In his inauguration address, President Donald Trump promised a “tide of change” and if the first two months are an indication, he seems poised to deliver on that claim. The stock market initially rallied in the aftermath of the election in part simply because it was over, but also under the expectation that the economy would be strong. In my December 2024 Market Commentary, I cautioned. “The outlook is more uncertain than the market expects. Tax cuts and deregulation will catalyze growth through increased optimism, but those positives could be offset by temporary setbacks because of deportations, tariffs, and spending cuts.” In the first two months of Trump 2.0, virtually all of the policy initiatives that have been pushed forward, such as tariffs and government spending cuts, are negative for economic growth. There has been virtually no talk of deregulation or tax cuts. I believe these are coming, but we will likely have to wait because these cannot be accomplished via executive orders with regards to tax cuts, they require an act of congress, and that takes time. Therefore, investors will need to be prepared to contend with more policy uncertainty in the months ahead.
It is said that optimism may significantly increase one’s mental and physical well-being, it can also promote better economic growth and prosperity for society. After the election, surveys gauging optimism amongst business executives, investors, and consumers went through the roof. There was widespread belief that regime change in Washington would translate into business-friendly policy and an ebullient economy. Thus far, the administration’s failure to deliver much in the way of good news has severely dented confidence, as a result talk has shifted from explosive growth to recession risk. The S&P 500 declined by more than 10%, meeting the definition of a correction. Uncertainty is to blame in the minds of most investors.
While markets loath ambiguity, it does create buying opportunities. This recent selloff was only the seventh time the S&P 500 declined by 10% in less than 20 trading days since 1950. One year after a correction of that speed, the market was up 13.7% on average (Source: Carson Investment Research). Investors have historically been rewarded for leaning into uncertainty with strong stock market returns. One cohort of investors that has been buying lately is corporate insiders. The Washington Service that tracks insider activity shows the ratio of buyer to sellers rose to 0.46, up from 0.31 in January, and the highest level since June 2024 (Source: Bloomberg). Insiders can sell for a variety of different reasons (pay taxes, buy a home, diversification) but there is only one reason they would buy their own stock, it is because they are bullish.
It is safe to say this year has not started as planned for most investors riding a wave of optimism after the election and two years of excellent stock market returns. Coming into the year valuations as measured by the P/E ratio, were near 25-year highs. The combination of high uncertainty and high valuations created a difficult environment for investors. With each passing day, we are getting a little more clarity on economic policy and the 10% decline in stock prices has helped to alleviate concerns about overvaluation, potentially setting up the market for better days ahead. In my experience, the stock market tends to rebound quickly from selloffs like we just experienced, provided the economy avoids a recession. Therefore, it will be important to remain diligent and monitor the health of the economy as it adapts to a rapid rate of change. If the economy remains resilient, it is likely that this burst of volatility creates a good long-term buying opportunity.