The stock market has taken investors on a wild ride in 2025. The S&P 500 is down almost 2% year-to-date after gaining an impressive 24% in 2024. The sharp drop caught many off guard, but veteran hedge fund manager Doug Kass predicted it back in December.
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Kass has nearly 50 years of experience navigating market cycles. He cites increasing inflation, a weakening job market, and new tariffs as reasons for the retreat. Inflation grew to 3% over the past year, up from 2.4% in September.
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The technology sector has seen substantial layoffs, with 172,000 workers losing their jobs in February alone. Recent tariffs on Canada, Mexico, and China are set to increase import costs across many industries. Companies in the materials, industrial, and consumer discretionary sectors have cited tariffs as a challenge in their earnings reports.
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Analysts have reduced their earnings outlook for these sectors. Kass remains concerned about high inflation and sluggish economic growth. However, he sees some short-term opportunities now that inflated valuations have corrected.
He has been buying into weakness and selling into strength to profit from oversold relief rallies.
Doug Kass’s prediction validated
For investors, Kass advises recognizing that there are periods of decline in the stock market.
Long-term investors should stay the course, while shorter-term investors may want to reduce risk or trade more actively. As the market faces uncertainty, there are three key mistakes to avoid. First, don’t get caught up in market noise and react based on short-term news.
Second, avoid overhauling your investment strategy due to short-term fluctuations. Finally, don’t become complacent – use downturns as an opportunity to review your portfolio and ensure you own stocks for the right reasons. Economists believe an improvement in the US economic growth outlook is needed for the market to climb higher.
The recent sell-off has hit many “momentum” stocks, such as Meta, Palantir, Nvidia, and Tesla. Economic data has led to downward revisions in growth forecasts, with proposed tariffs potentially slowing growth further. The February jobs report this Friday is expected to be a major pivot point for stocks.
Citi’s head of US equity trading strategy, Stuart Kaiser, emphasizes that consumer resilience, indicated by the unemployment rate, is a critical risk factor for equity markets. Investors should focus on the big picture and maintain a long-term perspective. By avoiding common pitfalls and staying patient, they can navigate market volatility more effectively and position their portfolios for future success.