Whatever Happened to Predictability?
By: Aaron Anderson, CFP®, CFA, Managing Partner
March 28, 2025
A few weeks ago I was contemplating a newsletter article centered around the market volatility we’ve been experiencing over the last month with a reminder that it’s normal. Then, on March 11th, I received an email from Jim with the subject line “Newsletter”, body that says “For review and publication” and a Word document attached. If you haven’t had a chance to read his recent article, This Too Shall Pass, please take a moment to do so.
Like Jim, I’ll start this article by saying I’ll do my best to avoid politics. My philosophy on politics is that I hope our leaders do well no matter their party or political persuasion because then the country does well and we all benefit. But you can’t talk about government policies without it sounding political. So, please don't read too much into it!
For the past few years, we’ve been talking mainly about monetary policy and its effect on the markets – interest rates, the Federal Reserve, how they are going to combat inflation, etc. We rarely discussed fiscal matters except wondering how our national debt would affect things.
The problem is that this market downturn seems to be mainly driven by uncertainty around tariffs which are government policy. I hesitate to use the term fiscal policy since that mainly focuses on government revenues and expenditures – while tariffs may raise revenue, the goal is more a behavioral change in demand patterns.
Notice I said uncertainty surrounding tariffs, not necessarily the tariffs themselves. The issue is that businesses and the market are asking themselves, “Whatever happened to predictability?” to steal a line from the Full House theme song.
Uncertainty over the tariffs makes decision making almost impossible. As an example, our church is having major work done on their sound equipment. Being good stewards, they got multiple quotes from vendors. All the vendors said the quotes are only good for a week to a few weeks because their suppliers are constantly adjusting prices due to tariffs. The price for the equipment could be higher or lower week to week depending on if tariffs have been added or removed. It's hard to run a business like that.
As I said in my 2025 Outlook article, there was a risk of President Trump’s tariff threats becoming real tariffs. Looking at this from a market standpoint, it’s difficult to value a company based on future earnings expectations when no one is certain if they will be in the tariff crosshairs. A company’s product gets tariffs, stock goes down. They get a temporary reprieve, stock goes up on hopes it will become permanent. It ends up not being permanent, stock goes back down.
Companies where demand is inelastic can handle the tariffs without hurting their bottom line too much because they can increase their price without demand decreasing much. One could argue that investing in those companies would be a good idea, but if the tariffs are just going to be lifted soon, it doesn’t make sense to make that portfolio adjustment.
Similarly, it would make sense to invest in companies not affected by the global supply chain. The problem there is that their costs to produce in the US tend to be higher and so if the tariff and the protection it provides is lifted, they would be less competitive than other companies who use the now tariff-free global supplier. Again, it’s the uncertainty that is the challenge.
So, what should we do? As Jim said, we’ve seen this movie before. History doesn’t repeat, but it often rhymes. Corrections are common and judging by the fact the market was at all-time highs a little over a month ago, it’s always recovered from them. Since we are probability based investors, I leave you with two statistics that I hope helps put your mind at ease.
The first comes from MFS’s Beyond the News newsletter dated March 17, 2025. For the three-week period from 2/19 to 3/12, the S&P 500 declined 8.6% which ranks in the bottom 2nd percentile of all 15-trading day periods. In prior periods when three-week returns were in the bottom two percentiles, the median 12 month gain afterward was 20.6% with positive returns 83% of the time. Times like these tend to be times to buy, not panic and sell.
The second comes from LPL Financial’s research team on March 12 (highly recommended read!). Looking at rolling one-year periods using monthly data, the market is up in 74% of them. Looking at rolling three years, it’s up 85% of the time, and looking at rolling 15-year periods, it’s up 100% of the time. This should give comfort to all long-term investors – which all of us are in one way or another.
Content in this material is for informational purposes only and not intended to provide specific advice for recommendations for any individual. All performance referenced is historical and is no guarantee future results. All indices are unmanaged and may not be invested into directly.
The Standard & Poor's 500 Index is a capitalization weighed index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
The economic forecasts set forth may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
Stock investing includes risks, including fluctuating prices and loss of principal.