How We Invest In a Falling Market

0:00Travis Hoium:.

0:05Travis Hoium:NASDAQ is officially in correction territory. So where are we doing now? Motley Fool Money starts now.

0:27Travis Hoium:Everybody needs money. That's why they call it money. The best things in life are free. But you can give them to the birds and bees. From Fool Global Headquarters, this is Motley Fool Money. Welcome to Motley Fool Money. I'm Travis Hoyam, joined today by Lou Whiteman and Andy Cross. And guys, as of early Friday, the NASDAQ is down 12 % from its all-time high. That actually happened in October, but the drop over the past couple of weeks has been pretty notable. Now, that means we're in correction territory. 20 % would be a bear market, I believe, if I'm getting my definitions correct. this is partly about Iran and oil prices, but it's also partly about questions about AI, lots of things going on.

1:13Travis Hoium:So Andy, when you look at this market overall, what do you think the market is seeing to have these big negative days? We're down 1.2 % early in trading on Friday. Yesterday was a big down day. We're not getting earnings. So what's on the top of mind for investors? Well, Trav, I think the start of the year, right? There was a little bit more of kind of, hey, how is the market shaping up with so much of the tech spending? There's just trillions going into data centers. And that pivoted very quickly towards the Iran war, the activities going on in the Middle East and the impact on not just oil prices, but now I think more and more, it's what are the ripple effects to those increases?

1:51Oil prices are going to percolate if they stay elevated throughout the economy. How is that going to impact consumer spending? how is that going to impact investor appetite? And so I think the markets have started shifting as we're thinking, gosh, where is the value going to be? Not just for individual investors, but also for institutional investors. And so much of that capital now has started to flow a little bit more towards things like energy and materials in the marketplace. Energy is up more than 30 % so far this year. But the overall impact into the market, whether it's the Nasdaq or just the S &P 500 for energy is relatively small.

2:31So you haven't really seen the impacts. And that's been, even though the investing appetite has shifted, you haven't seen that show up in the general markets because energy is just such a smaller part of the investment landscape and of the indices. And technology is so much of a huge, big part of that part of the market. And that's money starting to flow out of there as investors get a little bit worried about, oh gosh, how much of this AI spending in data centers is going to be recouped because of the value for those dollars looking down the road. Where is the investor return going to be? So you're starting to see this market shift and that is showing up in the overall indices and just some nervousness with the investor appetite going into 2026 and the rain war is certainly not helping.

3:17Travis Hoium:So I want to put some numbers to that the nasdaq composite year-to-date is down 8.9 as we're recording the s &p 500 is down 6.1 is that part of that energy allocation that you're talking about right the nasdaq is not going to be allocated energy whereas if you look at one of the things i like to look at recently is the heat map of the s &p 500 if you do a year-to-date heat map of the s &p 500 there are huge segments of the market a lot of the most popular stocks that we talk about all the time are down really big. And then you got these small little boxes like utilities, like oil producers, ExxonMobil that are up huge.

3:54Travis Hoium:Is that what you're talking about? Is that just that allocation has not kind of balanced out because of the weights of the index? Yeah. Energy makes up three to 4 % maybe of the index right around there compared to technology and financials. Financials are also not having a good start to the year just because of the interest rate concerns. So yes, those parts of the market just aren't represented in the index. So you're starting to see those fall off. And of course, many fools out there, including myself, own a lot of technology stocks. So as we see those technology stocks underperform, or there's the MAG-7 or other parts of the tech stack underperform, that also weighs on some of that confidence and just wondering, hey, where do I have to try to find some alpha in this market?

4:33Looking out over the next couple of years, do I need to raise some cash? How do I start to position myself knowing that technology or thinking about technology is starting to shift a little bit and other parts of the market are looking a little bit more attractive considering some of the macro factors that we're seeing. Now, I mentioned financials. Financials have not done well this year, mostly because the interest rate environment where we are expecting rate cuts throughout pretty much the year, if you look at a lot of the expectations and now the expectations are the rate cuts are not going to come, if at all, they come later in the year.

