Current Market Sell-off Is Well Overdue!

By Daniel Morgan, Synovus Trust Senior Portfolio Manager
Synovus Trust Company, N.A.

Policy uncertainty, fiscal drag, Department of Government Efficiency (DOGE), immigration enforcement and the lagged impact of higher rates and a stronger dollar have come together to pressure earnings revisions. This will most likely result in growth risks that could persist over the coming months. Perhaps even more important, U.S. President Donald Trump’s administration doesn't appear to be preoccupied with stock prices. In other words, don't think investors should view a relief rally from oversold levels as a sign that volatility is subsiding in a durable manner. Expect a measured succession of policy announcements filtering out over coming weeks, which will directly impact daily market trading. Not only is policy being sequenced in a more growth-negative way to start the year, the speed and uncertainty around new policy introduction could dent investor, consumer and corporate confidence.

The 10-year UST yield has come down by about 75-40 basic points (BPS) since the middle of January, yielding between 4.00%-4.40%. The UST set a high for the year, yielding 4.79% on January 13. This drop in yields suggests that economists no longer view current policy as inflationary but possibly slowing economic growth. Further, dollar strength (a headwind during 4Q earnings season for multinationals) has now reversed as the U.S. Dollar Index (DXY) is now down 6% since the middle of January. Finally, seasonals for both earnings revisions and index performance improved over the next few weeks.

As a result of all these factors combined with the recent tariff announcements, we've seen choppy stock index performance that has driven the S&P 500 Index (S&P) to the 5,000- 5,100 area. The current S&P 500 Index level is about 18% below the high of 6,147 achieved on Feb. 19. Typically, a correction will result in the market falling anywhere from 10%-20% from the original highs. Bear in mind, a “Bear Market” is a market drop of greater than 20% from the previous highs. Therefore, a Bear Market would place the S&P 500 Index trading below the 4,900-floor level.

In the interim of all this uncertainty, the combination of stronger seasonals, oversold sentiment and positioning indicators and month/quarter end flows market inflows continue to make the S&P 500 Index gain support at 5,000 for a trade able rally in the near term. Lower quality, higher beta stocks have led the market higher after reaching the lower end of the 1H trading range (S&P at 5,500-6,100). Keep in mind that while the S&P was down only 10% in the beginning of the correction, many stocks experienced a greater pullback, with many experiencing more than a 20% drawdown from previous February highs.

The end of March’s Federal Open Market Committee (FOMC) meeting appeared to come as a relief to market participants as two cuts remained in the dot plots for both this year and next. The market expectations now call for a year-end terminal rate of 3.88%. Further, Federal Reserve Chair Jerome Powell seemed to downplay concerns about inflation, perhaps offering a bit more emphasis on the growth side of the mandate than some assumed going into the meeting/presser. The Fed also made the decision to slow the pace of balance sheet runoff, a development that came sooner than economists expected.

After consecutive back-to-back years of the stock market benchmarks peaking at 20% annual growth, it seemed that it would be challenging for the markets to repeat that performance this year. The last two major Bull Markets – lasting from June of 1949 to February 1966 (16.7 years) and August 1982 to March 2000 (17.6 years) – combined for an average duration of 17.2 years. This current Bull Market that began in March of 2009 turned 16 years this past March. The current Bull phase is in the fourth quarter compared to previous cycles. Investors must remember that the law of averages is catching up to this Bull Market phase and eventually something will happen that will bring it to an end. The recent market “selloff” is reacting to concerns surrounding tariffs and the possibility of slower gross domestic product (GDP) growth in 1Q 2025.  Many of the core fundamentals – accommodating Fed, positive GDP growth, double-digit S&P profit growth, and a more normalized yield curve – are still in place. These conditions are offset by: inflated P/E market multiple of 24x earnings, persistent core inflation, policy uncertainty and the DOGE impact.

At this point correction is a healthy progression for the market.  I think the best advice is to tread carefully and keep your eyes wide open for any changes in the broader fundamentals. If we see a deterioration in the core fundamentals driving this market, we can take steps to adjust the portfolio asset allocations to a more defensive posture.