Liz:
Well Bob, welcome. Here we are — it’s spring in northeastern Pennsylvania, although it’s about 30 degrees outside.

Bob Graham:
It is. A beautiful spring day, Liz. That’s exactly why I’m dressed the way I am.

Liz:
Exactly. So we’ve had an interesting week in the markets — and honestly an interesting few weeks. We sent a note out to clients a couple of days ago, but we thought it might be helpful to record a quick video and talk about what we’re seeing.

Bob Graham:
Sure. If you look at the markets right now, we’re clearly in a corrective phase. Markets are pulling back. At the moment we’re down roughly 5%, and historically you tend to see four or five pullbacks like that each year. We’ll see how this one plays out.

Typically you’ll also get a couple of 10% corrections during the year, so again we’ll see where this one ultimately lands.

This particular pullback started around February 10th.

What’s interesting is that if you look at the markets as measured by the S&P 500, the index is down a little over 5.5% in the past four weeks.

But if you take those same 500 companies and weight them equally, giving each company one vote, the market is actually down only about 2.5%.

And if you isolate the **largest seven companies — often called the “Magnificent Seven” — they’re down a little more than 11%.

So the correction has largely been concentrated in the largest growth companies, which were the same companies that led the market higher last year.

Liz:
That actually makes sense. It’s a pretty typical pattern where the leaders of a strong market run get pulled back a bit when things cool off. The market basically says you got a little ahead of yourself and brings things back toward more normal levels.

But we also just finished earnings season, and for the most part companies were still reporting strong results.

Bob Graham:
Absolutely. When you look at the latest earnings season, roughly 78% of companies exceeded analysts’ expectations for earnings.

But what I find really interesting right now is investor sentiment.

Sentiment has become extremely bearish. Counterintuitively, extremely bearish sentiment often means the market may actually be closer to a bottom than a top.

For example, if you look at the American Association of Individual Investors sentiment survey, about a week and a half ago roughly 60% of respondents believed markets would be lower six months from now.

That level of pessimism is very rare. The last time we saw it was October 2022, which coincided with the bottom of that market correction. Before that, it occurred around October 2009, near the end of the global financial crisis.

Liz:
That’s a really important point. What you’re saying is that sentiment today is at levels we typically see when markets have already fallen 20–30%, yet the market has only pulled back about 5%.

Bob Graham:
Exactly. That tells you there’s a significant level of uncertainty and discomfort among investors.

A lot of that likely stems from the number of policy changes coming out of Washington. It’s not necessarily a commentary on whether those policies are good or bad — it’s simply that there are many changes happening quickly, and that tends to make investors nervous.

Liz:
Right. But that nervousness doesn’t necessarily mean the economy or markets will follow through negatively.

Bob Graham:
Correct. When we step back and look globally, the picture is actually fairly encouraging.

• European markets look strong

• Asian markets look strong

• Many emerging markets are improving

Typically, if the global economy were about to enter a major downturn, you wouldn’t see those regions performing well.

Liz:
Exactly. Since the United States is such a major consumer market, if the U.S. were heading into a serious recession, you would likely see global markets signaling that as well.

Bob Graham:
Absolutely. So right now we have a bit of a dichotomy.

On one hand:

• Earnings have been strong

• The market correction appears relatively normal

• Global markets are performing well

On the other hand:

• Investor sentiment is extremely pessimistic

That mismatch can sometimes represent a potential buying opportunity.

Liz:
And we may also be seeing a shift within the market leadership.

Bob Graham:
Exactly. The Magnificent Seven were extremely strong last year, but they’re not leading the market this year.

Instead, we’re seeing other areas of the market becoming more attractive.

That doesn’t mean those large technology companies are going to struggle long term — they’re still great companies — but markets often rotate leadership over time.

As you know, we’ve been gradually adjusting portfolios to take advantage of some of these shifts.

Right now, the correction still looks fairly normal. Could it go further? Absolutely.

But when you combine the level of pessimism with the broader economic signals we’re seeing, we’re actually quite optimistic looking out one month, three months, six months, and even a year.

Historically, periods like this have often been good opportunities to be invested or to increase investments.

Liz:
That’s great. As always, we’re following the markets very closely and keeping our eye on the ball.

Bob Graham:
Absolutely. It may not be golf season yet, but we’re definitely keeping our eye on the ball.

At the moment, it still looks like a good market until proven otherwise.

Liz:
So in your view, this is a fairly normal correction, combined with unusually negative sentiment?

Bob Graham:
Exactly. It’s a normal correction with extreme sentiment, and sometimes those extremes create opportunities.

Liz:
Well, let’s hope this is one of those times.

Bob Graham:
Absolutely.

Liz:
Thanks, Bob.

Bob Graham:
Thank you, Liz.