Stocks Are Going Down

Finally! Finally, stocks are going down. Through March 7th, the S&P 500 was down 1.9% so far in 2025. They were up, and they aren't down that much. Here is the 6-month chart of SPDR S&P 500 ETF (SPY):

SPY is up 5.4% over the past six months, but it has dropped a bit more than that in just two weeks. The market is actually down now a bit since the day of the elections. I continue to be very negative on stocks, so this has been nice to see.

Why Stocks Are Declining

Stocks are declining because they ran up too much, in my view. This is most easily seen in the Magnificent 7, which I have discussed here before. These stocks are down on average by 10.3%, with one stock up and the rest down.

So, the largest stocks are down by a lot more than the market, with Tesla (TSLA) leading the way. I have written about this one, which is still up 4.5% as of the close last week since the election. NVDIA (NVDA) has declined double-digit too.

The new Presidency could be playing a role in investment sentiment too. Four of the Magnificent 7 are up since then, while the S&P 500 has declined very slightly. There is so much discussion of big changes out of Washington, D.C., and the tariffs and immigration issues could be be playing a role.

One of the big issues that I have discussed here frequently is interest rates. On 11/14, which was a bit more than a week after the elections, I showed how the inversion in the yield curve had ended. Rates were rising despite the moves to cut Fed Funds by the Federal Reserve. The FOMC cut rates twice since the elections, including early November and then in mid-December. Treasury rates were soaring in February, but they have come down a lot since then. Here is the current yield-curve:

Rates have declined a lot since mid-February. The 30 Year Treasury peaked at 4.85% on 2/12, and it has dropped by 16 basis points over the past 30 days. Shorter-dated Treasuries have dropped in yield more. Year-to-date, Treasury yields are lower.

Gold prices have declined from their recent all-time high, but gold, as measured by the large SPDR Gold Shares (GLD) are still up by 10.9%. I have discussed Treasury Inflation-Protected Securities (TIPS), and they have bounced higher too. The large ishares TIPS Bond ETF (TIP) is up 2.7% so far in 2025, though this is in line with the decline in Treasury yields.

So, recession fears and inflation fears! Both could happen (stagflation), but usually it's one or the other. I think that the challenge is that stocks have done so well for the past two years, with the S&P 500 up more than 20% each year. The pandemic was announced 5 years ago, and stocks were whacked then. Here is how the S&P 500 and the NASDAQ 100 have performed since then:

So, post-election, both indices hit all-time highs, and they are correcting potentially. A correction is defined typically as a 10% retracement in a rally.

Why Stocks Will Decline More

I have been discussing here for a long time (too long!) why I think that stocks should decline. It is too early for me to declare any kind of victory, but I continue to be negative on stocks.

I continue to believe that rates could rise, though if we get hit with a recession they might not. As I have discussed in the past, younger folks think rates are very high already, while those of us who lived through the 80s know that they can go a lot higher. The main challenge right now is that the federal government is running a huge budget deficit and has a massive amount of debt. Perhaps the Trump Administration will dramatically cut spending, but this could weigh on the economy. If not, the supply of Treasury securities will increase. That chart above regarding interest rates shows that over the past year, despite huge cuts in Fed Funds, longer-dated Treasuries have increased in yield.

Stock returns are related interest rates, but it is not an either-or situation. Typically, if interest rates rise, it can weigh on the economy. Plus, investors may favor bond investments over stock investments. Despite the rise in rates over the past year, stocks have rallied a lot. If rates keep rising, we could see investors move from stocks to bonds. If a recession hits, we could see investors flee as well.

The real issue for stocks, in my view, is that they are expensive. Of course, the Magnificent 7, which represent a very large part of the S&P 500, a big part of this, but there are many stocks that seem too expensive to me. I have called out Financials. and they are still up year-to-date. The Financial Select SPDR Fund (XLF) has pulled back but is still up 1.6% in 2025. The Big Banks have rallied and look expensive. JPMorgan Chase (JPM) trades at 13X forward EPS, which doesn't seem so bad, but it was 9X just two years ago. The stock trades at 2.5X tangible book value, which is much higher than it has been historically.

If we get a recession, banks like JPM will see asset values decline, and investors will likely not want to own banks at such a premium to their assets.

The pandemic caused a lot of investors to be fearful, and FOMO has kicked in over the past two years.

What Investors Should Do

If stocks are going to keep falling, then obviously one should sell them, right? Well, this isn't exactly correct, though it may work out to be the smart move. I still like TIPS, and moving from stocks to cash or TIPS could make sense. I have upped my exposure to short-dated TIPS in my Vanguard charitable fund to 40%, with 10% cash.

I believe that financials especially could come under pressure, though I remain concerned about large-cap technology too. Investors can short these sectors or sell their holdings. I do not think one has to do anything right away, but people should be looking for an opportunity to do so.

Finally, I have discussed that there are many stocks that are already in a huge bear market, and these stocks, which tend to be smaller, could make sense as an alternative to cash or TIPS (or Treasuries for those who think rates are going to come down more). I have named names in prior articles and will not do so today, but I currently own more than a dozen stocks in my IRA. The iShares Russell 2000 ETF (IWM), by the way, is down 6.8% year-to-date and down more than 10% from its recent peak