‘Heads I win, tails I win’ market environment

It’s estimated that roughly $1.8 billion was gambled on the Super Bowl.¹ About 70% of that came from prop bets on something other than the traditional wagers on the outcome of the game.² It’s hard to know how much of that money was tied to bets on the length of the national anthem, the color of the Gatorade poured on the winning coach, or whether the opening coin flip would land heads or tails. What we do know is that heads or tails is the better bet. With a true 50-50 probability, the coin flip is one of the few wagers that resembles a fair game.

We bring this up following another challenging week in markets.³ It’s not because we think people should gamble their money rather than invest it — quite the opposite. The market, over time, has been a far more reliable proposition than any Super Bowl prop bet in our view. The analogy is useful, however, for thinking about the recent flow of economic data. It has felt like a “heads I win, tails I win” environment. On one side, weaker growth increases the likelihood of earlier or deeper Federal Reserve (Fed) easing. On the other side, stronger growth reinforces the view that the business cycle remains intact. Either outcome can be supportive of markets, provided inflation stays contained.

Strong and weak data

Last week, the jobs report was relatively strong,⁴ while the housing data was weak.⁵ It’s difficult to have a recession when unemployment remains low, even if certain interest rate-sensitive sectors are under pressure. At the same time, last week’s Consumer Price Index (CPI) report showed that inflation remains generally contained, including on the goods side.⁶ That gives the Fed the cover to lower rates. In theory, lower rates could potentially help with more rate-sensitive areas of the economy, including housing. More broadly, lower rates tend to support stocks if economic growth doesn’t collapse.

Winners and losers

We recognize how that message may land given the carnage we’ve seen in select parts of the market this month, particularly in software stocks.⁷ That pain is real. At the same time, it's worth noting that cyclical stocks such as industrials and energy have performed well over the past month.⁸ Semiconductor stocks also haven’t experienced anything resembling a broad downturn.⁹ The market has become more discerning within software, separating likely winners from losers. It also remained constructive on the scale of investment coming across technology and the businesses positioned to participate in that growth.

Addressing investors’ fears

We’ll close with three final thoughts about what investors feared last year.

• First, one of the biggest questions we’ve received was whether tariffs are inflationary. On the goods side, the answer is yes, but goods represent a relatively small share of the consumer basket, and any price impact tends to be short-lived. The recent benign inflation data supported that view.¹⁰
• Second, there were persistent concerns that global investors were abandoning US Treasuries and that the US would struggle to fund its debt. We were skeptical. Last week’s 30-year Treasury auction was significantly oversubscribed, and the 30-year yield fell below 4.7%.¹¹
• Third, there was the question of the so-called artificial intelligence (AI) bubble. Some excess has clearly been worked off in certain names, but not everything needs to be a bubble. Even after recent volatility, major indexes aren’t far from all-time highs,¹² and valuations in some growth companies now appear to be coming down to more reasonable levels. For long-term investors, that may be an opportunity.