By John Stewart, chief investment officer at Farmers Trust Co.

Week in Review: Stocks Falter

Well, it was only two weeks ago that I talked about how resilient the stock market had been so far this year. Now it seems that there are cracks in the market façade.

Investor pessimism has ramped up quickly with the American Association of Individual Investors showing less than 20% bulls versus more than 60% bears.

That is the highest level of bearishness going back to September of 2022, and nearly as bearish as early 2009.

As you might expect if you are a regular viewer of Investors Edge, extreme bearishness tends to be a contrarian indicator.

In fact, those prior extreme readings I just mentioned in 2009 and 2022 were great buying opportunities.

Will this time be different?  It’s always hard to know when you’re in the moment, but for now we’re staying cautiously optimistic, and using the current market pullback as an opportunity to add to some of our favorite stocks.

The most important decision most investors make is how to allocate their assets between different types of investments.

Assuming you invest in a diversified portfolio, your allocation between stocks and bonds will drive roughly 90% of the performance results of your portfolio.  Yes, I understand there are other potential asset classes to consider, but keeping it simple, most investors will own primarily equity and fixed income investments of some type or another.

I like to tell people that you should own as much equity exposure as possible such that you never put yourself in a position to sell at an inopportune time.

The first reason you might do that is if you need the money.  So if you expect to withdraw funds in the next couple of years, or if you’re taking regular distributions from your portfolio, that money should be invested in money markets or short-term fixed income securities.

The other reason you might sell at an inopportune time is that you panic when the market goes down.  This is a function of your risk tolerance.  Try to imagine how you would react if your portfolio fell 20% in value.  If your answer would be that you would liquidate everything to stop the bleeding, you should probably consider a smaller allocation to stocks.

Looking Ahead: Is Goldilocks Coming to Town?

I previously talked about the recent weakness in the stock market; some of it is being driven by fear of tariff-related impacts or job losses among some government workers, then there is also some cyclical economic softening that is bringing down corporate earnings estimates.

Nevertheless, this might end up being exactly what the doctor ordered.  If the current soft patch leads to lower inflationary pressures and lower interest rates without causing a deeper downturn or recession, we could end up with a Goldilocks scenario where things are not too hot and not too cold, but just right.

Spoiler alert – the stock market tends to love that type of environment.