ONE HEADLINE + + +

Fear and Loathing on Wall Street

True to form, investors flipped from bemoaning sky-high valuations for months to flat out fear and panic when those valuations suddenly got cheaper.

Or in the infamous words of Warren Buffett, “The stock market is the only market where things go on sale and all the customers run out of the store.”

Indeed!

To be clear, we’re not talking about a little bit of selling, either. We’re talking about a ton. Up and down Wall Street and Main Street.

Case in point: Trading volumes in (401)k plans over the past week matched volumes typically seen in a month, according to record-keeper Alight Solutions.

Here’s the rub: when you sell in a panic, you look smart for a moment. Then, the market turns bullish in a blink and you’re left sitting in cash for too long, once again bemoaning the valuations.

Here’s 10 reasons why everyone needs to simma down nah and sit tight or (dare I say it) get busy buying, not selling…

ONE CHART + + +

Everyone Loves a “Top 10” List

10 Signs We’re Close to a Market Bottom

Some of us prefer to learn with pictures, too. So I’m populating this list with links to all the pretty pictures backing up the data. Click away!

1. Put volumes peaked: In the history of the markets, did “everyone” ever see a market crash coming? Not a chance! The fact that put option contract volumes, which are bets that stock prices are going to fall, hit an all-time high in the last week indicates that we’re not on the brink of a bear market. There would be too many people bragging at the next cocktail party how smart they are and there’s just not that many smart people.

2. Too few fear gauge spikes: Whenever the $VIX ( ▲ 1.25% ) surges, investors automatically assume the end of the world is coming. The reality? Sudden and short-lived spikes don’t foreshadow impending doom. In fact, they’re often followed by double-digit gains on average. However, repeated and prolonged ones do. Or more specifically, per Nicholas Colas of DataTrek Research, “a periodic bout of outsized volatility is not necessarily the death knell for stocks.” The key metric to watch? At least 11 closes above 27.3 during the year. If that happens, “we should start to grow concerned that the worst is yet to come,” says Colas. The current count stands at a whopping… one. Simma down nah!

3. Fiscal uncertainty doesn’t undermine fundamental security: The headlines aren’t wrong that tariffs are causing enormous concerns about the future trajectory of the market and economy. The only problem? It seldom translates into true deterioration. Per the market’s #1 portfolio strategist, Michael Kantor, “The amount of fiscal uncertainty relative to fundamental uncertainty has surged to the highest levels in 35 years. Past peaks in this ratio have been quite positive for equities.” You read that right. Peaks in uncertainty are positive for stocks. Eventually.

4. Selling volume begets more selling begets a bottom: Monday’s selling on the Nasdaq marked the fourth highest volume day since October 2023. Care to guess what happened after the other three? It marked a bottom. So, “extrapolate as you see fit.”

5. Drawdowns happen (S&P 500 edition): Per Goldman Sachs, it’s perfectly normal for the $SPX ( ▲ 0.06% ) to experience a drawdown of about 10% per year (see here). It’s also perfectly normal for the market to experience less or more severe drawdowns with regularity (see here). As such, we should be accustomed to riding it out, not freaking out. But that’s the funny thing about market sell-offs and turbulence on a airplane. No matter how many times we “live” through it, we still get nervous that this time is different. It’s not.

6. Drawdowns happen (Nasdaq edition): Per Bespoke Investment Group (you guessed it), it’s also perfectly normal for the $NASDAQ ( 0.0% ) to experience double-digit declines without it turning into a bear market.

7. Corrections correct behavior: As Warren Buffett pointed out in his famous quote, when stock prices sell-off suddenly, the “product” gets cheaper. That’s precisely what’s happening now. Large-cap stocks are now trading for 20 times forward earnings, down from 23 times. Small- and mid-cap stocks are now trading or about 15 times, down from almost 18.5 times. Heck, following the $5 trillion market cap erosion, even the highest-flying stocks are now on sale, relatively speaking. The closely followed Mag 7 stocks + $NFLX ( ▲ 0.8% ) now collectively trade around 26 times forward earnings versus 31 times a few weeks ago and an eye-popping 38 times (see Figure 25 here).

8. After the declines, come gains: Following 10% corrections, the $SPX ( ▲ 0.06% ) is always positive 3-months, 6-months and 12-months later, per the number crunchers at Goldman Sachs. In other words, corrections serve as good buying opportunities. Speaking of which…

9. Sentiment at the extremes: No matter what sentiment index you look at, they’re all trading at extremes – The NDR Research Daily Trading Sentiment Composite, the AAII Sentiment Survey, the CNN Fear and Greed Index, the Investors’ Intelligence Survey. The list goes on. I’m sorry but as the saying goes, when everybody thinks alike, everybody is likely wrong. Fact is, these extreme sentiment readings serve as the best contrarian indicators in existence. So, don’t follow the crowd. Instead, profit from them by doing the opposite!

10. No recession, no problem: It’s widely believed President Trump’s tariffs will spark a recession. Nonsense! And I’ll prove it in today’s show and the next newsletter. For the purposes of this list, here’s what you need to know – since there’s no recession on the horizon, the “worst-case scenario” promises to be less severe (see here).

ONE INVESTMENT INSIGHT + + +

The Big Skinny...

You’re going to get tired of me saying it. But it’s the only market truth that matters…

Stock prices ultimately follow earnings, not emotions.

Right now, earnings are still growing. At a healthy-clip with no end in sight, per FactSet (see here).

What’s more, during the current market sell-off, forward earnings estimates actually increased. That means the stock market sell-off and resulting multiple compression was completely sentiment driven.

So no matter how scary it looks out there, we should stay the course and keep buying good businesses at reasonable prices.

Or as Andy Dufresne famously said in The Shawshank Redemption, “I guess it comes down to a simple choice, really. Get busy living, or get busy dying.”

With that in mind, I’ll share at least two “good buys” today on the second episode of The Big Skinny Show, including one that’s the perfect hedge against more volatility.

Tune it at 2pm ET!

Until then…

Don’t stop believin’!

– Lou