The market’s flash correction

The market’s decline has been one of the fastest in history.The fall has been fueled by the Trump administration’s economic policies. The question most investors are wrestling with is what to do about it.

Looking back on this period in a year or two, I guarantee that most investors will have trouble remembering exactly what happened. There is nothing abnormal in this decline thus far except its speed. It is a simple garden variety pullback, which occurs at least once a year if not more. It is the price of doing business for equity investors and savers with tax-deferred retirement accounts.

Given that, the decline is probably a good thing for an over-extended market on the upside. Stocks normally take the escalator up and the elevator down.In the pain game, I believe fast is better than slow when dealing with the emotional side of investing. Hopefully, the markets will bounce before too many more negative emotions surface.

I say that because emotions are your greatest enemy when investing. It would be a rare reader indeed who isn’t feeling worried and stressed right now when dealing with the market. The S&P 500 Index is down more than 10%, NASDAQ ­­­—17% and the Russell 2000 —18%.Is it time to bail?

No. The time for that decision is past. A month ago, taking some off the table may have made sense. Today it doesn’t.‘But what if it goes down even more?’ Let it, at worst you are halfway through a 20% correction but more likely on the eve of a turnaround.

Tom Lee, the founder of FSInsight, and a frequent guest on CNBC, reminds us that since 1928 going to cash and missing the 10 best days in a year reduces returns from 8% annually to —13%.

September 2022 was the last time investors were this pessimistic, according to the American Association of Individual Investors (AAII).

At the end of February, the proportion of investors identifying as bearish reached 60.6%.Historically, when this has occurred, the average subsequent 12-month return has been 24%.

How can you resist that desire to sell? Stop looking at your accounts. Watching your portfolio daily in a down market is behavioral suicide. Don’t do that.

So enough with the pep talk. Instead, the market had some good news last week for a change. The Consumer Price Index (CPI)and the Producer Price Index (PPI) came in cooler than most expected. I say ‘most’ because my forecast of weaker inflation numbers proved accurate. Next month’s data will show a 2.4% CPI, which will be weaker again. The following month should show a decrease as well. However, given the markets’ focus on tariffs and Trump’s economic policies, the inflation news did not matter to investors.

I expect the unemployment rate will rise as the administration reduces the number of the 3 million federal government workers. If you combine that trend with a slowing economy that is also being engineered by President Trump and his motley crew, we will have developed a perfect storm. That will provide a gateway for the Federal Reserve Bank to begin cutting interest rates once again.

Remember the Fed has two areas of responsibility: fighting inflation and maintaining employment. Chair Jerome Powell has already stated several times that the Fed now considers employment the focus of monetary policies. The bond market is already betting on a rate cut as early as May or June, with more to follow. That should be good for the stock market, which usually begins to discount events six months out.

The latest University of Michigan consumer sentiment numbers dropped another 10% in March.Trump has now admitted his policies will cause at least a slowdown in the economy, higher unemployment, and as for inflation, who knows?

As for the overall market, it is Trump-dependent, and the president has shown that he is no friend of the stock markets. Wall Street strategists and technicians are looking for at least a dead cat bounce.

Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires.