Expected, Or Unexpected

Is recent market activity to be expected or unexpected? It probably depends upon your point of view. That theme is why we were inspired by the 1988 movie, "Rain Man."

Unexpected dialogue and unexpected adventures lead to an expected outcome. Here’s some trivia about the movie:

• This film was nominated for 8 Oscars and won 4 for Best Picture, Best Actor (Hoffman), Best Director, and Best Screenplay. The unexpected success at the box office of more than $354 million on a meager $25 million budget was a surprise to be sure.

• Dustin Hoffman was so unsure of his work on the film that half-way through filing, he begged the director, Barry Levinson, to replace him. In his words, "This is the worst work of my life." Not too shabby for an Oscar for Best Actor.

• Tom Cruise also doubted the movie's potential during filming, so he and Hoffman often referred to the film as "Two Schmucks In A Car."

• Other actors who were originally considered for the role of Raymond Babbitt (the Rain Man) were: Jack Nicholson, Robert DeNiro, and Mel Gibson. They all turned the role down.

• During the shooting of the casino scenes, Hoffman would often wonder off to play blackjack during takes. Eventually, someone was assigned to watch him between takes to make sure he didn't wonder off.

Here's what we've seen so far this week..

Are Investors Excellent Allocators? Some of the warning signals that had reared their ugly heads in the latter half of last year, have eased.

However, many investors who traded out of the FOMO trade are experiencing some disappointment. Mag 7 stocks are down 1% for the week and up only 1% year-to-date while the S&P is up 4% for the year. And, that's a good thing. Investors have piled money into Mag 7 names, but it would appear the rest of the market is out-performing at the moment. Less than 40% of stocks in the S&P 500 were actually out-performing the index in 2023 & 2024. So far this year, nearly 50% are out-performing the index. While that's not am excellent number, it's a considerable improvement.

The so-called "smart money" is growing more optimistic in 2025. CEO confidence levels have risen this year and are more reminiscent of post-recession periods than pre-recession periods. If that's the case, we could see continued investment in businesses, which would be good for the economy from a growth standpoint. If breadth continues to improve and economic growth remains steady, the prospects of the current bull market cycle continuing would increase. Right now, the current bull market is 28 months old. By historical comparison, if the current bull market were to end today, it would be the 3rd shortest bull market cycle in history.

The average bull market is 67 months in length. While investors may be able to Google the hottest trend in stocks, know when market winds may be shifting or fundamentals are out of whack is something else entirely. As Raymond states in "Rain Man," he has been driving at the hospital in the circle drive with his recently deceased father. Ray declares, "I'm an excellent driver." After which, he grabs the steering wheel from Charlie as he is driving down the highway and nearly steers them into oncoming traffic. This obviously upsets Charlie. While investors might think they are excellent stock-pickers, staying within risk tolerances and time horizons is a better strategy than simply Googling stock recommendations.

Can Investors Determine Expected vs. Unexpected? Sometimes life throws the unexpected at us - just like Charlie when he discovers he has a brother, Raymond.

We have to expect the unexpected, especially when equity markets experience volatility. The recent sideways performance of equities should come as no shock. The 2nd half of February, from a historical perspective, typically shows weakness. Since 1928, the 1st half of February is up, on average, close to 1%, while the 2nd half of the month is down close to 1%. However, if February were to finish positive, it would bode well for the remainder of 2025. When January and February are both positive, the S&P 500 Index finishes positive for the year 93% of the time. Investors should expect more volatility and downside over the next couple of weeks and not panic if a pullback in equities is the result.

It's uncertain if investors are ready for some volatility as they continue to load up on equities. Over the past month and a half, retail investors have been adding to equities at nearly the fastest pace in history. It would appear as if the FOMO trade is alive and well. And, that's when investors get caught off guard by volatility. As a reminder, the current level of the VIX (volatility index) is 15.6, which is well below the historical average of 19.5. While the VIX became elevated a few times last year - July & December - the index averaged a level of 15.6.

As we mentioned last week, there is a cost to investing - and, that cost is risk or volatility. Do investors truly understand what they are getting themselves into? Like Raymond in "Rain Man," it's possible the answer to the question is a bit stale. When Charlie's girlfriend accuses him of using her, he asks Raymond, "Hey Raymond, am I using you? Am I using you Raymond?" To which Raymond says, "Yeah." Charlie responds, "Shut up! He is answering a question from a half hour ago!" Equity investing is not for the faint of heart. As along as risk expectations and time horizon matches with long-term volatility, equities should be appropriate. However, if investors have a lower risk tolerance, but are chasing equity returns, the results could be problematic.

Ray (Hoffman) at the casinos...

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Disclosures

The information contained herein is for informational purposes only and is developed from sources believed to be providing accurate information. The opinions expressed are those of the author, are for general information, and should not be considered a solicitation for the purchase or sale of any security. The decision to review or consider the purchase or sell of any security should not be undertaken without consideration of your personal financial information, investment objectives and risk tolerance with your financial professional.

Forecasts or forward-looking statements are based on assumptions, may not materialize, and are subject to revision without notice.

Any market indexes discussed are unmanaged, and generally, considered representative of their respective markets. Index performance is not indicative of the past performance of a particular investment. Indexes do not incur management fees, costs, and expenses. Individuals cannot directly invest in unmanaged indexes. The S&P 500 Composite Index is an unmanaged group of securities that are considered to be representative of the stock market in general.

Past Performance does not guarantee future results.