When uncertainty becomes unambiguously high 🎢
Plus a charted review of the macro crosscurrents 🔀
📉 The stock market fell, with the S&P 500 tumbling 3.1% last week to close at 5,770.20. It’s now down 1.9% year to date and up 61.3% from its October 12, 2022 closing low of 3,577.03. For more on market moves, read: Investing in the stock market is an unpleasant process 📉
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The word “uncertainty” gets thrown around a lot in discussions about the stock market.
And it’s not surprising. There is literally always something to be uncertain about. In fact, uncertainty defines the risk stock market investors take as they bet on a future that isn’t guaranteed. Uncertainty gives risk-tolerant investors the opportunity to buy stocks at a discount. Uncertainty is why the returns in the stock market tend to be relatively high.
But far too often, pundits will appear on TV or get quoted in a news article casually saying that “uncertainty is elevated” — when in fact uncertainty may be at normal levels. Because there is always uncertainty, and any implication that there can be periods with no uncertainty is ridiculous.
Of course, there are times when uncertainty explodes above typical levels. And they come with some very glaring signs.
When companies everywhere withdraw guidance 🧑🏻🦯➡️
Five years ago this week, the World Health Organization declared that COVID-19 as a pandemic.
In the weeks prior, there had already been concerns about the seriousness of the outbreak. But it wasn’t until mid-March that we began to see huge parts of the economy get shut down in the effort to contain the spread of the virus. And it would be months before we got a sense of what this unprecedented disruption would mean for the economy.
Businesses around the world were not prepared.
Most companies operate assuming a range of probable future outcomes. And for many publicly traded companies, the midpoint of that range is presented to investors in the form of quarterly and annual financial guidance. As the quarter and year proceeds, companies will sometimes raise guidance. Sometimes they’ll lower guidance.
Things have to get really bad for companies to withdraw or suspend guidance.
That’s exactly what a flood of companies did in early 2020 as they had little to no visibility into what business would look like in the near term.
According to BofA, 71 S&P 500 companies withdrew guidance from March 2 to April 7 that year.
Zooming out a bit, 173 Russell 3000 companies withdrew guidance during the first quarter, according to S&P Global. The chart below shows how unusual that was.
“The question for managers is: Do they know about future performance substantially more than investors do?” NYU Professor Baruch Lev told me at the time. “My guess is that in most cases managers aren’t now better informed than investors. We are all in the dark. In that case, guidance is futile.”
It’s one thing for a company to revise guidance lower. It’s another much scarier thing for a company to admit they just don’t know where things are headed.
That’s real uncertainty.
This speaks to TKer Stock Market Truth No. 8: “The most destabilizing risks are the ones people aren’t talking about.”
Pandemic risk was effectively on no one’s radar going into 2020. Companies didn’t have plans for addressing it, and it wasn’t priced into the market. It’s why the S&P 500 was able to rally to its then record high of 3,393 on February 19 before tumbling 35% to its low of 2,191 on March 23.
Tariffs: Bad, but it could be worse 🔭
As you’ll see in this week’s review of macro crosscurrents below, mentions of “uncertainty” about tariffs are appearing everywhere. Most informed folks agree raising tariffs is a net negative for the economy, so an uptick in uncertainty is warranted.
And lot of companies have said that the effect of tariffs haven’t been factored into their earnings guidance. Maybe we’ll soon hear about companies revising their guidance lower.
But will companies start withdrawing guidance in droves? I’m not convinced they will.
The threat of tariffs has been out there for months. And for months, many companies have announced plans for addressing new tariffs, including stockpiling goods ahead of tariffs and raising prices once tariffs are imposed.
It would’ve been much worse if President Trump had announced the imposition of tariffs with no warning.
To be clear, tariffs and global pandemics are two very different things. But both are similar in that they come with supply chain disruptions and higher costs of goods. And the more advanced notice companies have, the more time they have to prepare operations for the risk.
This is not to say we won’t experience market volatility in the coming months. The S&P 500 experiences an average annual max drawdown of 14%.
But I think we should be careful about underestimating the resilience of Corporate America, especially when they’ve had time to prepare for what may be coming.
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Related from TKer:
The business community's 2-part plan for addressing tariffs 📋
5 outstanding issues as Trump threatens the world with tariffs 😬
Timely perspective from the paid TKer archives ⏳
What happens when people believe uncertainty is low? Below is an excerpt from the Oct. 1, 2023, TKer:
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… I can recall two times in recent memory when the market environment seemed pretty comfortable.
In the fall of 2017, everything in the economy seemed to be moving in the right direction while the stock market was trading at all-time highs. And consumers took notice. From the University of Michigan’s November 2017 consumer sentiment survey:
“What has changed recently is the degree of certainty with which consumers hold their economic expectations. In contrast to the media buzz about approaching cyclical peaks and an aging expansion, with the implication of greater uncertainty about future economic trends, consumers have voiced greater certainty about their expectations for income, employment, and inflation. Inflation expectations have shown the smallest dispersion on record, and increased certainty about future income and job prospects has become a key factor that has supported discretionary purchases.”
