Worried couple meeting with their investment advisor
The leading bearish signs were right: The stock market is at risk of a major sell-off. What to do now? Raise cash reserves for future opportunities. However, do not expect the rising investor pessimism to reverse anytime soon.
Why not? Because it takes time for widespread optimism to wash out. Despite the reality weakening over the past weeks, bullishness remained the driving force. So, why the change now? Because the increasing uncertainties and negatives have finally begun to dent investors’ optimism.
“Increasing uncertainties and negatives” is threefold: In likelihood, number and seriousness. The Wall Street Journal (Monday, March 10) focused on a number of those issues:
- Investors switching to dividend stocks, a classic safety move
- Tariffs being seen as harming some U.S. businesses (e.g., home builders)
- Tariffs, even if rescinded, can damage long-term trade relationships
- Election excitement about stocks has turned to concern
- Warnings against thinking long-term stock returns are always favorable
- Rising recession expectations as global banks increasingly take a gloomier outlook
But that is not all. There are more uncertainties and risks. Four of my previous articles covered several of them:
December 28 – “Eight Issues Could Undermine The 2025 U.S. Stock Market”
“As the 2025 New Year’s excitement ends, look for the U.S. stock market to falter. It is carrying a lopsided enthusiasm from 2024, so 2025 could be a period of adjustment.”
February 14 – “Wall Street’s Four Bullish Views Will Likely Reverse“
“The stock market’s behavior is the gauge by which we can measure Wall Street’s attitude and outlook. Clearly, today’s reading continues to be one of bullish optimism.
“However, there is a problem with following Wall Street’s current enthusiasm. The four bullish views cited as reasons to own stocks carry the risk of having reality chip away at the optimistic rationale.”
March 1 – “Significant Uncertainties Put U.S. Stock Market At Risk“
“Now is a challenging time for consumers, economists, businesses and investors (including professionals). Multiple, diverse concerns are heightening uncertainties dramatically, putting the U.S. stock market at risk. There are three risk areas to examine: Normal, Federal Reserve, U.S. Government.”
March 8 – “U.S. Stock Market: Homebuilder Reversals Raise Concerns“
“After a lengthy rise, homebuilder stocks have dropped around 30%. Time to buy? Probably not. Fundamentals began weakening last year as homebuilders continued to build their significantly large inventories even as sales tapered off.”
The home builder reversals are an important indicator because the builders have been optimistic until recently. Therefore, the 30% decline will likely be the first step in a significant downside adjustment.
The Bottom Line: Multiple Uncertainties Can Produce Stock Market Turmoil
Unlike risks, uncertainties are hard to measure, both in probability and in possible results. That is why bullish markets tend to ignore them. However, once reality returns, those uncertainties enter investors’ thinking. Then, as the uncertainties gain shape and weight, investors begin to imagine what else could go wrong. Hence, bulls become bears.
Two more issues to recall from past turmoil sell-offs:
- First, they tend to bottom in a sea of negativity. Will it happen this time? I believe so because the number, spread and size of the uncertainties and risks are abnormally high. Therefore, until those issues are offset or removed, they are obvious reasons for investor worries and negative expectations.
- Second, it has been a long time since such a sell-off occurred. Memories and expectations tend to be short, so the idea of an extended sell-off (lasting quarters, not months or weeks) can seem silly. But it is not. There are plenty of bearish drivers to pull down and drag out this sell-off.
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