Given the popularity of our weekly Market in Pictures, we started the habit of picking out a few and going into more detail with our PMs. In this edition, John Luke and Dave spend a few minutes on each of the following:
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- A Wild February
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- Growth Worries?
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- Tarif-Fying?
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- Bull Market, Year 3
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- Market Broadening Out
3 Minute Read: Executive Summary
Full Transcript
Derek
Well, hello there. It’s March. Came on quick. Friday was February 28th, and all of a sudden it’s March 3rd. So we are doing it on the first of the month here. And we’ve got our usual experts here, Dave Wagner, head of equities, John Luke Tyner, head of fixed income. Lots to talk about. Could probably do a half a show just about today, but we’ll try to handle most of February in this recap. I’ll read a disclosure. The opinions expressed during this call are those of the Aptus Capital Advisors Investment Committee and are subject to change Without notice. This material is not financial advice or an offer to sell any product. Forward-looking statements are not guaranteed. Aptus reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs. More information about Aptus’s investment advisory services can be found in its form ADV part two, which is available upon request. So we’ll start with our usual recap from a performance standpoint. A lot of dispersion. I don’t know if you want to jump in and tackle some of that.
David
Yeah, the subject line here actually is probably a little bit misleading because it says Wild February. Well, if you looked at the returns of the S&P 500, it’s only down about 1.3%. I’d say that emotionally it felt more like wild more so than the actual performance itself. But overall, during the month, it felt like the animal spirits really coming out of the election. Well, they’ve finally been disrupted by what’s perceived to be hyperactivity in Washington D.C., especially when it comes to tariffs and probably to a lesser extent the implications of the establishment of DOGE. But all in all, I thought it was actually a pretty good quarter, given all the news surrounding that. Obviously, we’re taping this on March 3rd, the first day of the month where we had the S&P 500 down almost 2%, the VIX spiking 16% to 23%. But overall, I would say the things that I would be focusing on here is kind of two things, that there’s a lot of noise out there, and there could be a lot of misleading signals when you’re looking at the market as a whole because it’s such a weird dichotomy that usually in the first two months of the year, a lot of the losers of the previous year tend to outperform in the first two months of the following year.
But not only that, if you actually look at the Trump 1.0 regime versus kind of what we’ve seen so far as the Trump 2.0 regime, you kind of saw the exact same thing, that the high-flyers post-election into year-end really saw their momentum swap in the first quarter of 2017. And that’s exactly what you’re getting right now. International security is up about 7%, 8%. A lot of that is based off of probably the move and the dollar here recently. The U.S. dollar has really started to pull back since January 13th as a whole. But even if you look at underneath the hood, I think the second factor I want to say that I’m looking at right now is that if you look at the defensive names versus the cyclical names, when you usually have a pullback in the ten-year treasury, which really started to happen, let’s call it say also around that January 13th date, you actually tend to have cyclicals outperform. But right now you’re actually seeing the exact opposite. You’re seeing the defensive securities substantially outperform the cyclical securities.
So what that tells me in accordance with the ten-year pulling back from… What was it?… 4.8 to about 4.15 right now, it’s telling you that the market’s starting to focus on actual growth of S&P 500, which kind of baffles me a little bit because what we saw in the fourth quarter earnings was really strong. You had earnings grow about 16% off of sales growing about 5%. Obviously, the market’s a forward-looking mechanisms, so it’s trying to delineate what type of growth we’re going to have in the future, not just in the fourth quarter. But right now if you’re looking at signals, what the market’s telling you, that the market’s starting to get a little spooked from a growth perspective. We’ve only pulled back about 5.1% from the February 19th highs, but overall, it’s a small minor pullback. I think a lot of these pullbacks that you see in this market of 5%, they tend to be healthy. They tend to be natural, especially if you actually see a lot of the heavier risk on securities starting to pull back. And that’s what you’ve seen really over the last two weeks. You’ve seen the heavy risk on areas like Bitcoin, the high beta names, the highly, highly valued names, names that have price to sales greater than 10 times. They’ve started to pull back.
