes, this has been quite rough, but if you have a well-diversified portfolio it isn’t nearly as bad as they keep telling you on TV.

Here and now we are preaching to stay diversified. Yes, the S&P 500 is down more than 6% for the year, but core bonds are up a couple percent, long Treasuries are up close to 4%, gold is up double digits, and most European market are up in the upper teens or more.

We have exposure to all of these areas to help with this kind of volatility. We added gold in our tactical models as far back as March 2023, then added more after the big gold drop after the US Election in 2024, while we finally added some Treasuries late last year and added Treasury inflation-protected securities (TIPS) about a month ago. We have an allocation to international stocks and are actively considering whether we should add a little more. Yes, small caps have been quite disappointing, but we’ve been in both small and midcaps (what we call SMID) and midcaps have done a tad better than small caps. We won’t get them all right and will certainly have our share of incorrect calls, but the good investors are those who keep those mistakes small.