When the stock market falls more than 1% in a day or a couple percentage points over a couple of days, I always get the feeling that it’s the beginning of a much bigger sell-off.
This has been consistent in my 19 years of writing about stocks. To be fair, it’s a rational feeling to have because stock market history is riddled with big, lengthy sell-offs. And you can be sure there’ll be big sell-offs, including bear markets, in the years to come.
That said, something that has changed over the years is my growing familiarity with the data, which has made me a better investor less prone to making emotionally-driven adjustments to my portfolio.
Sure, buy-and-hold clearly dominates. And owning only on the days after up days still came with a positive return.
But owning only on the days after declines — which are the days many investors usually feel less bullish — have produced returns that eclipse owning only on days after up days.
We’ve already talked about how the best days in the stock market come at the worst times. Nevertheless, I was surprised to see how strong the returns were if you had only held on the day after all of the down days.
This is helpful to know, especially since the odds of a down day in the stock market are relatively high at 47%. This is is why the stock market gets so much negative daily news coverage. If we only got stock market news monthly, quarterly, or annually, the odds of seeing positive stories would be much higher.
And before you think about overhauling your investment process to only own the day after down days, keep in mind that buy-and-hold was still the winning strategy.
(By the way, this whole discussion is similar to what we know about how the stock market performs under various presidents. You might assume the stock market outperforms when a Republican sits in the Oval Office. In fact, the opposite is true: The market outperforms slightly when a Democrat is president. But again, owning stocks only when a certain party occupies the White House has been a mistake. Returns have been multitudes higher when you’ve held stocks through both Republican and Democrat presidencies.)
Make no mistake. We very well could be on the precipice of a bigger pullback.
The S&P 500 has historically experienced an intra-year max drawdown of 14%. From Feb. 19’s high of 6,147, the index fell 5% to a low of 5,837 on Friday. It would have to fall to 5,286 for that average move. That’s an 11% decline from Friday’s close.
That said, it’s also likely that we don’t experience a decline of that magnitude in the near-term — the stock market usually goes up.
Even if we were near some top, it’s incredibly difficult to time buys and sells to make trading the top make sense.
All that is to say that the best strategy for long-term investors is to hold and stand fast through what could be a big downturn. As they say, time in the market beats timing the market.
Investing in the stock market is an unpleasant process. The best you can do is to have clear goals and a thoughtful strategy based on your needs and timeline. And from there, you just keep your stock market seatbelts fastened.
There were several notable data points and macroeconomic developments since our last review:
Business investment activity rises. Orders for nondefense capital goods excluding aircraft — a.k.a. core capex or business investment — rose 0.8% to a record $75.1 billion in January.
Core capex orders are a leading indicator, meaning they foretell economic activity down the road. The growth rate had leveled off a bit, but they’ve perked up in recent months.
Inflation trends are cool. The personal consumption expenditures (PCE) price index in January was up 2.5% from a year ago, down from December’s 2.6% rate. The core PCE price index — the Federal Reserve’s preferred measure of inflation — was up 2.6% during the month, near its lowest level since March 2021.
On a month over month basis, the core PCE price index was up 0.3%. If you annualized the rolling three-month and six-month figures, the core PCE price index was up 2.4% and 2.6%, respectively.
Inflation rates continue to hover near the Federal Reserve’s target rate of 2%, which has given the central bank the flexibility to cut rates as it addresses other developing issues in the economy.
Consumer spending cools. According to BEA data, personal consumption expenditures declined 0.2% month over month in January to an annual rate of $20.4 trillion.
Adjusted for inflation, real personal consumption expenditures fell by 0.5%.
Card spending data is holding up. From JPMorgan: "As of 21 Feb 2025, our Chase Consumer Card spending data (unadjusted) was 0.1% above the same day last year. Based on the Chase Consumer Card data through 21 Feb 2025, our estimate of the US Census February control measure of retail sales m/m is 0.20%."
From BofA: "Total card spending per HH was down 0.9% y/y in the week ending Feb 22, according to BAC aggregated credit & debit card data. Relative to the week ending Feb 15, the biggest slowdowns were in entertainment, transit and furniture. Spending growth was strong in the West, but weak in other regions. This suggests winter weather likely disrupted spending."
Consumer vibes deteriorate. The Conference Board’s Consumer Confidence Index ticked lower in February. From the firm’s Stephanie Guichard: "In February, consumer confidence registered the largest monthly decline since August 2021. This is the third consecutive month on month decline, bringing the Index to the bottom of the range that has prevailed since 2022. Of the five components of the Index, only consumers’ assessment of present business conditions improved, albeit slightly. Views of current labor market conditions weakened. Consumers became pessimistic about future business conditions and less optimistic about future income. Pessimism about future employment prospects worsened and reached a ten-month high."
Relatively weak consumer sentiment readings appear to contradict resilient consumer spending data.
Consumers feel worse about the labor market. From The Conference Board’s February Consumer Confidence survey: "Consumers’ views of the labor market were less positive in February. 33.4% of consumers said jobs were ‘plentiful,’ down from 33.9% in January. 16.3% of consumers said jobs were ‘hard to get,’ up from 14.5%."