So I’d say that a lot of the areas where you tend to see rational exuberance, they’ve pulled back. So it tells me that this is a healthy and normal pullback that we’ve seen in the market so far.
Derek
Anything you want to add on there from your… Obviously, fixed income had a pretty big move for the month on the yield side.
John Luke
Yeah, you’ve seen yields drop a good bit, and I think a lot of it has come with a little bit of a growth scare, or at least perception of a potential growth scare. And I think you kind of have to look at it from a couple of different perspectives. First, the market loved the idea of deregulation, lower taxes, more business-friendly environment, but maybe you forgot that that’s like a medium to longer term sort of timeframe for that to play out. And then I think that it’s been a little bit underwhelmed as far as expectations or under expected on what the DOGE sort of approach would take and kind of gutting a lot of the expenditures from a government level and short term as fiscal policy goes down, that’s a potential negative, but you would hope that the private sector would come back in and help fill some of that void and improve efficiency.
So Scott Bessent and Trump’s goal is more targeted on the ten-year yield than it is maybe on his first term of what’s the Dow doing every day. And so I think that as they get yields back into at least a more stable range… They’re still higher than where they have been, but a more stable range and you take into account some of the cuts… We have a hundred bips of cuts that are lagging, but flowing into the economy from an effect perspective. So I do think that there are a couple of things that can kind of be offsetting in the shorter or medium type of term, but looking further out, as some of this policy gets put into place, as we get more clarity, which, like Dave says, the market wants clarity, loves clarity, that it could be really helpful in kind of stabilizing things and kicking things back into trend. And I they got a couple good charts on a little bit of the short-term noise that we’ll hit on coming up.
Derek
So you both mentioned growth. Obviously, Dave says often that’s the most important thing to markets. And this chart has kind of flown around all over the place the past few days. It’s probably been over-interpreted, but I’m curious your take on it. That’s a pretty sharp change. I know there’s some weird factors that go into this. So any comments here on this one?
John Luke
Yeah, I’ll take first stab and let Dave clean house as he always does. But this was a bit of a surprise. We’ve seen the Atlanta Fed GDP number come in pretty amazingly strong for the last several years. And as markets have gotten sort of hit with this growth scare, this number has continually been revised higher, and then you’ve seen it with the actual numbers come through because this is just simply an estimate. But a lot of the decline that we’ve seen is focused on inventories. And if you think about you have to pay for the inventories today, which we’re importing these goods in from other places, probably places impacted with tariffs, but as that gets either sold or marked as inventory, which is an asset, it will help offset a substantial bit of this drop. So it’s obviously a notable… I wouldn’t say it’s a red flag, but it’s something that we’re watching. But you would expect over the back half of the rest of this quarter for the number to be revised as it gets more properly accounted for.
But I think the big piece was the merchandise trade deficit was 153 billion, as far as it was accounted in Q1, which was 30 billion higher than any previous record. And so what that’s really just showing is people are buying like crazy to get ahead of the potential hit of tariffs, but it’s not necessarily a net negative for the economy because now there’s more goods to sell and potentially at prices that are less impacted by tariffs.
David
Yeah, I would say this just completely falls under the category of noise. It’s not a red flag. It’s not a green flag. It’s no flag. John Luke made a great point there that it’s going to right-side itself over the next month or two months. And when John Luke and I both spoke about the markets trying to recognize and dissect a growth scare, I think it has absolutely nothing to do with this Atlanta Fed GDPNow figure. I think it’s actually more on the earnings per share side. When you’ve actually started to see the first quarter 2025 earnings per share number come down to buy about $3 or $4 or buy about 1% or 2%, that’s normal. That happens all the time in the first quarter. So I think that’s what the market’s trying to dissect, is earning per share of the S&P 500, not kind of this growth worry from the Atlanta GDPNow Fed cast.
