Monthly Outlook: March 2025

Markets popped 3.5% higher for three days after the November elections. Since then, markets have been as volatile as the daily tweets and policy changes coming out of Washington. It’s creating a lot of anxiety for all of us: citizens, investors, and global politicians, alike. Since the 3-day post-election pop, U.S. markets have been stuck with uncertainty, with the S&P500 -0.3%, and the NASDAQ -0.9%. It surprises people to know that, for the same period, the international stock index, EAFE, is +4.5% and Bonds are +1.7%. So much for tariffs helping the U.S. and hurting our global partners. 2025 has only just begun and, as Pink Floyd might sing today, investors have become “uncomfortably numb.”

In the long run, markets trade on fundamentals and valuation. Calculate a business’s earnings today, estimate its future growth rate, assign a reasonable valuation multiple, and you’ve got your future price forecast. If it were only that simple. Many things can affect a company’s future growth including innovation, general economic condition, competitors, and so on. And valuation multiples change dramatically depending on the risk-free interest rate, expectations, and alternatives. So, while valuation matters in the long run, it’s confidence that matters in the short run. And isn’t the long run just the short run played over and over? It’s confidence that allows investors to believe in new-era growth and to pay peak valuations. It’s confidence that leads consumers to buy new cars or houses, to travel, and to take on more debt. And it’s confidence that encourages businesses to expand, hire more employees, and build new factories and offices.

The Conference Board publishes a monthly Consumer Confidence report. The survey is 60 years old, so we have a lot of data to study. The February index fell sharply to 98.3 and is now below the critical 100.0 level that has historically signaled an upcoming recession. Today’s reading is actually below where it was at the start of three of the last six recessions.

Valuations, Margins, and Momentum

As we consider how to invest in today’s markets, it’s useful to take a holistic approach and consider multiple factors. Valuations, whether we use price/earnings, price/sales, or market capitalization / GDP, are all at 100-year peak levels. Really. The market valuation is even higher than the previous peaks of 2000, 2007, even 1929. Non-financial corporate profit margins for the S&P500, thanks to stimulus coming out of COVID, are at a 60-year high of 10.1%. So, businesses are doing as well as they’ve ever done, and investors are paying top dollars for them. These fundamental indicators suggest that the stock markets are at risk, at least long term.

The better news is that price momentum continues to trend higher and it’s too soon to say that it’s peaking. We use moving averages and trend following techniques to determine whether markets are trending higher or lower. That is, whether they’re above their moving averages or below. And while they’re extended, price momentum is still uptrending for US Large stocks, and International Developed and Emerging Stocks. Only US Small company stocks have recently rolled over to a new downtrend (and we’ve sold). US Large stocks would only have to decline about 3% to 4% to trigger new downtrends and sell signals, incidentally.

How to Invest – Putting It All Together

Clearly, there is above-average risk in stock markets today. Valuations and margins are at peak levels, which is a negative. But price momentum continues to be positive. History teaches us that prices can go higher, for longer, than you’d think possible. And they have, recently. History also teaches us that it’s best to stay invested in extended, over-valued markets, as long as the price momentum is positive. That’s where we are today.

As we move into March, we remain globally diversified across many asset classes using low-cost index ETFs. We are aware of the peak valuation and margin levels and the risks they bring, especially for U.S. stock market ETFs. And as always, we remain vigilant, watching price trends and moving averages for every ETF that we own, with tight sell-stops in place. We’re still in growth mode and making money in 2025, so far. And we stand ready to move to protection mode if necessary. Lastly, I will boldly state the following: This is most likely one of the worst times in the last 100 years to be a “buy & hold” investor. There’s simply too much risk given peak valuations and margins and declining confidence. We can help.