Stocks Just Dropped 10%—Here’s Why the Weak Start to 2025 Might Be an Opportunity

Investors, this week we are back to charts and data series. Most will come in a quick rapid fire without lots of discussion, but most of them say the same thing.  While uncomfortable and near historically quick, the recent -10%+ decline in the S&P500 has not yet said the bull market for US equities is over.  Recall, the average decline in any year is a little over -13% and historically, rapid declines of -10% have been followed by good gains in the next 6 to 12 months. First, 75 years of data from the folks at Creative Planning, showing max intra-year losses in the S&P 500 versus year end returns.

You’ll note that the average loss in a year is over -13.5%, while the average year ending gain is still +11.6% up.  As many times as our team tries to message this, I am compelled to do it again.  Investors, there is no free lunch in the markets, except for historically the compounding over decades.  You cannot get high returns without sitting through periods of high volatility.   2022 was a great case in point to the downside in higher growth stocks versus dividend names, while the follow-on years of 2023 and 2024, showcased the higher compounding of growth stocks versus dividend names.  2025, YTD the markets have reverted back to slower growth, higher dividend names outperforming and higher growth names pretty dramatically underperforming.

Great data from Ben Carlson on the drawdowns in the S&P 500 over the last 75 years.  This is the 39^th >-10% decline, and there would be considerably more if the data did not use closing high and low prices, but instead of low and high levels.

Here’s the data from Seth Golden showing, historically, swift and fast down, has been followed by very profitable investment returns over the next 3,6, and 12 months.

Here’s the current 10-year chart in the S&P 500, which into Dec 6^th, 2024 and early 2025 had compounded at a little over +11.5% per Year. Investors, please note that includes around 15 drops of more than -10% including the -35% Covid crash and the 2022 Earnings and GDP recession that took the S&P 500 down -25% in nominal terms and -35% when adjusted for the near 10% inflation spike that year.

Here’s a shorter-term daily chart of the SP500 for 3 years.  As you can see, this is the 3^rd time the SP500 has dropped almost exactly -10% ad the second time the index had “broken” its 200-day moving average since the market bottomed down -25% +in October 2022.

While our team had forecasted a sloppy, choppy mess for the first few quarters of 2025, netting next to no gain the first 6-9 months, and our team was wary of a messy first quarter Presidential term as they are typically down before they are up, we definitely did not forecast a historically swift and sharp -10% down move.  This move has been largely attributable from the Trump administration focusing almost entirely on using a stick on the issues of tariffs, immigration, DOGE, and even regulation skipping their previous 2017 carrot approach, solely focused on lower taxes and deregulation, lower friction items that shareholders love.  FWIW this move down looks quite similar to the near exact move in 1q18, post Trump tax passage, when the administration flipped the script to a focus on Tarriffs, immigration, the border wall, and other less friendly shareholder and consumer initiatives.

Here’s a chart on that time period back in the 1h2018 in Trump 1.0 when the focus was frictionary policies.  A quick drop of over -10% in the 1q18, and then a subsequent +15% rally back to new ATH into early 4q18, then another drop as the Fed stayed too hawkish too long.

Here’s a series of good news charts first on seasonality patterns in the stock markets.  Historically, Mid-March ends one of the worst 4 week period of the trading year. Here’s another Ben Carlson chart showing March 12^th as historically the average low for the year the last 20 years.

So far, in 2025, Thursday March 13^th, my return to the office from vacation, S&P500 5525ish has been the closing low for the year.  As I said last week, historically, there has been something very coincidental about markets going down hard when I’m on planned vacation.

Doctor Copper is perking up and close to breaking out of a MASSIVE 4-year base at $488/contract.  While market economies and their demand has driven the incremental demand for copper for decades now, when this commodity move higher it is often cited by many when things turn more bullish for the US economy. Why isn’t anyone talking about this?

Are sell-side strategists, who are now sounding caution alarms, turning to negative just as Dr. Copper is saying they should be becoming more optimistic?

After declining most of the 2h of 2024 in front of the presidential election, liquidity in the US is starting to rise, following other countries higher. Broader Money supply growth as measured by M2 is starting to re-accelerate to almost +4% YTY.  Here’s that upturn in a chart from Manuel Blay.