John Luke
Yeah. One other thought, Dave, and I know we hadn’t really talked about this, but you’ve got the next Fed meeting on the 19th. Actually, this number was revised even lower this morning and put in the chart, but it was revised even worse. But you’ve got the Fed meeting coming up here, and call it two and a half weeks or so, you’ve got some data that’s not necessarily terrible, but it’s certainly not as strong as we are kind of accustomed to see in the last couple of years. The market’s got the Fed at about a 9% chance of cutting rates 25 bips, with the first full cut priced in by June. Do you think that we could see them speed that up with some data? I know we got jobs on Friday, and I think the expectation’s like 160,000 jobs. Maybe it’s barring on that, but do you think that we could see a cut?
David
I don’t see that. I think the Fed recognizes that a lot of the data, whether it’s on the TCE side or the CPI side, is that there’s a lot of moving parts that need to be reconciled from a data input perspective in the first two months of the year. We’ve continued to see that, especially with inflation data. And I think that that’s what they would point to, is not just the last one or two data points, but a smoothing of data over the last three or six months is really going to discern what they’re going to be doing in the future. So I don’t see it happening. Do you?
John Luke
I think it’s a higher chance than 9%, but I wouldn’t say it’s by any means like a coin toss.
David
Yeah, too much seasonality in a lot of this data, and we’re still going to see with the nonfarm payrolls on Friday.
John Luke
Yeah. Prices paid data across the board has continued to be slightly elevated.
David
Yeah.
Derek
And, Dave, to your point on earnings growth, I know there’s a couple reports coming out this week, but we’re pretty much going into a black hole of earnings. We’re going to get very little visibility on that stuff for a while, right? The whole month of March?
David
Yeah, I mean, you got a lot of the more cyclical consumer discretionary names still left to report like Target and whatnot, but 96% of the S&P 500 has reported their Q4 2024 earnings. And that actually brings up a great point, Derek, that, hey, you know what? Now that earnings is behind us, that actually opens up the window for buybacks, which tends to be from a net liquidity perspective pretty supportive of equities.
Derek
Awesome. Okay. Tariffs. I mean, got to mention them. They’re obviously getting mentioned in the headlines every day. So curious your thoughts there.
David
I think we could probably take this conversation in two different directions, where we can give you our thoughts on why it’s happening now and the implications of tariffs, that $300 billion consumption tax that’s basically going to be unleashed out into the markets at the end of tonight, or we can kind of take this conversation the route of how do I describe tariffs to clients, and more importantly, how can I make sure that they recognize that it’s not something to fully worry about right now. Obviously, when you’re talking politics, because in a way when you’re talking tariffs, you’re talking to the unknown ramifications of tariffs, but also you talk politics in a way, especially in a country that’s basically a 50/50 split between Democrats and Republican, this is going to be a polarizing topic. So I think I would prefer to take the route of the latter, not talking the fundamental aspect of this, but talking more about how do I explain this to clients and how they need to look through a lot of the short-term noise coming out of Washington D.C.? Because, one, we still don’t know if it’s a negotiating tactic or an opportunity for us to get more pay-fors to get that 2017 TCJA, the Tax Cuts Jobs Act, reenacted that sunsets at the end of this year.
But as rudimentary as it is… Well, let me step back actually. As investors, you can never let politics dictate your investment thesis or what you’re trying to do from an investment standpoint at all. We invest in the world that we have to live in, not in the world that we want. And I think that’s really important to recognize. So I think going back to historical statistics of what’s happened during different regimes is very, very important. And I don’t think you could have more of differentiated policy makers or policies from Trump 1.0, which is basically 2017 to 2020, and then the eight years under the Obama regime from 2009 to 2017. And if you look at those two periods, the Trump 1.0 and the Obama regime, you look at the underlying sectors underneath the S&P 500 and how they performed during that tenure of president, they’re almost identical. If you look at the top three sectors under each regime, there was IT one, discretionary one, and healthcare one. But not only that, if you look at the bottom end of the spectrum of what sectors performed the worst, there was energy, real estate, and staples also a commonality amongst both regimes.
