Atlantic Edge Insights
March 2025
Choppy Market - Not a Time to Panic
Recession Probabilities
On March 9th, during an interview with Fox News, President Trump declined to rule out a recession, stating “there is a period of transition,” and “we’re going to have disruption.” On March 10th, stoked by recession fears, the tech heavy NASDAQ retreated 3.8%, its worst day since September 13, 2022, while the S&P 500 fell 2.7%. Against this backdrop, inflation expectations are rising, economic growth projections are falling, and investor sentiment reached pessimism levels not seen since the start of Covid shutdowns.
As a result, after a two-year hiatus, stock market volatility (which is normal) is back. We believe the recent decline is part of a valuation adjustment due to expensive stock levels coming into the year. The correction catalyst this time is policy uncertainty with the new administration. We do not believe this is the start of a major bear market, which typically coincides with recession. Bloomberg Consensus Recession probability is only at 25%, meaning that there is still just a 1 in 4 chance of a recession this year. Additionally, our preferred research partner, Ned Davis Research, has recession odds even lower than the Bloomberg Consensus for the next 6 months. During the last recession scare in 2022, recession probability reached 65%. In short, economic growth that entered 2025 will likely be strong enough to weather the economic effects of these policy changes.
Market Timing – an Exercise in Futility
Trying to time the market and sidestep volatility will no doubt lead to reduced long-term returns. No one can foresee the exact timing of the stock market's worst days, but history shows that the best days often closely follow the most severe downturns. Missing the 10 best days in a period between 1993-2023 reduced portfolio returns by almost 3% per year. Said another way, if you invested $100,000 at the beginning of 1993 and you missed the 10 best days over the next 30 years, you would have $1,000,000 less than if you stayed invested through the good days and bad (see graphic below). It should not come as a shock that most of the best days from 1993-2023 were in the middle of the Great Financial Crisis of 2008-09.
Concentration Risks Remain
While a recession remains less likely, the investment landscape has changed dramatically from trends that persisted in 2023 and 2024. From the end of the bear market in October 2022 through year-end 2024, the S&P 500 stock index increased in price by 70%, driven in large part by the “Magnificent 7” stocks (Meta, Amazon, Google, Microsoft, Apple, Nvidia, and Tesla). This outperformance by the ‘Magnificent 7’ led to extreme market concentration in just a few expensive stocks.
Concerned about US stock market concentration in 2024 (in fact, the S&P 500 has never been more top heavy – meaning the 10 biggest stocks make up the largest weight of the overall market), we positioned portfolios to limit exposure in these stocks. Additionally, due to US stocks being priced relatively higher than usual and stocks in other parts of the world more reasonably priced (see graphic below), we reduced exposure to small company stocks domiciled in the US and added to European stocks and US bonds. Both changes have thus far yielded positive results as diversification has once again become beneficial to portfolio returns. Through March 10, the other 493 stocks in the S&P 500 outperformed the Magnificent 7’ stocks by almost 15%. In that same period, international stocks in developed economies (Europe, Japan, and Australia) are up 9% while the S&P 500 is down over 4%.
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We expect this to be a theme for the rest of the year.
Atlantic Edge Insights
Matthew Cochran, CFA
Robert Filosa, CFA
Ethan Caldarelli, CFA
Opinions expressed in this commentary may change as conditions warrant and are for informational purposes only. Information contained herein is not intended to be personal investment advice for any specific person for any particular purpose. We utilize information sources that we believe to be reliable but cannot guarantee the accuracy of those sources. Past performance is no guarantee of future performance; investing involves risk and may result in loss of capital. No graph, chart, formula or other device can, in and of itself, be used to determine which securities to buy or sell, or when to buy or sell such securities, or can assist persons in making those decisions. Consider seeking advice from a professional before implementing any investing strategy.
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