Investors Still Detoxing

Are markets melting down over tariffs or are investors just having trouble adjusting to a world where 7-10 stocks don't go up every week? We can argue it's the latter - and we will, but typical economic and market patterns suggest this is temporary.

This week's musings is inspired by the 1983 hit song, "I Want A New Drug." Here’s some trivia about the song:

• Huey Lewis wrote the song with his guitarist, Chris Hayes. The song is actually about "love." In an interview with Rolling Stone, Lewis said that the point of the song is that drugs aren't a part of life, but love is.

• The song peaked at #6 on the Billboard charts in 1984 and sold more than 500,000 copies (a lot by 1980s standards). The album "Sports," which featured the song have 4 other hits and sold more than 7 million copies.

• Lewis sued Ray Parker, Jr. for stealing the melody of "I Want A New Drug" for his hit single "Ghostbusters." They settle out of court, but part of the agreement was that it would never be mentioned publicly. Parker turned around and sued Lewis in 2001 after Lewis mention in a VH1 Behind the Music special that Parker have paid Lewis.

• Lewis has stated that the idea for the song came from an early morning appointment with his publicist and was suffering from a bad hangover. On the way to the meeting, he began crafting the song in his head, and when he arrived at the meeting he asked his publicist, "Bob, do you have a pen and paper?" Lewis says he wrote down most of the song right then and there.

"I want a new drug

One that won't make me sick

One that won't make me crash my car

Or make me feel three feet thick

I want a new drug

One that won't hurt my head

One that won't make my mouth too dry

Or make my eyes too red

One that won't make me nervous

Wondering what to do

One that makes me feel like I feel when I'm with you

When I'm alone with you"

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

Investors Hooked On Easy Street. For the past few weeks, investors have been acting like Huey Lewis - waking up hung over not knowing what to do next.

If you had just bought the Mag 7 in April of 2023 and held it until they peaked in December of 2024, you would have gained 143%. For those of you in the cheap seats, that's not normal. Now, after 4 consecutive weeks of equity declines and a flat week last week, the euphoric ride is officially over. However, that doesn't mean that we're setting up for recession. There have been multiple other periods (marked by purple circles on the graph) that euphoria came down without triggering a recession. More than likely, we have just experienced a consolidation event due to over-extended valuations.

How do we know this? Well, nothing is for certain, but there are patterns that typically point to recession that we just aren't seeing yet. For example, the labor market remains stable. Typically, Initial Jobless Claims and Continuing Jobless Claims are much higher preceding a recession. Currently, Initial Claims are at 224,000, while they range between 415,000 and 350,000 prior to the last 5 recessions (not including COVID). While Continuing Claims are at 1,856,000 and they typically range between 2.8 to 2.3 million leading up to recession.

Credit Spreads is another area where we see significant activity just prior to a recession. Before the 2000, 2008, & 2020 recessions, the High Yield Spread Index jumped more than triple-digits over just a few short days.

This year, however, we've only seen a 29% move in credit spreads. In fact, this is actually a smaller move higher than we saw in August of last year, which ended up being a 31% move. The last two weeks, we've seen spreads settle lower by 10%, indicating a lack of panic among fixed income investors with regard to the move lower in equities. Like Huey Lewis, we all want easy markets where we're not "nervous, wondering what to do." Alas, investing is not for the faint of heart.

Investors Want A New Drug. Not only are investors dealing with the shift in easy markets to more difficult markets, policy change in D.C. is worrying investors.

The recent move lower in the University of Michigan's Consumer Sentiment Index is typical around this time, after a change in leadership. When the GOP representative is ousted from the White House, the Republican contingent of the Sentiment Index moves lower and the Democrat contingent moves higher. Conversely, most recently, Dems are more worried, while GOP contingents are more optimistic. Investors, and people in general, don't react well to change. However, that doesn't mean money isn't to be made in markets.

The whispers around tariffs seem to move the market on any given day depending upon the announcement or the headline. However, the institutional money isn't panicking. The latest CFO survey conducted by Duke University shows that the vast majority of CFOs at the top 400 companies in the U.S. are not shifting course due to tariffs. Investors would be wise to do the same. First, no one knows if any of these tariffs will be long-lasting. Even if some do go into effect, affected countries may choose to back down and come back to the negotiation table. Second, there are some offsets to tariffs being crafted that may actually help the U.S. consumer, such as a proposed interest rate deduction on car loans used to purchase vehicles made in the U.S.

Investors need to remember that market pullbacks happen often and occur when either party is in control in D.C. NO one political party is immune from market volatility. Actions taken in D.C. have less to do with market movement than corporate profits and consumer spending. If investors want a new drug that won't "hurt their head," they should try sound financial planning, appropriate diversification, and turning off the noise. As we've stated before many times on this blog, financial and news media have one goal - to keep eyes glued to their program, website, etc. They will say/do whatever it takes to accomplish that goal. Working with a financial advisor helps keep clients on task and less affected by the noise.

If investors are suffering from a Mag 7 hangover, this is the video for them...

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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.

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