The Only Thing Certain is Uncertainty
As we move into the third month of the year, the stock market and the economy are experiencing a certain sense of pessimism.
This is understandable; administrations have changed in the U.S., geopolitical conflict continues in the Middle East and Ukraine, natural disasters and fires raged in Los Angeles, and increased uncertainty with tariffs and potential implications from DOGE efforts. Any of these items can weigh on the human psyche; add them up, and you can understand why consumer confidence has dropped in America.
We know that the events of today’s world will drive the stock market and the economy in the short run. We also know there is a lot of political discourse through the above items, and we strive to navigate them with as neutral and open of a mind as possible.
Our job as your trusted advisor is to take a longer-term perspective on the economy and investment world and look past divisive politics so we can remain focused on your long-term success. So, let's look at this uncertainty and a drop in consumer confidence.
Consumer Confidence
Consumer confidence measures how optimistic people are about the economy and their finances. It's an important economic indicator that helps businesses and policymakers understand how people spend and save. Monthly surveys of 5,000 households measure consumer confidence in the United States. A CCI above 100 indicates consumers are more confident, while a CCI below 100 means they are more pessimistic.
The CCI declined 7 points in February to a reading of 98.3, thus grabbing the headlines. But movements in Consumer Confidence are nothing new. We do not like uncertainty, and this is an excellent measure of that.
Volatility Index, or better for headlines “Fear Index”.
The relationship between anxiety and market performance has long been discussed. When uncertainty looms—be it from geopolitical tensions, inflation fears, or unexpected economic data—anxiety levels rise. This often leads to volatile market conditions, where fear can dictate trading decisions.
One measure commonly used to gauge market sentiment during times of uncertainty is the VIX, often called the “fear index.” When the VIX rises, traders expect significant volatility soon. For investors, it can serve as both a warning sign and an opportunity to reassess their strategies.
We can see that VIX has moved up recently, but when we take a longer-term view, we can see that we are not at the heights we saw during the 2008 financial crisis or the scary and uncertain times when COVID first appeared. These are uncertain times, but historical context is also important.
What does this mean for investors?
While uncertainty can induce fear, it presents unique opportunities for savvy investors. Legendary investor Warren Buffett famously said, “Only when the tide goes out do you discover who's been swimming naked.” This quote encapsulates that challenging times can reveal American companies' true strength and ability to adapt.
Many American companies have proven their resilience by innovating and finding new ways to create value in the face of uncertainty. These firms can navigate challenges through technological advancements, cost-cutting measures, or exploring new markets.
Investors should monitor how major companies respond to current market conditions. Those who demonstrate agility and strategic foresight will likely thrive, even amidst uncertainty.
We also know the American consumer has remained resilient. Even though we did see a slowdown in consumer spending in January, the unemployment rate remains at 4% (historically low), and real earnings (adjusted for inflation) have risen. If American workers remain gainfully employed and can harness the efficiency of Artificial Intelligence, these are positive signs for our economy. Our partners at Fidelity have a great graph showing the spending and adoption of artificial intelligence. The productivity gains employees should gain will help to keep the economy strong and hopefully help us all transition into a new economy once again.
What is an investor to do?
One core tenet of our investment philosophy at Charter Oak is diversification. Owning different baskets of U.S. stocks (e.g., different size companies, different lines of business), owning European and Asian stocks (this may seem counter-intuitive in today’s world, but they have performed better than their U.S. counterparts so far this year), and by owning bonds and cash. Bonds are a favorite here at Charter Oak as they provide the ballast in the portfolio and currently earn 4% to over 5% in interest.
We know there is more to the stories we see on the nightly news, and while uncertainty will persist, opportunity over the long term will abound. Please know your Charter Oak team is reviewing your investments daily and making allocation decisions we think will serve our clients well for decades.
As always, it is our pleasure to serve you. Don't hesitate to contact your Charter Oak Advisor with any questions or concerns at this time or anytime.