Remembering moments when I thought things took a permanent turn for the worse 🙇♂️
Plus a charted review of the macro crosscurrents 🔀
📆 TKer will be off next Sunday, May 25. The free weekly newsletter will return on Sunday, June 1.
📈 The stock market rallied last week, with the S&P 500 jumping 5.3% to close at 5,958.38. It’s now down 3% from its February 19 closing high of 6,144.15 and up 66.6% from its October 12, 2022 closing low of 3,577.03. For more on how the market moves, read: It's OK to have emotions — just don't let them near your stock portfolio 📉
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One of the benefits of aging as an investor is that you accumulate invaluable experience and perspective by living through a lot of very bad economic and financial market events.
These include events when, in the moment, it felt like things had permanently taken a turn for the worse. But time after time, you’re reminded that you can’t keep the U.S. economy and stock market down for very long.
I like to reflect on those events and recall the unpleasant memories because it helps me better process current and future periods of turmoil and crisis. And the more I reflect, the more I feel like I understand why we keep bouncing back.
From the Asian Financial Crisis to the COVID-19 Pandemic ⏰
In the late 1990s, I was just another immature high school kid without many cares in the world. I didn’t really keep up with current events. But I remember the Asian Financial Crisis because it was one of the topics in prayers my dad would give at his church in Kentucky. I’ll never forget hearing “IMF” come up in those Korean prayers because it was so unusual.
Among other things, the Korean won collapsed by more than half against the U.S. dollar over a very short period at the time. This was a particularly big problem for immigrants closely tied to family back in Korea. I didn’t quite understand it at the time, but I remember the mood being disturbingly gloomy for a while.
I don’t have many memories from the Dot-com Bubble bursting. Back then, I had little interest in or exposure to the stock market, and neither did the people around me. But I do remember watching 9/11 live on TV in my dorm with my roommates at Boston University. I remember not being able to get a hold of family members in New York and Kentucky because the phones were overloaded. I remember the extreme range of reactions from my friends: some fled Boston out of fear; some used it as an excuse to skip some classes; some explored joining the armed forces. Everyone was rattled. Everyone felt less safe.
And for my college friends and I, it soon became clear that we would all be entering a tighter job market with an elevated unemployment rate. Things weren’t great.
After graduating from college in 2004 and after months of searching, I randomly got a job as a contract paralegal where I got my first serious introduction to equity research. I quickly became hooked on learning about the what made the stock market move. In 2006, I got a job at Forbes Newsletters researching and writing up stock picks. I also enrolled in the CFA program that year, which helped me develop a sophisticated understanding of things like mortgage backed securities, collateralized debt obligations, derivatives, and value-at-risk models.
This education super-charged my fear and my feeling of hopelessness as the world tipped into recession in 2007 and spiraled into Global Financial Crisis (GFC) in 2008. The more I understood, the more I felt like there was no way out of it. And many pundits seemed to agree. I remember respected financial market prognosticators going on TV and proclaiming that the government’s bailouts of the big banks, the automakers, and the GSEs were proof that it was “the end of capitalism.”
It wasn’t the end of capitalism, though many were convinced the housing market would never come back as we entered a “new normal” of slow growth. Another popular phrase in the wake of the crisis was “secular stagnation.” Admittedly, I was sold on the idea that economic growth would forever be a long slog. You can’t blame me. In 2010, I got laid off from my job and I re-entered a job market flooded with unemployed people with backgrounds in finance.
But the post-GFC recovery helped me appreciate the resilience of the consumers and businesses propelling the economy forward. I got a great job in 2011, and over the next decade my income soared. Those years were riddled with numerous macro hiccups, but nothing could keep the economy and the stock market from accelerating again and blasting through record highs.
And then came the COVID-19 pandemic.
Those first 6-9 months were surreal. I remember feeling like I was living a sci-fi horror film. At many points I thought this new strange way of life would be permanent. Meanwhile, I was constantly worried that the whole economy would collapse on itself.
The discovery of the vaccine certainly helped things turn around. Fast forward a few years, and most things in the economy are back to normal. Notably, cruise and air travel have more than recovered as most people have gotten comfortable again with being in tight spaces with strangers — unless it’s in an office for work.
So despite the pain, the trauma, and even the loss of life, all these experiences eventually confirmed that we’ll always bounce back.
People will always want things to be better 📈
The economy and the stock market have always had an upward bias.
This makes sense if you think about it. There are way more people who want things to be better, not worse. And that demand incentivizes entrepreneurs and businesses to supply better goods and services. The winners in this process get bigger as revenue grows. Some even get big enough to get listed in the stock market. As revenue grows, so do earnings. And earnings drive stock prices.