5:05Lou Whiteman:Yeah, the six-month treasuries have been jumping, which, you know, music to my ear, but not really what we see with the markets. I think Andy did a great job, like, breaking down kind of the market dynamics and why maybe things, if anything, I'm a little surprised the overall markets have held up as well as they have. I mean, you listen, you read reports, you listen to podcasts, it's, you know, energy experts talk about, like, wow, we are experiencing things that in the models we said, well, this is worst case scenario and we will never say, you know, and that's our reality. I think part of this too is market psychology.

5:40Lou Whiteman:I'm worried, guys, because I do think that the damage done will take time to heal. And I think it's a question of quarters or if not years, how long it takes to ripple through the economy. And I think that as an investor, you know, I might not change things on that because I'm trying to focus on the long term. I'm trying to be in companies that can get through down cycles, but it feels like this is the straw that might break the camel's back and cause a recession. On the other hand, what's happened every time the stocks have gone down less since COVID? There has been a pop. And I do think the markets are likely looking for a pop when we finally do have some resolution to what's going on in the Middle East.

6:22Lou Whiteman:And I think that's kind of rational, especially if I'm a professional money manager and I'm graded quarter to quarter, if I think a pop is coming, I am not positioning for five years. So I do think there's these weird psychological dynamics that if anything, I think it's good to maybe understand or have a feel for. But for what I'm trying to do, I'm also trying to ignore. I'm trying to maybe use it to explain what I'm seeing and why things are moving. But I personally don't want to make decisions based on what could happen next week. But I do think the psychology of the market is, is that we do see kind of the, whether it's FOMO or whether, you know, what's going on is influencing what's going on.

7:06You know, Lou and Travis, it's interesting, the individual investor, Lou mentioned about the, you know, kind of the buy the dip mentality, individual investors now represent a good chunk of the investing activity. That's a lot different than it was five years ago. We've seen them be kind of a lot, in a lot of ways, the buyer of last resort and institutional investors a little bit more on the short term, panic, hit the button, jump out of positions. So individual investor trade.

7:34Travis Hoium:That has been a fascinating shift over the past 10 or 20 years. Yeah, and it's really elevated since COVID. If you look at since, really since COVID when so many institutional or so many individual investors and hey, credit us, right? Hey, win for the individual investor. That's awesome. Those individual investors have really, in many ways, supported the market, especially on the margin side. And I think you are starting to see, hey, it's been a great performance the last three years, really since 2022, after that bear market. The markets have done so well. So many positions have done so well, including technology, led by technology.

8:08And now I think individual investors are saying, hey, is that, hey, I'm maybe overweight in that area. Now I'm starting to pivot and looking at other spots of the market. I think that shift is going on, and that doesn't get reflected in the index, as we mentioned before, and that's one reason why the index has underperformed this year.

8:26Travis Hoium:One of the questions that I have about the market and the economy, one of the things, you guys talked a lot about market dynamics. We have not talked a lot about the economy, and the reality is oil prices are soaring. That's a huge expense for a lot of consumers. year to date. Brent crude is up 76%. WTI, West Texas Intermediate, is up 70%. We're at$93 per barrel. That is going to ultimately hit people's pocketbooks. So, you know, Lou, does that worry you that the, yes, I think Andy's totally right. The great thing that we've been trained as investors and as individual investors is to have a longer term view and to buy these dips.

9:08Travis Hoium:But what's different now is that in the last 17 years, we have not gone through a traditional recession where people are losing, you know, put COVID aside. There was a lot of weird things going on with COVID, but where those buyers of last resort that Andy said were, you know, losing jobs, were pulling money out of the market instead of putting money into the market. Are those two things, energy prices going up and the risk of a recession, could that be kind of bad news squared for the market overall because those buyers are going to start going elsewhere. They're just going to cash.

