Since December 6, 2024, the US stock market has been trading in a flat range up to February 19.   However, the flat trading range weakened on January 27 when DeepSeek announced it had developed an AI learning database using an outdated Nvidia GPU for less than $6M.  Investors panicked selling top AI company stocks with some share prices plummeting 15% - 20% that day.  Even though the selloff was short-lived, and nearly all the losses of that day were recovered within three weeks, investor confidence in the rally was shaken.

The next shock to the market happened on February 20th when Walmart had its fourth-quarter earnings call.  What concerned investors was not that the company met revenue and profit expectations, it was the CFO's future sales projections.  Wall Street Journal reported after markets closed on the 20th the following on Walmart’s earnings call:

• “Major stock indexes slid Thursday, with investors unsettled by a note of caution in Walmart’s forecast.  America’s biggest retailer posted strong results that met elevated expectations, but investors focused on its weaker-than-expected sales guidance for the coming year. “Wallets are still stretched,” said Walmart Chief Financial Officer John David Rainey.  Walmart shares sank 6.5%. The weaker guidance from the first major retailer to report earnings this year added to concerns about consumer strength that bubbled up after U.S. retail sales fell more than expected in January.”

Since then, came the following series of negative events and news that has exasperated investor nervousness.

Consumer Sentiment.  On February 21st we reported the Consumer Sentiment significantly declined in January reversing the improving sentiment trend since July of 2024.  The Sentiment index dropped 9.0% from January’s reading including a 19% plunge in buying conditions for durables.  Consumers reported in the survey their concerns about inflation due to pending tariffs.

Oval Office Meeting with President Zelenski. Most considered this meeting in the White House less than favorable toward the goal of peace in Ukraine. President Trump is strongly advocating for the Ukraine president to sign a minerals agreement with the US as partial repayment for the billions already sent to finance their war.  Several sources including Reuters have indicated today that both President Trump and Zelenski plan to execute the minerals agreement.

Tariffs.  Since President Trump announced his intentions to implement tariff taxes on various trading countries market nervousness increased.  His first announced tariff tax on Mexico, Canada, and China was postponed as the countries capitulated on their positions.  The market breathed a collective sigh of relief.  However, President Trump announced that on Monday new tariffs were set to start effectively at 12:01 a.m. ET on March 4. 

Tariffs seem to be too big of a variable for investors.  Monday and today investors accelerated their selling.   As a result, this run of negative news has kept investors on the sidelines as all major US indices have declined since February 19.  Not surprisingly, the S&P 600 Small Cap index leading the race to the bottom is now down -14.73% YTD through today. 

However, the reality is markets ebb and flow in cycles.  In good economies like today, stock market cycles are typically two periods of steady up trends followed by one period of declining trend.  Last year, the major indices rallied in the first two quarters, declined in the third quarter, and rallied in the fourth quarter. 

What Does This Mean to Me?

Stock market declines are certainly not fun to experience especially the negative impact on your accounts.  However, if it wasn’t for declining market cycles like the one we are in now, valuations would get well above standard levels leading to a major selloff that sometimes ends even the strongest of bull markets.  One of the most memorable examples of a strong market rally that led to a devasting selloff happened at the start of this century. 

From 1996 to March 2000, the S&P 500 rallied 143% and NASDAQ soared 379%.  It was the only time in history that the S&P 500 increased 20% or more for four consecutive years.  However, this remarkable rally was like a roller coaster cranking up to a peak of the tracks and rolling over the top into steep decline.  The extreme overvaluations were wiped out in the following devastating selloff. 

We were living in San Jose with offices in the heart of Silicon Valley, CA from the late nineties for the following 18 years.  Only those living there could appreciate the excitement as new disruptive technology was being introduced.  Along with new tech toys, a robust stock market gain was very rewarding for nearly all investors.  The capital value of many new start-up tech companies, some less than 24 months in existence, soared to billions in value with no profits and little revenue.   However, the roaring late 1990s led to extreme overvaluation of these companies and set up for a huge selloff.  Starting in March 2000 and shortly after President George Bush's inauguration, the entire US stock market started an extensive selloff that was so significant that many of the former leading tech companies had closed or filed bankruptcy by the end of 2001.  By the end of 2002, so many companies had closed and their employees returning to their homeland, that for a couple of years, there were almost no traffic jams.  

By the end of 2002, the S&P 500 had declined 38.5% and NASDAQ lost over 72% of its value. 

So, the lesson learned is investors can endure short-term corrections that reset market values like what we are experiencing now, or long-extended rallies that ultimately will lead to long-extended corrections.  

Let us know if you have any questions about this UPdate.  More importantly, give us a call to discuss long-term investment strategies for you and your family.