Five for Friday

Selloffs, Labor Market, Tarifflation, Thankful, and Happy Birthday Hetty

1. Selloffs

As of writing on Thursday morning, the S&P 500 is 2% off its all-time high, and at its worst was off 4%. That’s not much by the standards of historical market selloffs, but it was the largest pullback since April’s tariff volatility and sparked a decent amount of anxiety amongst investors. As with anything, context is important: Since 1928, 94% of years have seen a -5% pullback and over one in four have seen a -20% bear market. While the relentless bubble discourse in the media has primed investors to fear any minor weakness from Technology/AI stocks, the reality is that volatility is completely normal. In fact, the current selloff (to the extent that’s even an appropriate description of a -4% pullback) doesn’t even crack the top 5 worst pullbacks of just this specific bull market that started in Oct. 2022. This may all be moot as the market seems to be bouncing on another strong Nvidia quarter, seemingly erasing some of the anxiety around the AI trade. But there could easily be more downside ahead; overly bullish sentiment and  positioning, paired with higher volatility and downward price momentum, can often spark a feedback loop fueled by forced (e.g., rules-based) selling. But if there is more downside, it doesn’t mean a bubble is popping or the bull market is over or a recession is imminent. It’s just the market doing what it always has done.  

2. Jobs

Another source of investor anxiety is the labor market. And rightfully so. In a consumer economy, a consumer’s employment status (and the perceived stability of that status) drives big variations in the spending that fuels the U.S. economic flywheel. But is the reality as bad as headlines and consumer sentiment data make it seem? I’d argue no. The labor market has softened in recent years, but the layoff announcements that seem omnipresent in the media have not yet visibly translated into an uptick in unemployment claims. In fact, the San Francisco Fed’s “Labor Market Stress Indicator,” which utilizes weekly state unemployment claims, shows that the share of the national labor force that is experiencing accelerating unemployment in their state is at the lowest level since late 2022. Things are muddy, and the shutdown didn’t help, but if the labor market is slightly better than perceived—and with stimulus in the pipeline—things may not be as dire as sentiment data suggests.

3. Inflation

Sticking with important research from the San Francisco Fed, a recent working paper has made some noise with its conclusion—based on 150 years of studies on tariff policy in the US and abroad—that tariffs lower both economic activity and inflation. Given the market’s newfound uncertainty on the outlook for interest rates (the odds for a December rate cut have dropped from 100% a month ago to 40% today), this sort of in-house study pushing back against the idea that tariffs cause inflation—a view that Strategas, a Baird company, has espoused for some time—could help nudge the Fed toward more rate cuts in 2026 than are currently assumed. All else equal, a positive for spending and investment.

4. Giving thanks

Five for Friday will be off next week due to the stock market holiday, but in the spirit of the season, here are five (somewhat market-related) items that I am thankful for as we start to close the book on 2025.

5. Happy birthday

to Hetty Green, the erstwhile richest woman in America, “Queen of Wall Street,” and pioneer of modern value investing (Green: “There is no great secret in fortune making. All you have to do is buy cheap and sell dear, act with thrift and shrewdness and then be persistent”). She was not only a prudent and highly successful investor, but was also considered generous and fair in a time of robber barons and rampant speculation. Green played a pivotal role in stemming the Panic of 1907, lending millions at below market rates and cementing her role as a legendary and iconoclastic investor.  

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