The US dollar, or DXY index has topped and is trending lower not higher Same with market priced interest rates.  Both trends are better not worse for earnings in the 2h25 and valuations in the 2h25. Here’s the dollar chart

Here’s real-time 2-year inflation breakeven interest rates looking to be peaking and rolling over:

Here’s real time real interest rates, starting to trough and turn up.

And finally, here’s market sentiment as defined by AAII Sentiment. We’ve discussed this survey many times the last 7 years as a great contrary indicator.  At or nearing market tops, when FOMO, the fear of missing out has kicked in, most retail investors are  bullish and no one is bearish, at market lows, most retail investors answer bearishly and it has been historically a good time to add to market investments.

Here’s the updated Net score from AAI of bulls vs bears. I’ll give you a few seconds to process this.

 

Yes, investors you are seeing that correctly.  This reading has only been this low 2 other times.  Near the lows in 1q2009 during the GFC and in 1q2020 near the lows in the Covid crisis. Both of course proved to be buying, not selling opportunities.  FWIW, A bullish reading of below 20%wasnt even reached in those prior times.  It has been in 1q2025. On the flipside, a bearish reading over 57% for 3 weeks straight hasn’t happened since? 1990. Back when what turned out to be historical 10 year rally, including the internet bubble started. That bearish reading currently stands at 59.2%.

Investors, if you’re panicking now, all of these indicators, which have led rallies in stocks for this cycle, they are all saying the same thing, don’t panic here, there should be a better place and time higher to sell in the coming 3-5 months if your investment allocation is mismatched with your risk tolerance.

Are there other indicators saying it would be better to buy than to sell here?  Yes, there are quite a lot.  Volailty indicators are saying that much of the forced liquidation at hedge funds and in leveraged ETFs is over for now and while there is uncertainty around the April 2^nd Trump tariff announcements, there is always uncertainty in the economy and in markets.

A repeat of the gloriously boring and straight line up of 2017 under the first Trump presidency was a very unlikely scenario in our work.  Even though I like to say, it’s the same people managing the same money, doing the same things, some many times we can expect the same outcomes, we didn’t expect the Great scenario of 2017 to play out this year in 2025. The main reason was the fact that in 2017 DJT focused on one and only one thing, lower taxes and getting that policy through congress.  Lower taxes equal lower friction on consumers and corporations and shareholders love that! The GOPs linear focus on taxes caused the SP500 to move upward in 2017 in a near linear and historically low volatility year.

DJT 2.0 out of the gate, it appears that Trump is going for stick approach, mimicking 2018 and initially skipping the carrot of taxes and deregulation. They are taking on a myriad of policy changes in rapid fire manner.  Immigration, tariffs, foreigner policy changes, and government firings and downsizing by the DOGE, while potential good for taxpayers and citizens over time, short term do what?  They all increase friction in the economy.  The all increase costs to the economy short term and shareholders and financial markets hate added friction.  Is this max friction?  Is April 2^nd, Trump so called Tariff liberation day “max-pain”? The data behind the scenes says that’s highly likely, just as others panic and hike their recessionary odds.

While all these policies in DC are anti economic growth in the short-term, real-time inflation expectations looked to have peaked while real growth expectations have troughed just as others say the reverse.

With most of our real time data series flashing troughs and bottoms, I am actually more optimistic thinking about the next 12 months even as the markets are lower than 2 weeks ago. What if Trump is crazy like a fox?  As a voter you don’t have to like him or his policies, but that isn’t what investing is about.

Soft landings in the economy do NOT guarantee no volatility. We saw a -11% selloff in the soft-landing that Alan Greenspan induced in 1996 in the midst of the internet buildout, is this economic slowdown just a Presidential slowdown and AI cycle slowdown to be followed be an acceleration in 2h25? Is this merely a halftime pause?  This time around, the Trump administration seem to be going for the early, “shock and awe”, taking on the tough policy issues first.  Are the carrot policies coming in 2h25 and 2026?

The good news? We are oversold and historically speaking, nearing what is normally a low in both economic growth expectations in the 1q, a seasonal low in the stock markets, and yes, a seasonal high in inflation concerns.

Investors know that regardless of the path for the economy and financial markets in the next few months, the investment team at OHFG will be here manning the ship and adjusting our models and long/short hedge equity fund where we can. We expect 2025 to be a very active year for active stock management.

Until next week, have a blessed weekend and remember for you in the know from watching last week’s video, mark your calendar down. my next real vacation isn’t for 11-12 months, maybe more, and historically speaking, that’s been a good thing for stocks.

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