Note on the Stock Market, March, 2025

Here's a brief comment about the stock market.

The market has declined by about 10% since the high which it reached on February 18th.  That represents a significant decline.  I won't belittle it.  But it's not exactly a major crash.  It takes the market back to roughly the same levels which we enjoyed last September and October.  Back then, the market went through the same levels on the way up, and no one complained.  Now, as the market moves in the other direction, headlines and news reports attempt to convey that we have a problem.  I'm not sure that I agree.

For comparison, the market went down by 24% between January and September of 2022.  We barely remember that period today.  I think this period will pass too.  The stock market simply behaves like the stock market.

I don't mean to imply that nothing changes and that the future always looks rosy.  The investment outlook changes continuously.  Prices change.  Interest rates rise and fall.  Right now, we have tariffs to discuss, and the economic policies of President Trump more generally.

I personally support free trade and see how tariffs hinder economic growth.  They will make a difference, when implemented, and not in a good way.  But Trump has spoken about tariffs for months - for years, if we consider his first term in office - and I have a hard time thinking that the stock market has not taken his threats of tariffs seriously until just now, and reacts to them belatedly.  Similarly, I don't necessarily blame interest rates.  The Fed last touched rates in December, when they lowered them a bit, and we have no strong reason to think that rates will go up anytime soon.

Stocks simply became expensive, in my opinion, especially in the technology sector.  Markets bounce up and down continuously, always looking ahead, always trying to guess the next piece of news, and auto-correcting from time to time.  Often, they guess well.  Sometimes they develop a self-sustaining momentum, either up or down, which takes prices far beyond reasonable estimates of fair value. I think we have an auto-correction in progress right now, especially with some of the most favored stocks in AI and other technologies, which rose the most over the last couple of years, and which have fallen the most recently.

With this note I attach a chart of the P/E ratio of the S&P 500.  You will see that the current P/E ratio, though not at all time highs, still looks pretty high by historical standards, higher now than in all but a few periods, indicating that stock prices have become expensive.

Source: multpl.com.

This indicator has not yet reached extreme highs, and does not automatically foretell a market crash.  Stocks might stay pretty high, and earnings might catch up.  In that case, the line will descend gradually to more reasonable levels, without a market crash.  But we can't rule out the possibility of a more serious market correction entirely.

This chart goes all the way back to 1870, and gives you a very long perspective of equity values in our country.  The distant data points, which precede the invention of cars, airplanes, all electronic appliances, computers, software, and the internet, may not hold much relevance to our modern-day economy.  But even by modern standards, the stock market looks expensive to me, and I do not think that we may reasonably expect similar returns this year, to those which we enjoyed in the previous few years.

I think we should be content, if not exactly happy, for a correction now, rather than waiting for prices to get really out of line and potentially having a much larger problem one day in the future.  No one ever looks at the situation like that, but it's true.  We do not want prices to move only in one direction, up, lest we create a big bubble with larger consequences for ourselves further down the road.

Ultimately, just as in every other correction which we have experienced, I think the market will find a more reasonable level from which to consolidate and start going up again.