Many economists monitor the spread between these two percentages (a.k.a., the labor market differential), and it’s been reflecting a cooling labor market.
Unemployment claims rise. Initial claims for unemployment benefits increased to 242,000 during the week ending February 22, up from 220,000 the week prior. This metric continues to be at levels historically associated with economic growth.
Gas prices tick lower. From AAA: "With winter nearly in the rearview, temperatures warmed up while gas prices cooled down. This week, gas prices dropped by three cents, bringing the national average to $3.12 per gallon. … According to new data from the Energy Information Administration (EIA), gasoline demand increased from 8.23 million b/d last week to 8.45. Total domestic gasoline supply increased from 247.9 million barrels to 248.3, while gasoline production decreased last week, averaging 9.2 million barrels per day."
Mortgage rates tick lower. According to Freddie Mac, the average 30-year fixed-rate mortgage declined to 6.76% from 6.85% last week. From Freddie Mac: "This week, mortgage rates decreased to their lowest level in over two months. The drop in mortgage rates, combined with modestly improving inventory, is an encouraging sign for consumers in the market to buy a home."
There are 147 million housing units in the U.S., of which 86.6 million are owner-occupied and 34 million (or 40%) of which are mortgage-free. Of those carrying mortgage debt, almost all have fixed-rate mortgages, and most of those mortgages have rates that were locked in before rates surged from 2021 lows. All of this is to say: Most homeowners are not particularly sensitive to movements in home prices or mortgage rates.
Home prices rise. According to the S&P CoreLogic Case-Shiller index, home prices rose 0.5% month-over-month in December. From S&P Dow Jones Indices’ Brian Luke: "National home prices have risen by 8.8% annually since 2020, led by markets in Florida, North Carolina, Southern California, and Arizona. While our National Index continues to trend above inflation, we are a few years removed from peak home price appreciation of 18.9% observed in 2021 and are seeing below-trend growth over the history of the index. … Through this recent market cycle, the ability of Americans to grow wealth by participating in the upside of the U.S. housing market, particularly if done through a leveraged position by securing a mortgage, has proven to be historically beneficial."
New home sales fall. Sales of newly built homes fell 10.5% in January to an annualized rate of 657,000 units.
Offices remain relatively empty. From Kastle Systems: "Peak day office occupancy was 60.8% on Tuesday last week, down four tenths of a point from the previous week. In Washington, D.C., Chicago, and Philadelphia, Wednesday occupancy rose significantly after last week’s winter weather, increasing 35.7 points to 59.6%, 21.5 points to 65.5%, and 12.8 points to 50.5%, respectively. In Dallas, the effects of winter weather caused Wednesday occupancy to fall more than 20 points to 49.7%. The average low was on Friday at 32.5%, down 3.9 points from last week."
Near-term GDP growth estimates are tracking negative. The Atlanta Fed’s GDPNow model sees real GDP growth declining at a 1.5% rate in Q1.
Putting it all together
Earnings look bullish: The long-term outlook for the stock market remains favorable, bolstered by expectations for years of earnings growth. And earnings are the most important driver of stock prices.
Demand is positive: Demand for goods and services is positive, and the economy continues to grow. At the same time, economic growth has normalized from much hotter levels earlier in the cycle. The economy is less "coiled" these days as major tailwinds like excess job openings have faded.
But growth is cooling: To be clear: The economy remains very healthy, supported by strong consumer and business balance sheets. Job creation remains positive. And the Federal Reserve — having resolved the inflation crisis — has shifted its focus toward supporting the labor market.
Actions speak louder than words: We are in an odd period given that the hard economic data has decoupled from the soft sentiment-oriented data. Consumer and business sentiment has been relatively poor, even as tangible consumer and business activity continue to grow and trend at record levels. From an investor’s perspective, what matters is that the hard economic data continues to hold up.
Stocks look better than the economy: Analysts expect the U.S. stock market could outperform the U.S. economy, thanks largely due to positive operating leverage. Since the pandemic, companies have adjusted their cost structures aggressively. This has come with strategic layoffs and investment in new equipment, including hardware powered by AI. These moves are resulting in positive operating leverage, which means a modest amount of sales growth — in the cooling economy — is translating to robust earnings growth.
Mind the ever-present risks: Of course, this does not mean we should get complacent. There will always be risks to worry about — such as U.S. political uncertainty, geopolitical turmoil, energy price volatility, cyber attacks, etc. There are also the dreaded unknowns. Any of these risks can flare up and spark short-term volatility in the markets.
Investing is never a smooth ride: There’s also the harsh reality that economic recessions and bear markets are developments that all long-term investors should expect to experience as they build wealth in the markets. Always keep your stock market seat belts fastened.
Think long term: For now, there’s no reason to believe there’ll be a challenge that the economy and the markets won’t be able to overcome over time. The long game remains undefeated, and it’s a streak long-term investors can expect to continue.
