Warmer weather means that many animals come out of hibernation. Unfortunately for investors, market bears have also awakened from their slumber.
The recent selloff in U.S. stocks continued this week, with the S&P 500 dropping by nearly 3% on Monday, and nearly an additional percentage point today. With the recent market moves, the stock market has now fallen nearly 10% below its all-time highs.
Recession fears resurface
Trade policy uncertainty has stirred more anxiety around U.S. growth projections. In recent days, there has been a noticeable spike in the amount of "recession" related searches on the internet.
Still, our U.S. recession risk dashboard paints a more encouraging picture, especially compared to 2023. We are entering these turbulent times from a starting point of resilience. Against that backdrop, we think the risk of a U.S. recession occurring sometime over the next 12 months is 30%. Although the risk of a recession is still above-average, our base case still calls for the United States to achieve a soft landing. That's likely to be true even if the currently announced tariff measures remain in place for an extended period of time—although U.S. growth could slow modestly in that case.
Oversold sentiment
The U.S. stock market selloff has resulted in investor sentiment becoming noticeably oversold. Our sentiment indicator now stands at +1.7 standard deviations, reaching levels last seen in December 2022.
But historically, U.S. equities have rebounded roughly 11% over the next 12 months once sentiment gets to these levels. And, if sentiment reaches a panic, that return improves to roughly 20%.
Gut check
While stock-market drawdowns might be difficult to stomach, volatility is normal. In the past 60-plus years, markets have seen 9% drawdowns roughly half of the time. But following those drawdowns, investors who stick to their plan are often rewarded with double-digit gains.
However, there is a risk that this time could be different. While we believe President Trump's trade policy is aimed at reinvigorating the U.S. manufacturing sector and may be part of his negotiation strategy, there is still a lot of uncertainty around where these policies will settle. A prolonged trade standoff may eventually dampen business and consumer activity to the point where economic growth slows meaningfully.
Russell Investments continues to monitor this fluid situation closely and will adjust portfolios as warranted. If the selloff continues and U.S. equity valuations improve, we may consider potentially adding incremental risk to the portfolios. For now, we continue to believe that staying invested, rather than going to cash, could be the most prudent course of action.
Disclosures
These views are subject to change at any time based upon market or other conditions and are current as of the date at the top of the page. The information, analysis, and opinions expressed herein are for general information only and are not intended to provide specific advice or recommendations for any individual or entity.
This material is not an offer, solicitation or recommendation to purchase any security.
Forecasting represents predictions of market prices and/or volume patterns utilizing varying analytical data. It is not representative of a projection of the stock market, or of any specific investment.
Nothing contained in this material is intended to constitute legal, tax, securities or investment advice, nor an opinion regarding the appropriateness of any investment. The general information contained in this publication should not be acted upon without obtaining specific legal, tax and investment advice from a licensed professional.
Please remember that all investments carry some level of risk, including the potential loss of principal invested. They do not typically grow at an even rate of return and may experience negative growth. As with any type of portfolio structuring, attempting to reduce risk and increase return could, at certain times, unintentionally reduce returns.
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