Navigating Market Uncertainty: Two Scenarios for the Road Ahead

Marc Zabicki (00:00):

Forecasting market direction is always a difficult endeavor given the various moving parts of the economy and capital markets in general. Today is especially difficult given the relative lack of visibility as it relates to tariff policy, resulting federal reserve action and inflation, the economy, interest rates, and the list goes on. In this latest edition of LPL Street View, we will attempt to summarize all the variables into two potential market directions to which we believe investors should pay the closest attention. So here we go. When the market realizes a 15% or more decline, various things can happen. The path for stocks thereafter varies widely based on a historical lookback, but those various instances, we believe, can be bucketed into two main scenarios. Scenarios that may prove handy as we look into the near term future. The first is the direction the market appears to be on now, that is a sharp sell-off, followed by a V-shaped recovery.

Marc Zabicki (01:07):

This typically occurs when there is a shock to the system, say tariffs for instance. But once the shock is over, markets tend to snap back rather quickly. Recently, markets were under a significant pressure due to the tariff uncertainty, but have since recovered as the chances of a worst case scenario have seemingly been priced out of the market. The result is what looks like an all clear signal for investors. The second of the two main scenarios is when markets endure a sell-off, recover, and then weaken again, as market and economic fundamentals endure some change. It is this scenario rather than the all clear signal that we believe we are faced with today. Why? Because we believe tariff policy and the near to intermediate term fundamental changes that could occur as a result may have an anchoring effect on equity prices. Don't get us wrong, we realize that the recent tariff back and forth is in part a negotiating tactic aimed at exacting concessions from trading partners.

Marc Zabicki (02:14):

However, we do expect this to have a fundamental effect on the economy and on corporate earnings. Both of those effects have not yet been materially evident. However, when some weaker data begins to come through and we believe it will, we expect investors to take notice and markets could then weaken a bit again. Said another way, this V-shaped recovery and equity prices we have witnessed so far may not be long lived. What's the message here? Simply, investors should stay vigilant. While we believe the equity market could indeed have a constructive year in 2025, the volatility we have witnessed in recent months is likely not over. Keeping an eye on the fundamentals and playing it a bit cautious here by doing some dollar cost averaging rather than rushing back into the market may prove to be the best course of action. Thanks for listening, and as always, allocate wisely.