Dorato News - April 2025

Portfolio Issues - Timing

A phrase we hear a lot is, “I know you can’t time the market, but…” And the implied question is, “Don’t you think you should sell stocks and shelter in cash until things settle down?”

Recessions are bad for stocks. Are we about to have a recession? We don’t know. We know that various commentators and investors have been predicting a recession since 2021. If we’d listened to them, we would have missed out on  the market’s gains over the last several years. Paul Samuelson, a famous economist, quipped that Wall Street has predicted nine of the past five recessions.

We like to think that we’ll buy at the bottom, after stocks have dropped dramatically. But the news is invariably bad at those times. It’s the rare person who wants to buy stocks when unemployment is over 10% and banks are collapsing.

So there really are no buts about it. You can’t time the market. And even if you get it right once, selling at the right time, or buying at the right time, you won’t be able to do it again and again.

Rather than try to anticipate the market’s ups and downs, which is a fool’s game, we think it makes more sense to have a stock and bond allocation that’s appropriate for you, and an amount of cash that meets your short-term needs. If stock volatility is driving you nuts, you probably shouldn’t be so heavily invested in stocks, and you might want to reconsider your allocation.

Stocks are volatile. That’s the price you pay for getting a higher return. But not everyone handles that volatility the same way. We encourage you to think about the right approach for you.

“What? I’m worried about the stock market.”

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Market View - Buckle Up

We’ve had a number of people ask us about our economic outlook. While we’re happy to give it, we don’t recommend making big changes to your investments simply based upon someone’s economic predictions (see Portfolio Issues). But for the record, here it is. We think that the odds of recession have increased because we see the US consumer showing signs of financial stress: lower retail spending, more late payments on debt, higher credit card balances. And while businesses may increase spending in the US to bring production back home, they could also decide to wait if it looks like consumer spending will continue to weaken.

Markets are forward looking, but looking forward is a bit hard to do when the future looks pretty hazy. What will Washington do about budgets, inflation, tariffs, treaties, and regulations? How will businesses respond? What does all of that mean for earnings?

Stock prices are anchored by earnings, but stock prices are kind of like a kite blown about by investor moods. So when earnings don’t seem stable, the kite can fly around quite crazily.

Recessions are bad for stocks because company earnings fall in a recession. But recessions are temporary, and investors know that, so stock prices don’t fall as much as earnings do. Also, recessions are not created equal. The 2008-2009 recession was particularly nasty, as it involved financial institutions, whose problems sort of acted as accelerants on a fire. Stocks dropped 50% from 2007 to 2009. We don’t see a high risk of that sort of recession now.

US stocks, as measured by the S&P 500, started out the year up 4%, and then dropped 8%, leaving us down 4% for the year. Those are small swings. We would not be surprised if we see bigger swings as the year progresses.

While we still think stocks are best for long-term returns, we think investors should expect more modest returns for US stocks in the next few years. Remember that the average annual return for the S&P 500 from 2000 to 2010 was 0%. And because almost 40% of the S&P 500 is comprised of just ten stocks, and those ten stocks look expensive, the odds are against above-average performance for the S&P 500. Diversifying away from the S&P 500, and in particular from the top ten stocks, seems like a good approach to us.

Foreign stocks, for the first time in many years, are outperforming US stocks. Europe, and in particular Germany, appears ready to spend aggressively to bolster defense spending and to support the broader economy. That’s a dramatic shift for Germany, and is likely to lead to higher earnings for European companies.

China is also outperforming the US, but that has more of a casino feel to it, fueled by artificial intelligence and an exuberant investor base.

In the bond market, the yield curve is flat again. The one-year rate is almost identical to the 10-year annual rate. Does this mean investors are starting to worry about a recession? Or that they’re becoming less worried about inflation? We don’t know. At this point, we suggest a healthy dose of money market funds and inflation-protected bonds (TIPS) as a way to deal with the many unknowns we face.

There will always be someone who will happily state opinion as fact, and will tell you in no uncertain terms what the future holds. That’s not us. In our experience, the future is always hazy, sometimes more so, sometimes less so. We see our task as helping you navigate through the inevitable haze, and the inevitable ups and downs of investing.

Sources: Economist, Wall Street Journal, Value Line, Vanguard, Applied Finance Group, Schwab