When’s the last time you’ve heard the word “certainty” used so frequently in the context of the markets or the economy?
Early 2020 was another period where things seemed to only be looking up. Consumer confidence was even higher then compared to late 2017.
Of course, the market would prove cruel…
Read the rest at: Two recent instances when uncertainty seemed low and confidence was high 🌈
Review of the macro crosscurrents 🔀
There were several notable data points and macroeconomic developments since our last review:
👍 The labor market continues to add jobs. According to the BLS’s Employment Situation report released Friday, U.S. employers added 151,000 jobs in February. The report reflected the 50th straight month of gains, reaffirming an economy with growing demand for labor.
Total payroll employment is at a record 159.2 million jobs, up 6.9 million from the prepandemic high.
The unemployment rate — that is, the number of workers who identify as unemployed as a percentage of the civilian labor force — ticked up to 4.1% during the month. While it continues to hover near 50-year lows, the metric is near its highest level since November 2021.
While the major metrics continue to reflect job growth and low unemployment, the labor market isn’t as hot as it used to be.
For more on the labor market, read: The labor market is cooling 💼 and 9 once-hot economic charts that cooled 📉
💸 Wage growth ticks higher. Average hourly earnings rose by 0.3% month-over-month in February, down from the 0.4% pace in January. On a year-over-year basis, this metric is up 4.0%.
For more on why policymakers are watching wage growth, read: Revisiting the key chart to watch amid the Fed's war on inflation 📈
👎 Businesses warn costs are going up. From the New York Fed’s February survey of businesses in the New York-Northern New Jersey region: “Looking ahead, firms expect more significant cost increases in 2025. On average, service firms expect costs to rise at a 5.7% pace, while manufacturing firms expect cost increases to rise 2.5 percentage points to 7.3%.”
The threat of tariffs is playing a big role in these expectations. From the NY Fed: “Indeed, higher cost expectations were related to the import share of firms’ inputs — a measure of potential exposure to tariffs. About 82% of service firms and 86% of manufacturing firms in the survey reported some use of imported inputs, which speaks to the globally integrated nature of firms in the U.S. economy.“
And companies are being frank about their intention to pass some of those costs to their customers. From the NY Fed: ”Among service firms, the average annual price increase moved lower in both 2023 and 2024 but is expected to rise from about 4% to about 5% over the next year. Among manufacturing firms, the average annual reported price increase was 3.2% in both 2023 and 2024, but price increases are expected to rise by over 2 percentage points to 5.4% in 2025.”
For more on tariffs, read: Companies plan to 'pass on costs' to customers 🤑, Wall Street agrees: Tariffs are bad 👎 and 5 outstanding issues as President Trump threatens the world with tariffs 😬
🚢 Trade deficit balloons. The U.S. trade deficit expanded to a record $131.4 billion in January as imports surged 10% to $401.2 billion and exports increased 1.2% to $269.8 billion.
Evidence suggests the spike in imports reflects U.S. companies stockpiling goods ahead tariffs announced by the Trump administration.
For more on the implications of purchases pulled forward, read: A BIG economic question right now 🤔
📈 Job switchers still get better pay. According to ADP, which tracks private payrolls and employs a different methodology than the BLS, annual pay growth in February for people who changed jobs was up 6.7% from a year ago. For those who stayed at their job, pay growth was 4.7%
For more on why policymakers are watching wage growth, read: Revisiting the key chart to watch amid the Fed's war on inflation 📈
💼 Unemployment claims fall. Initial claims for unemployment benefits declined to 221,000 during the week ending March 1, down from 242,000 the week prior. This metric continues to be at levels historically associated with economic growth.
For more on the labor market, read: The labor market is cooling 💼
Federal layoffs brought by the Trump administration’s Department of Government Efficiency appear making their way into the data. Initial claims filed by federal employees jumped to 1,634 in the week ending February 22, up from 614 the week prior.
For more context, read: A note about federal layoffs 🏛️
💪 Labor productivity inches up. From the BLS: “Nonfarm business sector labor productivity increased 1.5% in the fourth quarter of 2024 … as output increased 2.4% and hours worked increased 0.8%. … From the same quarter a year ago, nonfarm business sector labor productivity increased 2.0% in the fourth quarter of 2024. Annual average productivity was revised up 0.4 percentage point to an increase of 2.7% from 2023 to 2024.”
For more, read: Promising signs for productivity ⚙️
💳 Card spending data is holding up. From JPMorgan: “As of 28 Feb 2025, our Chase Consumer Card spending data (unadjusted) was 4.4% above the same day last year. Based on the Chase Consumer Card data through 28 Feb 2025, our estimate of the US Census February control measure of retail sales m/m is 0.23%.”
