Dear Clients,
While the S&P 500 Index is more or less flat on the year, the experience beneath the surface has been anything but calm. We have seen an elevated level of volatility as investors reposition portfolios and leadership rotates away from the “AI” cohort into other areas of the market unrelated to the new technology theme.
Periods like this often create the impression that a material decline is imminent. When volatility increases, the natural human tendency is to assume something is “wrong.” Yet history shows that short bursts of turbulence frequently reflect repositioning and sentiment shifts rather than structural deterioration.
Seasonality has also contributed to the unease. Historically, the final two weeks of February tend to trade lower. We witnessed a similar dynamic last year following the White House tariff announcement, which ultimately led to an approximate 20% decline in the S&P 500 — technically a bear market. Yet that decline proved temporary, and stocks recovered into solidly positive territory by year-end. The lesson: sharp corrections can occur within broader constructive cycles.
Today’s volatility is measurable. More than 20% of the individual stocks within the S&P 500 are either up or down by 20% or more this year, even as the index itself is only modestly lower. That dispersion speaks far more to portfolio rotation and capital reallocation than to systemic risk.
Some commentators are suggesting that the bull market that began in 2016 is nearing its end — the familiar refrain that “trees don’t grow to the sky.” A more applicable market adage is: “Bull markets don’t die of old age; they are murdered by the Fed.” At present, the Federal Reserve is signaling rate cuts ahead, not restrictive policy escalation. That distinction matters.
A meaningful portion of current volatility stems from the narrative that AI spending is creating a speculative bubble. We strongly disagree with that characterization. History provides perspective.
In December 1999, Style Weekly dismissed the internet as a fad and likened it to digging through a digital landfill. In February 1995, Newsweek published Clifford Stoll’s article, “Why the Web Won’t Be Nirvana.” In 1999, Barron’s questioned Amazon’s viability, citing lack of profits and heavy spending — concerns that were widely echoed at the time. Following Google’s August 19, 2004 IPO, Knowledge at Wharton, the official online research journal of the Wharton School at the University of Pennsylvania, highlighted skepticism around valuation and investor behavior, noting that Google reduced its offering price from an initial $108–$135 range to $85 per share due to weak demand. At the time, Google’s market capitalization was approximately $23 billion. Today, Alphabet’s market capitalization exceeds $2 trillion. Myopic skepticism to say the least.
Innovation cycles are often accompanied by skepticism, volatility, and misplaced certainty. The early stages of transformative technologies rarely look orderly. They look noisy.
The Stock Trader’s Almanac recently outlined why a 50% gain in the Dow could be possible from a 2026 low to a 2027 high, noting that major corrections frequently occur in the first or second year following presidential elections. In the last 16 midterm election years, bear markets began or were in progress 10 times. Yet there were bull years in 1986, 2006, 2010, and 2014, while 1994 was flat. The 2018 correction ended abruptly on Christmas Eve. Election cycles often produce volatility — but not necessarily prolonged structural damage.
From our vantage point, the worst of the correction that began in late 2025 appears to be nearing its end. Earnings remain solid. The anticipated Fed rate cuts should provide incremental support. The repositioning that has driven much of the recent volatility appears largely complete.
We have witnessed a selloff in the software sector and a rotation out of the “Mag 7,” the largest global companies that had previously led performance. Importantly, the criticism of the broader market has been more optical than fundamentally based. When volatility is driven by emotion rather than earnings deterioration or liquidity stress, it tends to be temporary.
Emotion has never been a sound basis for investment decisions. Discipline, valuation, liquidity conditions, and earnings power matter far more than headlines.
We remain constructive, selective, and focused on long-term capital appreciation. Periods like this test conviction — but they also create opportunity.
As always, we appreciate your trust.
Sincerely,
Craig Kessler
Kessler Investment Group, LLC
Past performance does not predict future results.
All information in this presentation is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. All economic performance data is historical and not indicative of future results. The market indices discussed are unmanaged. Investors cannot invest in unmanaged indices. Certain statements contained within are forward looking statements including, but not limited to, statements that are predictions of or indicate future events, trends, plans or objectives. Undue reliance should not be placed on such statements because, by their nature, they are subject to known and unknown risks and uncertainties. Please consult your adviser for further information.
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