So the takeaway here should be is that the policy-makers in D.C. and the policies that they create, it doesn’t dictate the direction of the market over longer periods of time. That’s why we shouldn’t focus on it. That’s why I believe that it’s short-term noise. We need to focus on the deep fundamentals of what’s actually driving the economy from a growth perspective. All right, so that’s going to be earnings per share of the S&P 500, the operating margin of the S&P 500, and just the macroeconomic strength of the consumer within the U.S. That’s what actually drives the market over longer periods of time. And I think that this is such a very basic table to be able to show clients that even if you have two completely different policy-makers coming out of Washington D.C., policy doesn’t drive the market. Fundamentals do, and that’s what we need to focus on.
Derek
So this is Bill Murray from Meatballs, “It just doesn’t matter.”
John Luke
Got to loop it in.
David
I used that too much heading into the election, so I don’t know if I can use it right now. I need to come up with a new one.
Derek
Yep. All right, cool. I do think obviously clients are just going to hit advisors on this stuff because it’s in the news every single night, but hopefully people will become desensitized to it a little bit and, as you said, the economic impact is not nearly as great as the day-to-day noise that’s coming out of there. And you’ve written some pieces on it that I think advisors have benefited from and used with clients, so that’s a good thing. Year three of the bull. All right, so we got a script here of a couple comparative charts. Anyone want to talk through this one?
John Luke
Yeah, I’ll start and let Dave go. This is a point we’ve talked a lot about the last really 18 months or so, but when you look at the backdrop of the bull market, which was solidified, I guess two years of it last fall from the lows that we saw off of the 2022 kind of Q4, I guess meltdown that we saw, and then pretty massive recovery off of that, so after hitting sort of this bull market stride, what you see is year one and year two are typically the most friendly to market participants, which you can see in kind of the charts on the two left sides, year one and year two. We underperformed slightly in year one compared to the average year one, but we mightily outperformed in the year two period. But what you’ve seen since is a lot of chop with the market, and that’s not atypical to what you see in year three of bull markets. I’ll let Dave say the stat so I don’t misstate it, but I think whenever you typically see year two of bull markets achieved, it’s something like the average bull markets. Is it eight years, Dave? Yeah, and so-
David
Eight years.
John Luke
We’re not super surprised to see a little bit of chop, especially after two pretty monumental years from a performance perspective. And then the other thing that you have going against you… And, again, this is short term and probably a lot of noise, but after the inauguration typically leads to some choppiness. So you’ve got sort of the tail of the worst side on both pieces of it, year three of a bull market post-inauguration and then a lot of headlines obviously from the Trump administration and coming out of D.C. and what’s getting shaken up. But what I think the important piece is, and I’m sure Dave will strike on this, is this doesn’t mean it’s the end of the duration of the bull market by any stretch of the imagination.
And while it might be a little bit more volatile in year three, we think, number one, there’s a lot of benefits that hanging on, but then not to mention any of the funds specifically at Aptus, but we’ve got a number of things in place that are taking advantage of a lot of the volatility that we’re seeing, whether it’s higher income off of certain products or enhanced yield, whether it’s covered calls, whether it’s actively managed puts that can take advantage of some of the chops and keep getting money redeployed back into equity. So I think while it might not be as fun or as easy as it was the last two years, that we’re still positioned very well to navigate what hopefully is just the early parts of a longer bull run.
David
I think that point you made there, John Luke, is perfect from two perspectives, that the returns are going to be harder to come from this year, but luckily we have a lot of active levers in place to take advantage of the volatility. And let’s get into this, John Luke, because John Luke and I were talking today. I’m not going to lie, I very much dislike charts like this that people try to overlap a certain period with another period. There’s so much chart crime that can really be put out there into Twitter. And JL and I were going back on a certain person on that today, actually that Derek knows, but I won’t name them on here. But I would say that we can make analogies to previous years as much as we possibly can because I do think that history doesn’t repeat itself, but it rhymes after two really, really strong years in the market. It’s normal for the market to take maybe a little pullback for some type of breather. A lot of people don’t recognize that markets and individual stocks, they kind of work in lockstep approach. Or set another way, they kind of do the stair-step approach on returns, that they go up for a little bit, they go sideways for a bit, and consolidate for a bit, then they go back up for a little bit, consolidate for a bit.
