This Week in Review | Market Corrections, Germany, the Fed (Mar. 21, 2025)

Transcript

Stephanie Kuehne:
Hello and welcome to This Week in Review. This weekly segment is designed to highlight a few important developments you may have missed this week, what they mean for markets, and most importantly, the potential impact for investors.

Now, let's review what happened this week.

First, market correction.

This week US stocks fluctuated after hitting the -10% correction threshold last week. When periods of elevated market volatility strike, we believe it is important for investors to remember that not all negative volatility is the same. There are different magnitudes of declines, and knowing the differences can help you better assess what might be going on. Corrections, for example, tend to be shorter, sharper sentiment driven declines of around 10 to 20% amid a bull market. Bear markets on the other hand, are lengthy, fundamentally driven declines, generally exceeding 20%.

While corrections often start suddenly accompanied by fearful headlines, bear markets tend to begin gradually and don't dramatically announce themselves. In our view, this recent downturn looks more like a correction rather than the beginning of a bigger bear market. More downside is always possible, but we believe reacting to market volatility in an environment like this increases the risk of missing bull market returns. For example, in 2023, global stocks fell around 11% over three months in a late summer correction before bouncing back strong and finishing the year up 22%. While corrections can be tough to stomach, they are a normal part of bull markets and importantly, don't dictate how the whole year goes.

Next, German spending plans.

On Tuesday, Germany's parliament approved plans allowing for a significant increase in infrastructure and military defense spending. Some assume this will act as fiscal stimulus and is certain to boost German economic prospects. But we believe that it is important not to overstate the likely impact. In our view, the outlook for German stocks and its economy doesn't hinge on massive public spending, which would likely trickle out too slowly to matter for markets anyway. Some argue the proposed spending is necessary to jolt the economy, but we don't think Germany is in as terrible of an economic shape as many believe.

While German GDP declined slightly over the last two years, the underlying economic drivers were not uniformly weak. Heavy industry and manufacturing weren't strong, but consumer spending and services have held up relatively well. And more recently, global manufacturing and demand has shown early signs of recovery, which should support Germany's many export driven businesses. So, while government spending can certainly help, we think Germany's economy has already been recovering nicely. And the ten-year targeted spending plan is likely to slow and subject to change to really move the needle.

Finally, the Fed.

As expected, the Fed left its policy rate unchanged following their meeting on Wednesday. The Fed also lowered its growth outlook, raised its inflation forecast and announced that it would slow parts of its balance sheet runoff process. Many investors interpreted this meeting as hawkish, and headlines warned of the dreaded stagflation scenario. But we think that these fears overstate the impact central banks have on the economy and the accuracy of their forecasts. The Fed announcement mostly reflected trends already priced in by markets, such as minor disappointment in economic data and uncertainties around tariff policy. But importantly, the Fed still expects the economy to grow nicely this year and for inflation to remain relatively contained.

Additionally, what matters more for forward looking stocks is how the economy ends up relative to what is currently priced in. Economic data can be volatile in the short term, but we think the economy is more resilient than many appreciate. That, combined with what's likely tamer than feared effects from the US tariff policy, should provide plenty of upside surprise for markets as this year goes on.

And that's it for this week.

Thanks for tuning in to This Week in Review. If you're looking for more insights, then don't miss our other series, 3 Things You Need to Know This Week, released every Monday. You can also visit FisherInvestments.com anytime for our latest thoughts on markets. Thanks again for joining us and don't forget to hit "like" and "subscribe!"