9:48Lou Whiteman:I'm definitely worried. I mean, look, we've talked about this a lot before. We like to talk about the consumers if it's one person, but it really is just kind of all of the households out there. On an individual level, do you feel confident enough to keep spending at your average pace, right? And it's always a mix between yes and no. So if the nose hit a critical point, then that is when the consumer is having trouble. You can see how not just, you know, I mean, oil is one thing, but just the, you know, the refined products, what we actually consume, hopefully not literally. But from whether it's oil, I mean, whether it's gas, whether it's jet fuel, whether it's, you know, what happens with plastics on all the chip making, the helium and some of the acids that we get out of it.

10:31Lou Whiteman:If everything is getting more expensive, does that shift the K-shaped economy just slightly till we end up in a downturn? It wouldn't shock me. You know, Travis, you're right. We are now conditioned to kind of buy the dip. It wasn't too long ago that, I mean, look at after the dot-com boom, the Nasdaqs took what, a decade to recover? There was a whole, you know, kind of, I think, market mentality tied to that before. I'm guessing this time around won't be either extreme. I don't think, knock on wood, it won't take 10 years to bounce back. But I think we might end up with enough headwinds that we find this a lot easier to just bounce back and move on.

11:15Lou Whiteman:And yeah, I'm trying to think about that. I don't know if I can change my portfolio with that, but mentally I'm trying to prepare myself so I don't do anything panicked if and when that does happen. The one slight bright side is just the dependence, the impact of increasing energy prices and oil prices, gasoline prices is much less now than it was 30, 40 years ago. So that's some good sign. But Lou is absolutely right. It's just going to percolate through the economy. I think, again, investors are kind of sensitive to this. Travis, you did, I think, bring up a great point when you just think about there's just this uncertainty around jobs, I think, now that we're all feeling, whether it's AI or just macro conditions.

12:01And that might be a weighing impact on investor appetite to put more capital to work into stocks. Now, we might have some pretty big IPOs hitting the market this year, which would be very exciting. And I think individual investors especially would kind of gravitate towards that. In the K-shaped economy, the wealthy are as well off now as ever before. So we have a little bit of that. But I do worry about the job impact having some negative consequences on the appetite for individual investors to be investing.

12:32Travis Hoium:Yeah, it does seem like there's multiple pieces of the market too. We talked about that a little bit, like energy is doing very well. But if you just look at certain segments, we went through this in 2022 as well. There were certain segments down 70, 80, 90%. And then you look at the market overall and it was like, eh, it was a down year, but it wasn't the end of the world. We didn't actually end up in a recession. The other thing that I wanted to note too is even going back to the Great Depression, these recessions, market corrections, any sort of downturn you want to talk about, they seem to be shorter than every single time we go through them.

13:08Travis Hoium:The Great Depression was a decade. You know, even.com was two years. COVID was like five minutes. And so it may be the case again this time. When we come back, we're going to get an update on the AI trade. You're listening to Motley Fool Money. Have you been sleeping on your mattress a little too long like I have? My back's getting sore more than it used to, and I feel like Homer Simpson with my body shape and printing on the mattress. But like you, I'm busy with a job and kids, and who wants to go to the mattress store with the family only to deal with a pushy salesperson? That's why I was excited to learn about Lisa and their premium mattresses that you can shop for from the comfort of your own home.

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14:34Travis Hoium:All right, let's get this thing moving.

14:47Travis Hoium:Welcome back to Motley Fool Money. The question I have this week is, has the AI trade lost its legs? Andy, we've got some big moves in some of the AI players over the past few years. And this is what's really driven a lot of the market. Even GDP growth has been driven by AI investment. So Microsoft down 24 % this year, Tesla down 17%. NVIDIA is down 8%. Oracle down 27%. Some of these stocks are really taking it on the chin despite some phenomenal numbers. So what is going on with this AI trade? Yeah, they continue to put up great on, for the most part, great on the earning side, the revenue side, even making impacts on a lot of their AI benefits.

15:24But certainly the market is just thinking about the return on all of these spending. It's going to be trillions of dollars, trillion dollars, close, give or take, whatever year you're talking about.