I can’t imagine anything changing these attitudes. Sure, there will be periods of when we feel angry and hopeless along the way. But we’re never gonna wake up one day and decide we have everything we want or settle on the idea that what we’ve got can’t be improved on.
And there will always be a sense of urgency. Even during difficult periods, people understand that life won’t wait. You’re getting older. You’re kids are getting older. You’re parents are getting older. If you have the resources, you won’t put your lives on hold. This is bullish as it keeps the wheels on the economy spinning.
Sure, many things change after all the events I mentioned. But things are always changing. Importantly, the changes that stuck have never prevent the economy and the markets from setting new records.
Where we are today
If you’ve been following the news at all over the past two months, you’ve probably heard at least a few folks talking about how the Trump administration’s approach to trade policy is damaging the U.S.’s standing in the world while also threatening to send the global economy into recession.
As the stock market tumbled, phrases like “sell America” and “end of American exceptionalism” began to trend. Popular measures of investor sentiment tanked.
To be clear, I think the past two months created some damage, and we have yet to learn the extent of that damage. It’s certainly possible that we’re in a recession or headed for one. And it’s certainly possible the stock market could take another leg lower.
But I’m nowhere near convinced that we’re destined for a extended, multi-year period of turmoil and pain.
Our system is amazing at self-correcting. Whether it’s through votes or something else, we always seem to find a way to get things back on track toward increasing prosperity and improving our standard of living.
And to repeat what I said last week: There’s basically three scenarios investors always have to consider: 1) Things improve from here, and the market goes up; 2) Things get worse before they get better, which means markets could fall before resuming a more firm rally; or 3) Things get worse and never get better.
If we’re facing scenario 3, then we may have bigger problems than stocks not recovering. But scenario 3 has never played out.
Scenarios 1 and 2 favor long-term investors. Maybe things get worse before they get better. (Note: Timing market bottoms is nearly impossible.) But staying long the stock market covers you in case the low of this cycle is behind us.
I’ll leave you with Warren Buffett said earlier this month at Berkshire Hathaway’s annual meeting:
“We’re always in the process of change. We’ll always find all kinds of things to criticize in the country. … If you don’t think the United States has changed since I was born in 1930… We’ve gone through all kinds of things. We’ve gone through great recessions. We’ve gone through world wars. We’ve gone through the development of the atomic bomb that we never dreamt of when I was born. So I would not get discouraged about the fact that it doesn’t look like we’ve solved every problem that’s come along.”
The 94-year-old investor has lived through everything, and he’s made a fortune investing in the stock market along the way.
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Related from TKer:
This stat about offices reminds us things are far from normal 🏢
A very long-term chart of U.S. stock prices usually going up 📈
Review of the macro crosscurrents 🔀
There were several notable data points and macroeconomic developments since our last review:
🇺🇸 Moody’s downgraded its rating on the U.S. from Aaa to Aa1. Like most analysts out there, I’m not too surprised or concerned by the action. You can read my thoughts on credit rating downgrades in the this 2023 TKer: Some thoughts on the U.S. credit rating downgrade 🤔
🛍️ Shopping ticks higher. Retail sales increased 0.1% in April to a record $724.1 billion.
For more on consumer spending, read: We're gonna get ambiguous signals in the economic data 😵💫 and Americans have money, and they're spending it 🛍️
💳 Card spending data is holding up. From JPMorgan: “As of 08 May 2025, our Chase Consumer Card spending data (unadjusted) was 2.3% above the same day last year. Based on the Chase Consumer Card data through 08 May 2025, our estimate of the US Census May control measure of retail sales m/m is 0.54%.”
From BofA: “Total card spending per HH was up 1.3% y/y in the week ending May 10, according to BAC aggregated credit & debit card data. Relative to last week, the biggest gains were in dept stores & grocery while entertainment & lodging saw the biggest decline. Spending has recovered from the Easter slowdown. Overall, there has been some moderation but spending momentum remains.“
May spending is likely being boosted by consumers pulling forward purchases in an attempt to front-run tariffs.
For more on consumer spending, read: We're gonna get ambiguous signals in the economic data 😵💫 and Americans have money, and they're spending it 🛍️
👎 Consumer sentiment is tumbling. From the University of Michigan’s May Surveys of Consumers: “Sentiment is now down almost 30% since January 2025. Slight increases in sentiment this month for independents were offset by a 7% decline among Republicans. While most index components were little changed, current assessments of personal finances sank nearly 10% on the basis of weakening incomes. Tariffs were spontaneously mentioned by nearly three-quarters of consumers, up from almost 60% in April; uncertainty over trade policy continues to dominate consumers’ thinking about the economy.“
Politics clearly plays a role in peoples’ perception of the economy.
