Everything, Everywhere, All at Once

By Crest Capital Advisors on March 3, 2025

Dow: 0.95% to 43,840.91
S&P 500: (0.98%) to 5,954.50
Nasdaq: (3.47%) to 18,847.28
Russell 2000: (1.47%) to 2,163.07
Bitcoin: 84,795
10 Year Yield: 4.21%
Outperformers: Financials 2.80%, Real Estate 2.13%, Healthcare 1.74%
Underperformers: Technology (4.01%), Communication Services (2.55%)

US equities were mostly lower for the week, with the S&P 500, Nasdaq, and Russell 2000 indices extending last week’s slides. Big tech was by far the major drag, with all the “Mag 7” names lower on the week, despite solid earnings and outlook results for AI poster child and Mag 7 club member, Nvidia, on Wednesday evening. In contrast, the equal-weighted S&P 500 (the version of the S&P that weights all components 1/500 rather than by the size of the company as the standard index does) logged a slight gain for the week, and the value-tilted Dow Jones Industrial Average finished up nearly 1%. So, despite what you may have heard about political volatility and tariff fears, the selling climax we experienced this week was broadly concentrated in the areas of the market that previously had posted the most upside momentum. Notably, Treasuries were firmer across the curve as well, with the 10-year yield finishing at 4.21% (was as high as 4.81% in mid-January!). Despite this move to safe haven bonds, we haven’t seen any corresponding increases in credit spreads which would indicate a deterioration in economic outlook.

Overall, the market contended with a wide array of moving parts this week, all of which contributed to the risk-off atmosphere. The speed with which we went from all-time highs to a quick 5%+ correction in the headline indices (worse declines for individual names) made it seem as though everything, everywhere, all at once turned negative. And Trump 2.0 policy uncertainty got most of the blame from the media. While markets do indeed dislike uncertainty, and we agree the volatile nature of the tariff threats is not helping matters, we see the selling pressure within momentum tech and growth segments as mostly technical in nature, particularly as algorithmic hedge funds de-lever and move capital elsewhere. With Q4 earnings nearly complete and earnings on balance very strong…coupled with more confirmation AI secular growth by the hyper-scalers remains intact, we would expect to see markets stabilize in the not-too-distant future.

Unfortunately, as we look ahead to next week, we expect tariffs will be a big focus, with 25% levies scheduled to be imposed on Canada and Mexico following a one-month reprieve, while China may see the White House place an additional 10% tariff atop the 10% imposed earlier. To this means more uncertainty to the wire and perhaps some residual market volatility to come along with it. On the economic front, the highlight will be the monthly Jobs report on Friday which will go a long way to determining when the Fed may resume easing interest rates.

Embrace, Don’t Fear, Market Declines!

Emotions and investing don’t mix very well. Emotional investors tend to sell when the market is going down and buy when the market is going up. They should be doing the opposite. As shown in the chart below, if you only owned the US stock market on the day after up days since the S&P 500 ETF began trading in 1993, your cumulative gain would be just 44%. On the other hand, if you owned the market on the days after down days, you’d be up 851%! Of course, the best course of action was to do NOTHING! The buy and hold performance, owning the S&P 500 on every single up and down day over the period, resulted in a gain of 1,273.5%!!! (Of course, past performance is no guarantee of future results.)

Just a Reminder – Intra-Year Drawdowns are Normal

One of the most challenging things to do when the market is moving against you is to keep things in perspective. Theres no question the decline in equities has been more painful for the companies with the highest price to sales ratios, but the S&P 500 is just -5% off its all-time highs from last week. In any given year, the average decline has been roughly -14.3% (see chart below of annual returns and the intra-year drawdown that occurred). Therefore, the drawdown we have seen this year would have to be more severe before it would become overly concerning. The fact that sentiment and positioning has gotten so extreme (more on this below), leads us to believe we may be closer to the end than the beginning.