15:32Travis Hoium:What's a few hundred billion dollars between friends? Yes. And we had just re-recommended Amazon recently. We had this conversation among the team. Amazon's going to spend hundreds of billions of dollars on CapEx this year. What happens if they came out and said, hey, we're not going to spend quite as much? How would the market react? Would they be positive because it's going to benefit their free cash flow? Or negative and say, gosh, they're not spending enough to be competitive in the AI race against the likes of OpenAI and Google and Microsoft and Meta who are spending equally hundreds of billions total.

16:04So there is this thinking of the market and the market doesn't quite know what to make of these numbers, Travis. And it gets to our earlier conversation. They're saying, hey, great investors are, I think, thinking, hey, it was a great run, but now these dollars are getting so high. I made a lot of money in these stocks and I want to pivot and look at other parts of the market.

16:21Travis Hoium:So what is your answer? What do you think is going to, if let's say that Amazon this year or even next year says, hey, we are going to pull back. Do you think that boosts the stock? I think the market would react positively to that. Yeah. It has changed 180 in six months, it seems like.

16:37Lou Whiteman:Yeah. Honestly, I'm not sure. I just kind of the play devil's advocate, but I think, yeah, the market long-term may like it, But I think in the short term, the first company that says we're cutting back is sort of risking that it's going to be read. It's like ours isn't as good or we have failed and everybody else is still, you know, it's still going. So that's fascinating to me. I mean, look, for long term, if that's what they're seeing, they need to pull the bandaid. But I am not sure the market initially would cheer any one company alone saying, oh, I'm not so sure.

17:09Travis Hoium:So they need to have like a joint press release.

17:12Lou Whiteman:We're all pulling back. Good luck. Good luck with that. Good luck with that, right? You know, part of this too, I think, is just, you know, the sheer excitement, the euphoria always degrades over time. So, you know, so many of these stocks are still up so big over, say, five years. The fact that they're down for a few months, you know, maybe that is just kind of us normalizing. But there is, I mean, look, just look at OpenAI the last month. They've introduced things. They've dropped things. I think that as we are seeing that, I mean, it's good that these companies are trying to focus on where can we make money, especially the ones like OpenAI that are going from zero to try to do it.

17:52Lou Whiteman:But I also think it is more we are introduced into the conversation, the idea of will this make money or how are you going to make money? Seeing things fail kind of makes that a big red underlined. It might not just work out. So maybe there is just a little more of like, like Andy said, the show me, or maybe it's, maybe we're just a little more grounded as we look at this instead of just anything and everything is good.

18:19Travis Hoium:Well, and a lot of things are cycles. So if you think about something like the Gartner hype cycle, where you have this hype cycle with artificial intelligence started at the ChatGPT moment in November of 2022. You eventually end up at a point where you get to a trough of disillusionment where people go, ah, man, this isn't real. There is no payoff. You know, maybe the technology is real, but we went through this with the internet where are these companies going to actually be able to make money? And that took years to get to that point. Is it possible, Andy, that we get to that point in the next year or two with AI?

18:56Travis Hoium:And actually, that's when you want to start buying some of these companies, because that's when you're going to be able to find the next Amazon, the next Google, and they're going to already have kind of won the market. I think that's what, looking back historically, that would have been the time to buy. I think that's right, Travis. I mean, these are some of the greatest companies ever created in the world. So I think their chances of them making and doing well with these kinds of investments is spot on. And it's just that right now the market is just not rewarding that.

19:20Lou Whiteman:Yeah, almost inevitably. And I agree. And it's hard to imagine any of these as really the quote unquote losers. I mean, they are so good. And so many of these companies are in so many places. I don't think it's existential threat. But if everybody's a winner this time, it will be the first time, right? So I do think that like part of this is just kind of trying to think in those terms, like who is maybe again, I don't think Microsoft is going to go to zero. if they happen to be a loser, but there will be relative winners and losers here. I don't think any of us know the answer to that, but I think maybe what we're seeing is just that these discussions start to happen instead of, yes, just go.

20:00Travis Hoium:When we come back, we're going to see how well Lou and Andy remember their market history. You're listening to Motley Fool Money.

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