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Agenda for the Morningstar Investment Conference Announced 

First, the bad news. The Nasdaq 100 has become an absolute meat grinder this year. According to Bespoke Investment Group, the QQQ’s have dropped by more than 1% intraday every day for the last 16 days. That’s just flat-out relentless.

Here’s what it looks like:

And in worse news, the weakness that began with the Magnificent 7 stocks failing to impress during their earnings reports this February has now spilled over into the rest of the stock market. The median stock in the S&P 500 is now almost in a bear market:

On the surface, the 10% correction for the S&P 500 is hiding much larger losses for most individual names.

And now the Dow Jones Industrials are rolling, with the Dow Jones Transport Average leading the way. According to Dow Theory, when the Transports and Industrials are making new highs together, as they last did Thanksgiving week, it’s a green light for the bulls to stay long and keep buying. Unfortunately, when the Dow Industrials made their next attempt this January, the Transports were negatively diverging (trading lower) and did not confirm that attempt.

I illustrate this below:

As the tariffs make their way through Wall Street’s expectations, risk is repriced and stock market multiples take a hit before the actual earnings estimate cuts (which are likely to follow). Absent some sort of resolution on the political front, our imaginations run wild with worst-case scenarios starting to hit the table.

Chart Kid Matt illustrates what’s happened on this front so far:

All of the year-to-date drop so far can be explained by multiple contraction - we’re not willing to pay as much for a dollar of earnings given tariff-related uncertainty this month as we were willing to pay two months ago when the tariff talk was just talk.

But there’s good news. Diversified portfolios aren’t down anywhere near the S&P 500’s 10% drop. Bonds have done spectacularly well as a diversifier and a risk-off safe haven. International stocks have also done much better than most would have expected as China doubles down on stimulus and Europe gets serious about mobilizing its economy for a world where the United States cannot be counted on as a stalwart ally. For the people asking their financial advisors “Why do we bother owning anything but the Nasdaq and big growth stocks?” for the last couple of years, the current situation is providing the answer. This is why.

On Monday I reminded my team that this is when we earn our keep in our clients’ lives. These environments are where client relationships are solidified and we do some of our best work. We’ve been through many 10% drawdowns before and we will survive many 10% drawdowns in the future. These are the moments we live for.

And just think of all the opportunities now being created. Some of the highest quality companies in the stock market have just gotten materially cheaper. Tax loss harvesting is also presenting massive opportunity for net returns for the advisors utilizing direct and custom indexing strategies in their clients’ portfolios. When we get to the other side of this thing - however long that takes - those who have held durable portfolios with built-in plans for weathering downturns will be standing tall. Those who went into the meat grinder without having had a plan in place will be wondering what the hell just happened.

Insights from the Experts

We talked to Nick Colas of DataTrek Research this week about his analysis of the current volatility. He shares my belief that recession calls are premature and that, so far, what we’re witnessing is an orderly de-rating of stocks in light of uncertainty about earnings for the full year. It’s important not to jump the gun and start pricing in the end of the world.

If you haven’t seen it yet, the video is below and the audio is available on The Compound and Friends podcast feed:

Finally, this morning we dropped the new episode of TCAF featuring our friend Rob Arnott of Research Affiliates.

Rob’s contrarian investing style is perfectly suited for a market like this one, where once-cheap and ignored areas of the investing markets all of a sudden become rediscovered as investors rotate away from high-multiple growth darlings that have stolen the show for so long.

Rob correctly called the problem with electric vehicle stocks a few years ago and is now turning his attention to the AI theme. You’re not going to want to miss this conversation:

You can listen on Apple and Spotify here:

Thanks for checking in with me. Have a great weekend! - JB