We Count 15 Times

The chart below shows the Mag 7 names (yes, they have their own tracking index now) going back over the past 10 years. The blue circles, where we count 15 occurrences, represent when the Mag 7 collective was down at least -10% from its prior peak. That’s 15 times the names have taken at least a 10% hit, and you may note the drawdowns exceeded -20% on 6 occurrences. This month marks the 15th such time the names have experienced an official “correction”. The point is this is normal market action, and a regular occurrence inside of a larger bull trend. If you were a buy and hold investor, your trailing 10-year annualized rate of return for the Mag-7 names would be a whopping 36.98%, despite the frequent drawdowns you would have experienced! Stay focused on the big picture.

What Happened to Sentiment?

Everywhere you look, fear has set into the collective mood. Indices that measure economic uncertainty have shot up to record highs, even taking out their prior extremes from the early days of Covid. The latest measures of consumer sentiment from the University of Michigan and the Conference Board also showed much larger than expected declines in their latest readings. But nowhere has the negative turn in sentiment been more pronounced than in the equity market.

The CNN Fear & Greed Index gauges stock market behavior by looking at momentum, breadth, options activity, strength in the junk bond market, and demand for safe havens. As of the end of this week, the index was at 21, putting it in the “Extreme Fear” range.

Over the last year, the current level of the CNN Fear & Green Index is among the lowest. The only time it was lower was in early August when markets briefly sold off as the Japanese equity market crashed over 10% in a single day.

The Fear & Greed Index isn’t just an outlier either. The weekly results of the American Association of Individual Investors (AAII) survey just came out, and the bears are out in full force here as well. Starting with bullish sentiment, it dropped from 29.2% last week to 19.4%, the lowest reading since March 2023 when Silicon Valley Bank and other smaller regional banks collapsed. Back then regulators had to take extraordinary measures to ensure the soundness of the banking system, and the S&P 500 was down close to 8% from its recent highs. Today, there’s no crisis to speak of (at least that we know of), and the S&P 500 is down just over 5% from an all-time high as of Thursday’s close.

The surge in bearish sentiment has been even more dramatic than the collapse in bullish sentiment. After dropping to 40.5% last week, negative sentiment shot up to over 60% for its largest weekly increase since August 2019. As shown in the chart below, current levels are now higher than any point in the current bull market (since October 2022)!

In the entire history of the AAII sentiment survey, there have only been six other weeks when bearish sentiment was higher, and these occurred during the 1990 recession and Iraq’s invasion of Kuwait, late in the Financial Crisis, and most recently, back in September 2022 right before the market lows. A key difference between now and those periods is that in each one, the S&P 500 was down at least 10% from a 52-week high when bearish sentiment exceeded 60%. Today, the S&P 500 is down just over 5%. It takes a lot less to strike fear into investors than it has in the past. If there is one word to describe the state of investor sentiment right now, complacent it is not.

In summary, retail investors have been spooked to a historic degree! AAII Bearish sentiment ticked above 60% for just the sixth time in its history dating back to 1987. The 5-week change in Bearish sentiment is the 3rd highest in history behind only December 2000 and August 1990.

A Word on Credit

Credit spreads have not responded the way they normally do to rising policy uncertainty. Economic policy uncertainty is spiking higher, but credit spreads are not widening. Translated to the layman, the bond market is not flashing any signs of elevated risk or concerns about economic growth at this time. Regular readers will recall that we frequently pulse-check the bond market to determine if stock market price action is reflecting underlying credit concerns. Often, not always, it can be the tell as to whether stock prices are reflecting something more serious, or merely just correcting for other reasons.

Not So Save Haven

Bitcoin dropped below $80,000 on Thursday night, now shedding more than 25% since its record high on January 20th, the day of President Trump’s inauguration. Other cryptocurrencies have also been weighed down by the prevailing global risk-off sentiment.