Notably, expectations for inflation appear to be a partisan matter.
For more on the state of sentiment, read: We're gonna get ambiguous signals in the economic data 😵💫 and Beware how your politics distort how you perceive economic realities 😵💫
📦 Inventory levels fall. Total business inventories increased just 0.1% to $2.58 trillion in March. However, this lagged sales growth during the period. As a result, the inventories/sales ratio declined to 1.34 in March, down from 1.35 in February.
For more on why we’re watching inventories, read: How much inventory did companies actually build ahead of tariffs? 🤷🏻♂️
👍 Inflation cools. The Consumer Price Index (CPI) in April was up 2.3% from a year ago, down from the 2.4% rate in March. Adjusted for food and energy prices, core CPI was up 2.8%, unchanged from the prior month’s level.
On a month-over-month basis, CPI and core CPI increased just 0.2%. If you annualize the three-month trend in the monthly figures — a reflection of the short-term trend in prices — core CPI climbed 2.1%.
For more on inflation, read: The end of the inflation crisis 🎈and The Fed closes a chapter with a rate cut ✂️
⛽️ Gas prices tick higher. From AAA: “Gas prices are creeping back up just in time for the busy summer driving season. The national average for a gallon of regular is up 4 cents from last week, as the price of crude oil rises and demand goes up. Typically, the seasonal increase in gas prices starts earlier in the spring, but lower crude oil prices so far this year have kept that from happening. Now, we’re starting to settle in a more typical pattern. Despite the upward trend, drivers are paying about 40 cents less compared to last year, which is good news for the record 39.4 million Americans expected to take road trips over Memorial Day weekend.”
For more on energy prices, read: Higher oil prices meant something different in the past 🛢️
💰 Household finances are deteriorating but also normalizing. From the New York Fed’s Q1 Household Debt & Credit report: “Transition into early delinquency held steady for nearly all debt types; the exception was for student loans, which saw a large uptick in the rate at which balances went from current to delinquent due to the resumption of reporting of delinquent student loans on credit reports after a nearly 5-year pause due to the pandemic.“
While the rate at which debt is going into delinquency has moved higher, the total amount of debt in delinquency remains low at just 4.3% of outstanding debt.
And while credit card delinquency rates may be up, it’s a mistake to say consumers are maxing out their credit cards. The $1.2 trillion in credit card balances as of Q1 represents just tiny fraction of credit card limits.
For more on household finances, read: Americans have money, and they're spending it 🛍️
💼 Unemployment claims tread. Initial claims for unemployment benefits fell to 229,000 during the week ending May 10, unchanged from the week prior. This metric continues to be at levels historically associated with economic growth.
For more context, read: A note about federal layoffs 🏛️ and The labor market is cooling 💼
👎 Small business optimism falls. From the NFIB’s April Small Business Optimism Index report: “Very few small businesses export their goods and services, but millions acquire imported goods as inputs to their operations and those supply chains are currently at risk. Tariff policy is suddenly and dramatically changing relative prices (costs), and relative prices drive all decisions. Uncertainly remains elevated and thus caution clouds spending, hiring, and investing decisions.”
For more on the state of sentiment, read: The post-election sentiment sea change 🔃 and Beware how your politics distort how you perceive economic realities 😵💫
🏠 Homebuilder sentiment sinks. From the NAHB’s Robert Dietz: “Policy uncertainty stemming in large part from the stop-and-start tariff issues has hurt builder confidence but the initial trade arrangements with the United Kingdom and China are a welcome development. Still, the overall actions on tariffs in recent weeks have had a negative impact on builders, as 78% reported difficulties pricing their homes recently due to uncertainty around material prices.”
🔨 New home construction starts rise. Housing starts grew 1.6% in April to an annualized rate of 1.36 million units, according to the Census Bureau. Building permits ticked down 4.7% to an annualized rate of 1.41 million units.
🏠 Mortgage rates tick higher. According to Freddie Mac, the average 30-year fixed-rate mortgage rose to 6.81%, up from 6.76% last week. From Freddie Mac: “The 30-year fixed-rate mortgage remained below the 7% threshold for the 17th consecutive week. Stable mortgage rates coupled with moderately rising inventory are attracting homebuyers into the market, with purchase application activity up 18% from last year.”