And we’ve had two really strong returns for the S&P 500 really going back to August 12th, 2022. I mean, 2023, the mark was up 27 and some change. Last year, the mark was up 25% exactly. We could say more superlatives that over the last four starts to a new election year, so basically year one of election year, the market has had really, really strong returns. It hasn’t seen a recession during that period of time, which kind of bucks the trend of what historical data has told you. Historically speaking, the [inaudible 00:21:56] is that year one is the worst year of the presidential election cycle in those four markets, but ever since the introduction of quantitative easing and a few other aspects, it’s actually the best. The year two tends to be the most difficult, but I think we, John Luke and I, can data mine any market fat to try to turn it bullish or to turn it bare. So as much I like these charts from a descriptive perspective or from a visual perspective, it’s hard to take them completely seriously without some context.
Derek
So I would also say a lot of the market the past couple of years has just been the Mag 7, right? That’s what everybody’s been watching. You guys have this chart in here about the market broadening out, and I think that’s probably more relevant to people’s actual portfolios versus picking dates. What is actually happening? Are we seeing differences in the market? I mean, obviously there’s been a lot less upside momentum in those handful of names than we had seen in the past. And we’re seeing other names step up, which I’m sure you both kind of appreciate that. But I’m just curious, what does this chart say to you? I see, I guess the black line in the middle is the S&P, and you’ve got gray on top as the S&P 493, and then on the bottom you’ve got the Mag 7. So kind of flipped from where we’ve been the past couple of years, I guess.
David
I’ll start, and John Luke, you finish. You close it. You’re the closer. I’m a starter. I think people want to talk out of both sides of their mouths. When the Mag 7 is working, they say it’s not a healthy market because the average stock isn’t participating. And then they say, hey, you know what? I don’t think the market can go higher if the Mag 7 isn’t driving the market. Well, what we’ve learned over the past few years is that you can have your cake and eat it too. The Mag 7 can drive this market higher, but when the Mag 7 takes a break, a lot of these stocks in the markets, they work in a stair-step approach. So when the Mag 7 is going sideways and consolidating for a little bit, I think you can actually see the average stock or the remaining 493 stocks and the S&P 500 can insulate the return of the overall benchmark itself. You saw it for a quarter last year. You’ve seen it year to date this year. And I think it’s more of a reason to be optimistic about this year, that the average stock can continue to drive this market higher, even if we don’t have any positive leadership from the Mag 7. It’s just such a great yin and yang of the S&P 500 right now.
And I think that this performance that we’ve seen to start the year with the average stock outperforming kind of mirrors and mimics what we saw coming out of earnings season. The Mag 7 continues egregiously high and very strong growth rates from an absolute perspective, but it’s really starting to come down. So I think this is the first time in maybe seven or eight quarters that we’ve seen a spread this narrow between the Mag 7 earnings growth on a year-over-year basis and the remaining 493 stocks growth on a year-over-year basis. So I think that you’re starting to see these two numbers converge kind of really mimics and shifts why we’ve seen the performance that we’ve seen of the average stock and the international stocks really starting to outperform to start 2025.
John Luke
Yeah, we certainly welcome a little bit of broadening in markets. It’s still been fairly central to large caps, especially on the U.S. side. If you asked me, if small caps would have done better than the equal weight S&P based on what we’ve seen this far this year, I would’ve said definitely, but actually that hasn’t been the case. Pretty decent gap there. But I think you take this and the broadening, which I think is good longer term, I always think back to looking at the long-term performance of the equal weight S&P, and believe it or not, it’s actually outperformed since they started tracking it, I think it was in the early 90s, the market cap weighted index. And so I think you get these kind of fits and rallies, and obviously market cap has a lot of momentum characteristics. It’s heavier than it has been in a while. It can still keep going up obviously, but we do like some of the cheaper parts of the market that I think can provide value.
And probably the most surprising that it’s actually happened, but the least surprising, based off the feedback we got at the beginning of the year, has been international. Rewind three months ago, and pretty much every advisor we talked to was questioning whether we should continue to hold international in their models at all. And we talked a lot of folks off the cliff of getting rid of it and prove some of the diversification there. But I think when you have a general overweight to equities and you can have different components or diversification of the types of equities, that this type of broadening really benefits our portfolios versus most of your simple 60/40 type of benchmarks that are pretty geared towards just the largest names.