From BofA: “Total card spending per HH was up 1.4% y/y in the week ending Mar 01, according to BAC aggregated credit & debit card data. But, y/y card spending growth was down 0.3% in the week ending Mar 01 in Washington, DC MSA likely due to DOGE job cuts. Y/y card spending growth has recovered in the snowstorm impacted regions of South, MW and NE in the week ending Mar 01.“
For more on the consumer, read: Americans have money, and they're spending it 🛍️
⛽️ Gas prices tick lower. From AAA: “The national average for a gallon of gas dropped a penny since last week to $3.11 thanks in part to softer oil prices. Some drivers could see fluctuations at the pump due to markets and retailers reacting to news of tariffs and the transition to summer-grade gasoline, which is more expensive to produce. ”
For more on energy prices, read: Higher oil prices meant something different in the past 🛢️
🤷🏻♂️ Manufacturing surveys were mixed. From S&P Global’s February U.S. Manufacturing PMI: “A rise in the PMI to a 32-month high signals an improvement in the health of the manufacturing sector which may only be skin deep. Although manufacturing production grew at the strongest rates since May 2022 and new orders increased at the best pace in a year, there’s much to suggest that this improvement could be short lived. Production and purchasing were often buoyed by companies and their customers building inventory to beat price hikes and supply issues caused by tariffs. Exports have meanwhile slumped and supplier delivery delays were the most common since October 2022 amid disruptions to trade caused by tariff worries.”
The ISM’s February Manufacturing PMI reflected growth, but slowing growth:
A popular theme in the surveys was “uncertainty” regarding “tariffs.” From the ISM’s report:
🤷🏻♂️ Services surveys were mixed. From S&P Global’s February U.S. Services PMI: “Expectations for output growth have also been revised sharply lower as service providers have become increasingly worried over signs of slower demand growth and uncertainty over the impact of new government policies, ranging from tariffs and trade policy to federal budget cutting.”
The ISM’s February Services PMI reflected accelerating growth:
Similar to the ISM Manufacturing report, a popular theme in the services surveys was “uncertainty” regarding “tariffs.” From the ISM’s report:
Keep in mind that during times of perceived stress, soft survey data tends to be more exaggerated than actual hard data.
For more on this, read: What businesses do > what businesses say 🙊
🔨 Construction spending ticked lower. Construction spending declined 0.2% to an annual rate of $2.19 trillion in January.
🏠 Mortgage rates tick lower. According to Freddie Mac, the average 30-year fixed-rate mortgage declined to 6.63% from 6.76% last week. From Freddie Mac: “As the spring homebuying season gets underway, the 30-year fixed-rate mortgage saw the largest weekly decline since mid-September. The decline in rates increases prospective homebuyers’ purchasing power and should provide a strong incentive to make a move. Additionally, this decline in rates is already providing some existing homeowners the opportunity to refinance. In fact, the refinance share of market mortgage applications released this week reached nearly 44%, the highest since mid-December.”
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.
For more on mortgages and home prices, read: Why home prices and rents are creating all sorts of confusion about inflation 😖
🏢 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.”
For more on office occupancy, read: This stat about offices reminds us things are far from normal 🏢
📉 Near-term GDP growth estimates are tracking negative. The Atlanta Fed’s GDPNow model sees real GDP growth declining at a 2.4% rate in Q1.
For more on the economy, read: 9 once-hot economic charts that cooled 📉
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: The economy remains very healthy, supported by strong consumer and business balance sheets, though momentum is slowing. Overall, 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.
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%.
High and rising interest rates don't spell doom for stocks👍
Generally speaking, rising interest rates are not welcome news for the economy and the stock market. They represent higher financing costs for businesses and consumers. All other things being equal, rising rates represent a hindrance to growth. However, the world is complicated, and this narrative comes with a lot of nuance. One big counterintuitive piece to this narrative is that historically, stocks have actually performed well during periods of rising interest rates.
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), 59.7% of U.S. large-cap equity fund managers underperformed the S&P 500 in 2023. As you stretch the time horizon, the numbers get even more dismal. Over a three-year period, 79.8% underperformed. Over a 10-year period, 87.4% underperformed. And over a 20-year period, 93% underperformed. This 2023 performance follows 13 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' 📊
S&P Dow Jones Indices found that funds beat their benchmark in a given year are rarely able to continue outperforming in subsequent years. For example, 334 large-cap equity funds were in the top half of performance in 2021. Of those funds, 58.7% came in the top half again in 2022. But just 6.9% were able to extend that streak through 2023. If you set the bar even higher and consider those in the top quartile of performance, just 20.1% of 164 large-cap funds remained in the top quartile in 2022. No large-cap funds were able to stay in the top quartile for the three consecutive years ending in 2023.
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%.
