Mind the gap: how investors perceive markets vs. how they actually perform
The Sandbox Daily (2.24.2025)
Welcome, Sandbox friends.
Today’s Daily discusses:
market pessimism running rampant
Let’s dig in.
Blake
Markets in review
EQUITIES: Dow +0.08% | S&P 500 -0.50% | Russell 2000 -0.78% | Nasdaq 100 -1.21%
FIXED INCOME: Barclays Agg Bond +0.17% | High Yield +0.13% | 2yr UST 4.175% | 10yr UST 4.402%
COMMODITIES: Brent Crude +0.56% to $74.85/barrel. Gold +0.41% to $2,965.2/oz.
BITCOIN: -4.26% to $91,856
US DOLLAR INDEX: +0.08% to 106.695
CBOE TOTAL PUT/CALL RATIO: 0.87
VIX: +4.23% to 18.98
Quote of the day
-Warren Buffett, Berkshire Hathaway 2024 Annual Report
* Berkshire Hathaway paid $26.8B in taxes in 2024, which is 5% of ALL corporate taxes collected by the IRS that year. This was Buffett’s response.
Market pessimism running rampant
The recent market chop fest highlights the important gap between how investors feel and how markets perform.
Here is the S&P 500 volleying back and forth in a high level trading range. Four months and very little progress at the index level.
As the famed investor Warren Buffett – fresh off his highly-anticipated 2024 Annual Report – once stated: “be fearful when others are greedy and greedy when others are fearful.”
While this thought runs counterintuitive to human intuition and to logic when there are so many economic and political cross currents (hint: there always are), having the fortitude to stay invested has historically been the reason investors are rewarded in the long run. Much easier said than done, of course.
While some investors are worried about inflation, tariffs, interest rates, and more, many of the underlying market drivers remain strong – albeit softening off very firm levels from 2023 and 2024. In times like these, the key to managing volatility isn't reacting to the market's daily ups and downs, but rather to maintain (and then commit) to a well-constructed portfolio that aligns with your goals and risk tolerance.
So, how can investors maintain a cool head on the heels of recent market moves and macro developments?
According to the AAII Investor Sentiment Survey – which measures how investors feel about the market – general bearishness has outpaced bullish sentiment by a growing margin over the last few months.
In fact, this is the most pessimistic investors have felt since late 2023 when some expected the economy to tip into recession. As my colleague Brian Salcetti noted, maybe investors are watching too much television.
On the heels of this downtrodden AAII report, we then learned from the University of Michigan that consumer sentiment just collapsed to 15-month lows.
There often exists this gap between how investors perceive markets and how they actually perform.
Despite day-to-day market swings and declining sentiment gauges, major stock market indices have experienced positive returns over the past several months – with the S&P 500 printing fresh new all-time highs as recently as last week. Abroad, stocks look even better.
This underscores the fact that investor sentiment is often a contrarian indicator.
As Warren Buffett’s quote suggests, the greatest market opportunities tend to present themselves when investors are the most worried. Historically, this is because investor emotions can change quickly and reflect near-term data points, not always what will drive markets in the future. Shoot now, ask questions later.
Remember when it took four or five years for investors to finally buy into in the bull market following the 2008 Global Financial Crisis?
So, headlines on investor sentiment should often be taken with the right amount of historical perspective.
The same is true when it comes to our own portfolios.
We should take comfort in knowing our financial plans are built to weather changing market conditions and are aligned with our own stated goals, even if we experience some turbulence along the way.
Many economic fundamentals remain strong: unemployment is historically low, manufacturing is showing signs of life for the first time since 2022, CEOs are feeling confident, and productivity gains have been meaningful.
At the same time, pockets of stock market valuations remain elevated, which suggest broad market indices could face some challenges.
When faced with conflicting market signals and investor pessimism, the solution is not to try to time the market or to exit the market altogether. Instead, these factors are a reminder of the importance of portfolio construction.
Below is a chart showing that risk and reward are two sides of the same coin and need to be managed together. If higher valuations suggest an asset class or sector will face greater risks, then it may be appropriate to tilt toward other investments.
When done right, the balance of stocks, bonds, and other diversifying asset classes takes various market and economic scenarios into account, managing risk and returns to keep you on track toward your financial goals. What’s more, market pullbacks can present opportunities to rebalance and add high-quality investments at better prices.
Most importantly, there is perhaps nothing more important to the everyday long-term investor than to simply stay invested.
History has consistently shown that staying invested through market cycles is one of the best ways to build wealth over years and decades. Regardless of the causes of short-term market uncertainty, trying to time the market is incredibly difficult and often backfires.
Over the past 25 years, holding on after pullbacks was superior to getting out of the market, even for brief periods. That’s because volatility – both downside AND upside – often clusters where the market experiences big moves in both directions.
Bottom line?
It’s natural to be concerned about recent market swings and negative headlines. However, history shows that long-term investors who hold properly constructed portfolios and stay disciplined are best positioned to achieve their financial goals.
Sources: Larry Thompson CMT, Optuma, Clearnomics
That’s all for today.
Blake
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Welcome to The Sandbox Daily, a daily curation of relevant research at the intersection of markets, economics, and lifestyle. We are committed to delivering high-quality and timely content to help investors make sense of capital markets.
Blake Millard is the Director of Investments at Sandbox Financial Partners, a Registered Investment Advisor. All opinions expressed here are solely his opinion and do not express or reflect the opinion of Sandbox Financial Partners. This Substack channel is for informational purposes only and should not be construed as investment advice. The information and opinions provided within should not be taken as specific advice on the merits of any investment decision by the reader. Investors should conduct their own due diligence regarding the prospects of any security discussed herein based on such investors’ own review of publicly available information. Clients of Sandbox Financial Partners may maintain positions in the markets, indexes, corporations, and/or securities discussed within The Sandbox Daily. Any projections, market outlooks, or estimates stated here are forward looking statements and are inherently unreliable; they are based upon certain assumptions and should not be construed to be indicative of the actual events that will occur.
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