It’s interesting to us to take note of this, not because we are owners of crypto, but because Bitcoin had been one of the most popular Trump trades, given expectations of a friendlier regulatory environment under the new administration. But investors are now moving towards safer assets as Trump ramps up his tariff threats and markets get wobbly. Instead of serving as an alternative to ‘fiat’ currency as its proponents have long claimed, crypto has once again been treated like any other high-risk asset and sold off accordingly.  

Earnings Season Update

Overall, the fourth-quarter reporting season has been strong. Earnings growth for the quarter is nearly 16%, with 85% of companies having reported, while sales growth is approaching 5%. On the earnings side, all sectors except energy have exceeded their initial growth estimates for the quarter. On the sales side, the only sectors falling short of their initial estimates are Industrials, Materials, and Utilities. Earnings are not a reason to be selling stocks at this time.

Speaking of earnings, we see an interesting development taking shape whereby small cap earnings per share growth is forecasted to surpass large caps in the second half of 2025. Elevated interest rates and inflation, in addition to the regional bank run in 2023 have not been kind to small caps, while large caps have been far more immune to this. In turn, small cap earnings growth, or lack thereof, has trailed large caps since Q3 2022! Could the forgotten small cap segment be about to assert outperformance over their large cap brethren? This is worth keeping an eye on.

Economic Funnies

Crazy Stat(s) of the Week

• Pending Home Sales dropped to the lowest level on record in January. High mortgage rates and elevated home prices combined to crush home sales in January. With the month’s -4.6% drop, it brought the measure down to the lowest level since the National Association of Realtors began tracking this metric in 2001.

• The percentage of NBA shots that are 3-pointers has now reached a whopping 42%. This is why the games have become almost unwatchable in our opinion. (Our apologies to NBA fans) In 1985 the percentage was just 4%, in 1995 it was 19%. In 2015, it rose to 27% and today it’s 42%! Gone our the days when coach would bench you for throwing up 3’s!

Quote of the Week

“The stock market is not a casino, but if you treat it like one, you’ll get casino results.”                

   –         Peter Lynch

Calendar of Events to Watch for the Week of March 3rd

Earnings season continues with a move past the heavy tech/Mag7 tilt of the past few weeks to a bit more consumer-focused names. Notable reports expected from Costco, BestBuy, Macy’s, Nordstrom and others.

The Economic Calendar picks up again with data readings on Manufacturing PMI and Construction Spending on Monday, the ADP Employment Report and Services PMI on Wednesday, and then wraps the week with Nonfarm Payrolls on Friday. The payrolls report will get outsized attention as the Fed continues to put the second half of its mandate (full employment) on the back burner. Any weakening of employment could force them to become accommodative once again.

Monday 3/3 – The February ISM Manufacturing Index ix expected to remain slightly in expansionary territory at 50.8, down a tick from 50.9 last month. January Construction Spending is expected to be flat at 0.0% v. 0.5% last month.

Tuesday 3/4 – No Major US Economic reports due out today. NY Fed President Williams will be speaking at an event in New York and has the potential to move markets with comments about interest rates and inflation.

Wednesday 3/5 – The ADP Employment Survey for February is expected to come in at 145k net new private sector jobs, down from last month’s 183k pace. January Factory Orders are expected to show a 0.5% increase vs. the prior month’s -0.9% contraction. The most important read will come from the ISM Services where economists project 53.0, up from last month’s 52.8.  

Thursday 3/6 – The weekly jobless claims data will continue to garner attention for any signs of weakening trends within employment. We’ll also get final reads on Q4 Unit Labor Costs (expected unchanged at 3.0%) and Productivity (also expected unchanged at 1.2%).

Friday 3/7 – The main event of the week will be the February Non-Farm Payrolls report. Economists are projecting 160k net new jobs v. last month’s 143k increase and an unchanged unemployment rate of 4.0%.

Source: MarketWatch / FactSet (February 2025)