There's been a lot of volatility recently and I think it's easy to be on edge. I know I have been checking the news a lot and it has been stressful.
I think if we zoom out a bit it will help give us some context. The yield curve resteepened (un-inverted) in September of 2024. If you have followed the yield curve historically, this has been the number one timing indicator of a coming recession. I believe it's been 100% accurate since at least 1970. Usually something like 6-12 months out. One can say we were due for a recession and we're certainly likely to get one now.
Looking back, a market bottom typically happens (a) during the recession not before it, (b) after there is reason for optimism usually due to policy changes (fiscal and/or monetary), and (c) when valuations have been reset.
Right now we haven't hit any of these three. Recession hasn't started, tariff situation and even monetary policy is tenuous at best, and valuations are not cheap.
Based on the current environment, my best guess for what's about to take place:
1. Tariff uncertainty is not going to be resolved for a while. At best, parts of it will be on "pause" which is not a resolution. Business make cannot plans around temporary and volatile pauses.
2. We're going to start feeling economic pain - which will be felt in earnings, layoffs, & unemployment - driving the economy into a recession. We won't necessarily know that the recession started until a few months into it.
3. I don't think inflation goes up in a meaningful way because of demand destruction. (not totally confident about this)
4. At some point the pain will be great enough to exert pressure on all sides to have a resolution on the global tariff situation. There will be some policy change that will feel more permanent, although I'm not sure what this will be.
5. This will be contemporaneous with a decisive monetary easing policy following the rising unemployment rate and economic contraction, coupled with manageable inflation.
6. At this time we'll see a sharp rebound. Recovery will be relatively fast.
Personally, given where we are with the valuations, I think the overall market goes down at minimum another 10% and worst case another 30%. Probably somewhere in between.
Due to the speed of this initial decline, I think the whole process will be more accelerated, although the true bottom won't be for another 5-7 months out, assuming no other crazy external shocks.