What is Normal? 

Five Things You Should Know

1. Equity Markets – were mixed this week with U.S. stocks (S&P 500) down – 0.16% while international stocks (EAFE) were up 0.50%. 
2. Fixed Income Markets – were steady this week with investment grade bonds (AGG) up 0.39% and high yield bonds (JNK) remaining flat.  
3. U.S. Jobs Report – The U.S. economy added 143,000 jobs in January, fewer than expected. However, the unemployment rate improved to 4% from 4.1%. Average hourly earnings posted a 4.1% increase in 2024, with the Economic Policy Institute estimating that more than 9.2 million workers would see earnings increases in January totaling an estimated $5.7 billion. 
4. Bank of England – Decided this week to cut interest rates to their lowest level in over 18 months and halved their growth expectations for 2025. While 2025 forecasts for GDP growth were cut to 0.75%, the outlook for 2026 and 2027 saw upward revisions to 1.5%. 
5. Key Insight – [VIDEO & ARTICLE] With the recent equity market volatility around AI, tech valuations and tariffs we address the common question “What is Normal?” Looking at the question in terms of both volatility and current market valuations. 

Insights for Investors

By Tim Mitrovich

What is Normal? 

After back-to-back 20%+ returns the last two years in the S&P 500 coupled with recently beleaguered assets such as fixed income and real estate managing to post positive (albeit slightly) returns in 2024 you can’t blame investors for getting a bit apathetic to the realities of volatility. For most, 2022 and its historical levels of volatility now seem like a long time ago – such is the mindset of many investors. 

And then out of the blue a day comes along like last Monday when widely embraced narratives get flipped upside down. Ask many market participants, and for that matter so-called experts, and they would likely tell you about the invincibility of technology and AI. While that may prove to be true in time that doesn’t mean there won’t be bouts of extreme volatility along the way, that we know for certain which companies will win out, or even if certain companies do well if the price investors are paying for some of them today will prove to be a wise investment. 

Last Monday’s news out of China of startup Deepseek and its utilization of a much cheaper AI model sent shockwaves around the world and called into question the valuations being demanded by many current tech stocks. Market darling Nvidia was hit particularly hard and at one point on January 27^th it had dropped over 18% (from 142.62 on 1/24/25 at close to a low of 116.70 on 1/27/25, see article here). Given the hit to the broader AI narrative, along with Nvidia’s dominant position in terms of market cap, both the NASDAQ and S&P declined over 3% and 1.5% respectively on January 27^th.  The market recovered much of those losses over the rest of the week only to get again this Monday over the threats and implementations of tariffs by the Trump administration. 

These shocks of course woke many investors out of their “slumber” and brought about questions such as “is this normal?” and “what is my exposure to tech?” 

To help address these questions this week we’ll go back over a) what is normal? while discussing both volatility and current market valuations, and b) how then does one address allocating for long-term performance?  

I. What is Normal? 

A. Volatility is Normal 

There is a great Chris Rock bit where he talks about an incident years ago where a tiger attacked one of the members of Siegfried & Roy. To paraphrase him, “People ask why the tiger went crazy, the tiger didn’t go crazy, it went tiger.” In another words, it was people’s expectations, not the tiger’s actions, that were truly crazy. 

The same is often the case with investors’ attitudes to 

wards markets and particularly the stock market. 

Monday’s sell-off, even Nvidia’s, is not what is abnormal. What is “crazy” is people expecting the stock market to keep going up 20%+ per year or in the case of the stock perhaps a 100% or more, and even especially without expecting any volatility along the way. 

As the chart below shows, volatility is not the exception it is the rule.  

Most people we share the information below with are shocked to learn that the average intra-year decline is over 14%. Despite the frequency and magnitude of the market declines (i.e. the red dots), the S&P has still managed to post a positive return over 75% of the time in the last 45 years. 

In short, what is “odd” is periods of little to no volatility (e.g. 2017) and if anything, most periods of volatility should reassure investors that markets are in fact “working” or at least behaving “normally.” 

B. Current Equity Valuations are NOT Normal 

Risk Happens Slowly and Then All at Once – Current Market Valuations 

In our Commentary from a few weeks ago, we shared our thoughts that “The concern that we have is that concentration is extremely high … And when we put that in our models, it points to low average returns.” The key here, and one we’ve emphasized a number of times of late (see October 18, 2024 on valuations/future returns and December 6th 2024 looking at the valuations of Top 10 S&P 500 positions) is that valuations matter to future returns (see second chart below). Therefore, investors currently blindly buying indices that have become not only concentrated, but concentrated in positions trading at incredibly high valuations, is unlikely to go well. 

The first chart below shows that the S&P 500 is currently trading around 28x earnings, while above the historical average in the high teens. While the second chart shows you not only those parts of the equity market well-above their averages but also that there are others not quite so extended. Whether the latter are worth investing in, is an entirely different question. 

Why do valuations matter? Because generally speaking the more one pays for an investment in terms of valuation, the lower the expectation of their future returns. 

This third chart shows the historic correlation between the price paid (i.e. market valuation, P/E ratio) and the expected 10-year returns. The yellow line is the theoretical expectation based on the mean of actual historic returns, while the blue dots represent actually historic 10-year rolling results.  As you can see equity markets trading at levels similar to current market multiples have historically (blue dots) had negative 10-year returns, and theoretically project to a 0% return. 

The Takeaway 

There is a saying that “an expectation is just a premeditated disappointment.” I find that is very true in many aspects of life, but certainly when it comes to investing.  

Sadly, the real issue, as it relates to investing, is that such “disappointment” usually need not exist if one gives things time and has proper perspective but arises because the investor has unrealistic expectations most often around the “time frame” they expect things to happen and see volatility as an obstacle rather than the necessary path to achieving their goals. 

As relates to our second topic above, the danger around investor expectations and chasing market/stock momentum comes from the expectation that what has occurred will continue to occur. The last chart above hopefully shows you that such an expectation is usually completely counter to what is most probable. Thus, the common warning “past performance is not indicative of future returns.” 

Such misunderstandings around how markets work leads to hasty/emotionally charged decisions that are counterproductive to one’s goals. The good news is with a proper historical perspective, a solid plan and a good partner to keep you on track one must not live in fear of any of the above. 

As always, we are here for you and those you care about. 

Have a wonderful weekend, 

Tim and the team at TEN Capital 

Data, Just the Data

• U.S. Jobless Claims – initial claims rose by 11,000 last week to 219,000 and above expectations of 213,000. Recurring claims also rose by 26,000 to 1,886,000.  

• U.S. ISM Manufacturing PMI – expanded for the first time in 26 months in January with a reading of 50.9. The components for new orders (55.1), production (52.5), and employment (50.3) all saw improvement.  

• Euroarea Retail Sales – grew by 1.9% year-over-year in December and in line with market expectations.  

• U.K. Manufacturing PMI – came in with a reading of 48.3 in January, up from December’s 11-month low of 47. Manufacturing output has now contracted for 3 straight months while new orders have declined for a fourth consecutive month.  

• Japan Household Spending – rose 2.7% year-over-year in December for the first positive growth in 5 months. This was the strongest rise since August 2022.  

Journal of Business 25 People of Influence in 2025

We are thrilled to share that our CEO, Tim Mitrovich, has been recognized by the Journal of Business as one of the 25 People of Influence in 2025! This award is a true reflection of Tim’s hard work and dedication to Ten Capital and the greater Spokane community. Congratulations, Tim!