There are 147.8 million housing units in the U.S., of which 86.1 million are owner-occupied and about 34.1 million 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.
For more on mortgages and home prices, read: Why home prices and rents are creating all sorts of confusion about inflation 😖
😬 This is the stuff pros are worried about. From BofA’s May Global Fund Manager Survey: “The US-China meeting in Geneva was announced in the middle of the May FMS survey period; even still, trade war triggering global recession continues to be seen as the biggest 'tail risk' per 62% of investors, albeit down from peak 80% in April (in 15-year history).”
For more on risks, read: When uncertainty becomes unambiguously high 🎢, Three observations about uncertainty in the markets 😟 and Two times when uncertainty seemed low and confidence was high 🌈
🍾 The entrepreneurial spirit is alive. From the Census Bureau: “Total U.S. Business Applications were 449,508 in April 2025, down 0.9% from March 2025.“
TKer is a small business that launched three years ago. For more, read: TKer's 3rd birthday comes with an extraordinarily average stock market stat 📈🎂
🛠️ Industrial activity flattens. Industrial production activity in April didn’t change much from prior month levels. Manufacturing output decreased 0.4%.
For more on economic activity cooling, read: 9 once-hot economic charts that cooled 📉
📈 Near-term GDP growth estimates are tracking positive. The Atlanta Fed’s GDPNow model sees real GDP growth rising at a 2.4% rate in Q2.
For more on GDP and the economy, read: 9 once-hot economic charts that cooled 📉 and You call this a recession? 🤨
🏢 Offices remain relatively empty. From Kastle Systems: “Peak day office occupancy was 62.8% on Tuesday last week, down half a point from the previous week. New York and San Jose experienced the largest declines, falling 2.5 points to 66.8% and 2.9 points to 57.1%, respectively. The average low was on Friday at 34.8%, same as the previous week.”
For more on office occupancy, read: This stat about offices reminds us things are far from normal 🏢
Putting it all together 🤔
🚨 The tariffs announced by President Trump as they stand threaten to upend global trade — with significant implications for the U.S. economy, corporate earnings, and the stock market. Until we get some more clarity, here’s where things stand:
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 remains positive, supported by healthy consumer and business balance sheets. Job creation, while cooling, also remains positive, and the Federal Reserve — having resolved the inflation crisis — has shifted its focus toward supporting the labor market.
But growth is cooling: While the economy remains healthy, 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. It has become harder to argue that growth is destiny.
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 are not 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.
For more on how the macro story is evolving, check out the previous review of the macro crosscurrents »
Key insights about the stock market 📈
Here’s a roundup of some of TKer’s most talked-about paid and free newsletters about the stock market. All of the headlines are hyperlinked to the archived pieces.
10 truths about the stock market 📈
The stock market can be an intimidating place: It’s real money on the line, there’s an overwhelming amount of information, and people have lost fortunes in it very quickly. But it’s also a place where thoughtful investors have long accumulated a lot of wealth. The primary difference between those two outlooks is related to misconceptions about the stock market that can lead people to make poor investment decisions.
The makeup of the S&P 500 is constantly changing 🔀
Passive investing is a concept usually associated with buying and holding a fund that tracks an index. And no passive investment strategy has attracted as much attention as buying an S&P 500 index fund. However, the S&P 500 — an index of 500 of the largest U.S. companies — is anything but a static set of 500 stocks.
The key driver of stock prices: Earnings💰
For investors, anything you can ever learn about a company matters only if it also tells you something about earnings. That’s because long-term moves in a stock can ultimately be explained by the underlying company’s earnings, expectations for earnings, and uncertainty about those expectations for earnings. Over time, the relationship between stock prices and earnings have a very tight statistical relationship.
Stomach-churning stock market sell-offs are normal🎢
Investors should always be mentally prepared for some big sell-offs in the stock market. It’s part of the deal when you invest in an asset class that is sensitive to the constant flow of good and bad news. Since 1950, the S&P 500 has seen an average annual max drawdown (i.e., the biggest intra-year sell-off) of 14%.
How the stock market performed around recessions 📉📈
Every recession in history was different. And the range of stock performance around them varied greatly. There are two things worth noting. First, recessions have always been accompanied by a significant drawdown in stock prices. Second, the stock market bottomed and inflected upward long before recessions ended.
In the stock market, time pays ⏳
Since 1928, the S&P 500 generated a positive total return more than 89% of the time over all five-year periods. Those are pretty good odds. When you extend the timeframe to 20 years, you’ll see that there’s never been a period where the S&P 500 didn’t generate a positive return.