David
JL, let me ask you a question real quick. You brought up a great point, like hey, small caps have not participated in the broadening. Obviously, I think I know small caps pretty well, so I actually want to hear your response in this. Everyone says that small caps should benefit from some reshoring aspects, from a market broadening out perspective. Why do you think small caps have not kept up in this year-to-date rally?
John Luke
I think sensitivity to rates, even though they’ve dropped, has probably been some of them, but I also think it has to do a lot with the policy marks and what tariffs are going to do to some of the companies that have less operating leverage and more susceptibility to taking a hit from eating some of the impact of the tariff. That would be my thought. And then the other piece is you had such a boom in infrastructure spending and construction that I know a lot of the companies benefited from, that it’s potentially getting DOGE’d in some capacity. So maybe a little bit more sensitivity to that side. But I do think, speaking out of the other side of my mouth, that the deregulation and the tax impact could be the story that changes that. Just like I said at the beginning, it doesn’t happen immediately. It’s a medium to longer term type of playbook, and I think it speaks to being patient on it. I’m definitely not throwing in the towel on small caps. I just have been surprised that 493 has done as well as it has and small caps haven’t.
David
I would agree, and I think it comes down to the constituents within the benchmark of the two. So I would say I think your reasons are exactly correct. I think if I was to put an ordinal rank, rates would be number one, even though they’ve pulled back. As we mentioned at the start of this call, the market’s trying to digest some type of growth scare, and that’s why you’ve seen defensive outperform cyclicals. And small caps are going to be heavily more tied to the sensitivity of growth of the domestic market itself, so that’s probably another reason. But even if you look at the constituents within the Russell 2000, specifically the Russell 2000 growth, 15% to 18% of the weightings within the Russell 2000 growth or within biotech and pharmaceuticals. And they have the exorbitant amounts of debt, and with the rates where they are, then you have the introduction of some R.F.K. Junior policies. There’s kind of just been an overhang. So I think that shows the necessity to be active within the small cap space, especially with so many landmines out there from unprofitable high debt ridding companies. But I’m definitely not throwing in the towel on small caps either, John Luke. I’m pretty excited for the potential in the future for them, especially in the second half of this year.
John Luke
Yeah, my uncanned response was there’s a lot of crap in the index on the small cap side. Didn’t you set it out? Say it more clearly.
David
Crapsy stocks, but pretty cool managers.
John Luke
Yep.
Derek
There you go. All right, well, cool. It sounds like growth is what we’re going to be watching.
David
Yeah.
Derek
So we’ll go with the macroeconomic figures first and earnings later. So appreciate you guys coming on and talking through some of this. Obviously, hit us up. We’re coming up on tax time, so I’m guessing a lot of advisors are talking to clients about different things. It’s not year-end where you’re doing last minute tax planning, but anything we can do to help think through ways to be more tax-efficient and strategies for handling concentrated positions or any of that kind of stuff, please do reach out.
John Luke
Yeah, we’re here to help as we navigate a little bit more difficult environment than we have been in. But I think it’s still exciting looking forward.
David
Appreciate you.
Derek
Thanks guys.
John Luke
All right, thanks.
Disclosures
Past performance is not indicative of future results. This material is not financial advice or an offer to sell any product. The information contained herein should not be considered a recommendation to purchase or sell any particular security.
The opinions expressed are those of the Aptus Capital Advisors Investment Team. The opinions referenced are as of the date of publication and are subject to change due to changes in the market or economic conditions and may not necessarily come to pass. Forward-looking statements cannot be guaranteed.
Aptus Capital Advisors, LLC is a Registered Investment Advisor (RIA) registered with the Securities and Exchange Commission and is headquartered in Fairhope, Alabama. Registration does not imply a certain level of skill or training. For more information about our firm, or to receive a copy of our disclosure Form ADV and Privacy Policy call (251) 517-7198. ACA-2503-7.
