It's All About Good Will?

After a few days of rough trading, it turns out all investors wanted was some good will from the President. But, was it really just all about tariffs? We're not so sure.

This week's musings is inspired by the 1997 surprise hit movie, "Good Will Hunting." Here’s some trivia about the movie:

• This movie was based on the screenplay written by Matt Damon and Ben Affleck, who at the time had only seen limited success with bit parts in movies. The budget was only $10 million, but the movie garnered $225 million at the box office.

• Damon & Affleck found a clever way to see if the studios were even reading their submitted script. They sent out the script, but inserted a gratuitous/meaningless sex scene that was not part of their original idea. Several studios never even mentioned the scene in their rejection letter, meaning they had probably not even read the script at all. Miramax expressed interest, but stated they would prefer the scene be removed, and so, Miramax was chosen to produce the film.

• Damon was in his 5th year at Harvard when he was tasked with writing a one-act play as an assignment. He and Affleck started writing the play, which turned into the script for this movie.

• Damon & Affleck were the youngest winners of the Academy Award for Best Original Screenplay.

• The director of the film, Gus Van Sant, painted the picture that becomes the focus of Will during one of his initial therapy sessions in the film.

• In 2014, after Robin Williams' death, the Boston park bench where he and Matt Damon filmed a famous scene from the movie became a memorial site of people leaving flowers and various other items at the bench. A petition has been signed to erect a statue of Williams to commemorate the site.

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

How Do You Like Them Apples?! If we can take away anything from movies like "Good Will Hunting," it's that you have to be fluid in life. Sometimes, life throws

you a curve ball and you have to adjust. Both of my sons play baseball and it's a constant struggle to help them learn to adjust, on the fly, when the pitcher switches the type of pitch. Such is life and such is the world of investing. Both individual and institutional investors alike seem to be caught off guard by how markets are responding to tariff news. During Trump's first presidency, markets responded negatively to tariff news (-12%), then rebounded (+10%), only to fall again (-9%), then finally recover all in a matter of a 8 months. Should there be so much shock that we're seeing volatility the second time around?

The selling hasn't been exactly orderly either, and only a few asset classes have been spared. With the exception of Gold & short-term T-bills, most major asset classes are negative over the past 13 trading days. We will address this later, but suffice to say the market hasn't been rotating into defensive stocks, as Healthcare, Consumer Staples, & Utilities are also negative over the last 13 trading days. This as been a deleveraging process.

Yet, on Wednesday, the White House threw the market a curve ball when it was

announced that most tariffs would be delayed for 90 days while on-going negotiations with various countries were taking place. Except, that is, for China, which now has approximately 125% tariffs on goods imported to the U.S. The market cheered the announcement and had one of the best single day returns for equities since 1990. Investors who panicked over the past several trading days missed out on Wednesday's gains, which depending upon their asset allocation, could have an impact on their ending portfolio value when they are preparing for retirement. Investors should expect the unexpected. After all, who would have guessed that a poor kid from south Boston would have been able to get the phone number of a Harvard girl over all the other guys in the bar? But, as Will relayed to his mental nemesis, "Well, I got her number. How do you like them apples?"

Wicked Smart. As financial advisors, do we always have the answer? Absolutely not. But, most of us have been working in and studying markets more than the average investor. This is where we typically add value - urging clients to stick to

their stated financial plan and investment strategy. This is most valuable when markets are in major flux, as they are now. What separates good decisions from bad ones is typically emotion. A headline grabs an investor's attention and the next thing you know, bad investment decisions are made. A data-driven approach is typically better than responding to a headline (more on that in a minute). The U.S. Recession Probabilities metric published by the St. Louis Federal Reserve is not showing much movement yet, despite the market volatility.

In light of constant warnings and articles about "stagflation," we're not seeing the signs of the dreaded condition yet. In order to have "stagflation," you need slow growth, high unemployment, and rising inflation. Well, we got the unemployment data last week, which continues to show a healthy labor market. This week, both Initial Jobless Claims and Continuing Claims data was benign. Yesterday, the Consumer Price Index showed a decline for the 2nd consecutive month. That's two out of three conditions that have not yet been met to meet the definition of stagflation.

Finally, it's very likely that much of the movement in the market is not due solely to tariff news, but built-up leverage in the system. As we pointed out last week, despite certain goods being excluded from U.S. tariffs (i.e., semiconductors), all major sectors sold off immediately with the general news about tariffs. Institutions such as Hedge Funds, CTAs, etc. utilize futures contracts and collateral to gain an advantage in terms of total return. What has been unwinding over the past several days has been the "Basis Trade." This is similar to the "Yen Carry Trade" that imploded in August of last year.

With the Basis Trade, hedge funds exploit the price difference between T-bills and futures contracts. Upon the announcement of tariffs last week, inflation expectations began to rise and interest rates on Treasury bonds along with it. This caused treasuries, used as collateral on the Basis Trade futures contracts to drop. In order to meet margin calls, hedge funds had to dump treasuries and other assets to satisfy their debt, which has further exacerbated the decline. Like our friend Morgan indicated to Skylar in the Harvard bar when describing his friend Will, "My boy's wicked smart." Investors would be smart to avoid major investment decisions before contacting their financial advisor.

Stole My Line?.  What has made the past couple of weeks more difficult for advisors and clients alike, is the constant barrage of fear being peddled by the financial news media. As we regularly remind investors of on this blog, news media

want one thing - advertising revenue. It's how they stay in business. They will often make situations sound worse than they are to keep your attention. Clients can do themselves a favor and turn off media when the headlines and chyrons become too exaggerated. News media have no idea what any one investor's particulat risk tolerance or objectives are with regard to investing. The headlines are sometimes so ridiculous, they become comical. As we already stated, the markets saw the 3rd best return in a single day on Wednesday.

Yet, before the markets opened on Thursday and prior to the release of March's CPI number, we get the headline "Nasdaq 100: Tariff Relief Bounce Starting to Fade with US CPI on Tap." Investors who took action on that headline would have made a poor decision. Before noon on Thursday the Nasdaq dropped 7%, but by the end of the day ended down only 4% (after Wednesday's +12% return). In addition, as we pointed out, CPI came in cooler than expected. The reality is media want people to be focused on the short-term - that's how they generate fear.

If we look at days like Tuesday & Wednesday, when the S&P closed below it's 200-day low, then 97% of the stocks in the index move higher the following day, we see good results long-term. Tuesday & Wednesday's results have occurred 9 other times since 2008. In each case, the returns 9 months and 12 months later were positive, with the average return being 25.3% and 29.9%, respectively. In five of these instances, the phenomenon happened at the bottom of a correction and three of them occurred in markets without a recession. In "Good Will Hunting," one of the things Sean teaches Will is to look at the long-term instead of immediate gratification. In the end, Will chooses to go after the girl instead of taking the guaranteed job. Robin Williams' character get's the last speaking part in the movie when he declares, "Son of a @#$&%. He stole my line."

The famous ending...

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