What a strong dollar means for stocks 👑
While a strong dollar may be great news for Americans vacationing abroad and U.S. businesses importing goods from overseas, it’s a headwind for multinational U.S.-based corporations doing business in non-U.S. markets.
Economy ≠ Stock Market 🤷♂️
The stock market sorta reflects the economy. But also, not really. The S&P 500 is more about the manufacture and sale of goods. U.S. GDP is more about providing services.
Stanley Druckenmiller's No. 1 piece of advice for novice investors 🧐
…you don't want to buy them when earnings are great, because what are they doing when their earnings are great? They go out and expand capacity. Three or four years later, there's overcapacity and they're losing money. What about when they're losing money? Well, then they’ve stopped building capacity. So three or four years later, capacity will have shrunk and their profit margins will be way up. So, you always have to sort of imagine the world the way it's going to be in 18 to 24 months as opposed to now. If you buy it now, you're buying into every single fad every single moment. Whereas if you envision the future, you're trying to imagine how that might be reflected differently in security prices.
Peter Lynch made a remarkably prescient market observation in 1994 🎯
Some event will come out of left field, and the market will go down, or the market will go up. Volatility will occur. Markets will continue to have these ups and downs. … Basic corporate profits have grown about 8% a year historically. So, corporate profits double about every nine years. The stock market ought to double about every nine years… The next 500 points, the next 600 points — I don’t know which way they’ll go… They’ll double again in eight or nine years after that. Because profits go up 8% a year, and stocks will follow. That's all there is to it.
Warren Buffett's 'fourth law of motion' 📉
Long ago, Sir Isaac Newton gave us three laws of motion, which were the work of genius. But Sir Isaac’s talents didn’t extend to investing: He lost a bundle in the South Sea Bubble, explaining later, “I can calculate the movement of the stars, but not the madness of men.” If he had not been traumatized by this loss, Sir Isaac might well have gone on to discover the Fourth Law of Motion: For investors as a whole, returns decrease as motion increases.
Most pros can’t beat the market 🥊
According to S&P Dow Jones Indices (SPDJI), 65% of U.S. large-cap equity fund managers underperformed the S&P 500 in 2024. As you stretch the time horizon, the numbers get even more dismal. Over a three-year period, 85% underperformed. Over a 10-year period, 90% underperformed. And over a 20-year period, 92% underperformed. This 2023 performance follows 14 consecutive years in which the majority of fund managers in this category have lagged the index.
Proof that 'past performance is no guarantee of future results' 📊
Even if you are a fund manager who generated industry-leading returns in one year, history says it’s an almost insurmountable task to stay on top consistently in subsequent years. According to S&P Dow Jones Indices, just 4.21% of all U.S. equity funds in the top half of performance during the first year were able to remain in the top during the four subsequent years. Only 2.42% of U.S. large-cap funds remained in the top half
SPDJI’s report also considered fund performance relative to their benchmarks over the past three years. Of 738 U.S. large-cap equity funds tracked by SPDJI, 50.68% beat the S&P 500 in 2022. Just 5.08% beat the S&P in the two years ending 2023. And only 2.14% beat the index in the three years ending in 2024.
The odds are stacked against stock pickers 🎲
Picking stocks in an attempt to beat market averages is an incredibly challenging and sometimes money-losing effort. In fact, most professional stock pickers aren’t able to do this on a consistent basis. One of the reasons for this is that most stocks don’t deliver above-average returns. According to S&P Dow Jones Indices, only 24% of the stocks in the S&P 500 outperformed the average stock’s return from 2000 to 2022. Over this period, the average return on an S&P 500 stock was 390%, while the median stock rose by just 93%.
Great write up. The framing of the 3 possible scenarios - which is so smart - makes it seem ludicrous to be a bear.
As an RIA firm owner and financial advisor to hundreds of households, if I could segment client into two buckets, optimists and pessimists, I would say from twenty years of experience that the optimists have higher returns. Easily.
First they tend to have heavier strategic allocations to equities. Next, they generally believe the best time to put cash to work is today, not tomorrow. And those that are decumulating assets leave their money invested as long as they can before they need it.
What’s amazing to me, and I never would have guessed before entering the business, is that those clients we are always trying to keep in their seats and keep from panicking and taking their money out of the market are those with the most conservative allocations to begin with, reflecting their pessimism, not their need for fixed income to match a spending liability. Many may not even touch their equities during their lifetime.
Isn’t there a saying “that we don’t see the world as it is, we see the world as we are?” Or something like that.
Great post Sam. Thank you. 🙏