Podcast Summary: The Compound and Friends – "Correction Territory"

Episode Details:

• Title: Correction Territory
• Release Date: March 18, 2025
• Host: The Compound (Downtown Josh Brown, Michael Batnick)
• Guest: Joe Terranova, Chief Market Strategist and Senior Managing Director for Virtus Investment Partners

1. Introduction to the Episode

The episode kicks off with a warm welcome from Michael Batnick, who introduces the special guest, Joe Terranova. Batnick highlights Joe’s extensive experience on CNBC since 2007 and his role in developing the TerraNova US Quality Momentum Index in 2020, which focuses on large-cap quality and momentum stocks.

Notable Quote:

Michael Batnick [02:28]: "Joe Terranova is the chief market strategist and senior managing director for Virtus Investment Partners, as well as a frequent contributor on CNBC."

2. Analyzing Recent Market Corrections

The discussion begins with an analysis of the recent sharp market sell-off. Joe Terranova provides context by comparing the current 10% drawdown to the average intra-year drawdown of the S&P 500, typically around 14%, suggesting that while concerning, this correction aligns with historical patterns.

Notable Quote:

Joe Terranova [03:00]: "The chart that we're showing is the average intra year drawdown for The S&P 500 is...we felt 10%. Okay, we did it, no big deal."

Michael Batnick emphasizes the importance of not overreacting to these typical market fluctuations, which have been recurring since at least the 1990s.

3. The Complexities of Momentum Investing

Josh Brown delves into the challenges of relying solely on momentum as an investment strategy, particularly during market downturns. He advocates for incorporating additional factors, such as quality, to create a more resilient portfolio.

Notable Quote:

Josh Brown [04:55]: "When you allocate specifically towards a single factor of momentum, you leave yourself in a somewhat perilous position when you have these market declines."

He recounts past experiences where analysts favored stock price increases without considering underlying fundamentals, leading to potential pitfalls during corrections.

4. Wealth Effect and Its Economic Implications

The conversation shifts to the "wealth effect," where increases in portfolio and home values can influence consumer spending. Joe Terranova raises concerns about the current high allocation of U.S. households in equities (around 60%), making the economy vulnerable to stock market declines.

Notable Quote:

Joe Terranova [07:12]: "The danger where we are today from the great war and pies is that because households are so exposed to equities, this could be dangerous."

Michael Batnick explores the chicken-and-egg scenario of whether the stock market influences consumer spending or vice versa, ultimately siding with the former.

5. Investor Sentiment and Market Behavior

Josh Brown and Joe Terranova discuss the current bearish sentiment among investors, highlighted by low percentages of bulls in recent AAII sentiment surveys. They debate the impact of this sentiment on market behavior, considering whether it reflects genuine economic concerns or is influenced by media narratives.

Notable Quote:

Joe Terranova [16:37]: "Only two other times were the percentage of bear of bulls...less than 20 for three consecutive weeks."

Michael Batnick points out the difficulty in leveraging sentiment as a reliable market indicator due to its extreme volatility in 2025.

6. Rules-Based Investment Strategies and Quantitative Approaches

The trio examines the role of rules-based and quantitative investment strategies in the current market landscape. Josh Brown criticizes the focus on price movement alone, advocating for strategies that incorporate multiple factors like momentum, quality, and growth to manage risk effectively.

Notable Quote:

Josh Brown [20:42]: "I look at sentiment and I look at positioning. I say to myself, okay, 60 days ago, overwhelmingly bullish...you are very judicious in how you're allocating into the markets because you have that extreme surrounding sentiment."

Joe Terranova discusses the challenges quantitative strategies face during market reversals, emphasizing the importance of diversification within these strategies.

7. Sector Exposure and Diversification

Michael Batnick and Joe Terranova analyze how sector exposures shift in response to market dynamics, using charts to illustrate changes in financials, healthcare, and information technology sectors. They highlight the adaptability of momentum strategies in capturing these shifts.

Notable Quote:

Joe Terranova [42:04]: "It takes momentum wherever the prices are moving."

Josh Brown showcases how combining momentum with quality and growth factors results in a more balanced and defensible investment strategy, capable of managing volatility better.

8. Personal Insights and Concluding Thoughts

Towards the end, Josh Brown shares personal lessons from his extensive career, emphasizing the importance of managing risk over obsessing about market movements. He advises that the first loss in investing is the best loss, highlighting resilience through market cycles.

Notable Quote:

Josh Brown [44:08]: "Your first loss is your best loss. There's no loss that you can incur in this industry that's going to exceed the loss that you might experience in your personal life."

Joe Terranova concludes by reiterating the importance of understanding quantitative strategies and their impact on market expectations.

Closing Remarks: Michael Batnick wraps up the episode by thanking listeners and expressing gratitude for their attention and support, underscoring the commitment to delivering valuable insights consistently.

Key Takeaways:

• Market Corrections: Recent downturns align with historical intra-year drawdowns, suggesting typical market behavior rather than unprecedented turmoil.
• Momentum Investing: While valuable, momentum strategies require additional factors like quality and growth to mitigate risks during corrections.
• Wealth Effect: High household equity exposure heightens economic vulnerability to stock market declines, potentially affecting consumer spending.
• Investor Sentiment: Current bearish sentiment is reflective of deep market unease, though its reliability as an indicator is debated.
• Investment Strategies: Rules-based and quantitative approaches must balance price movements with diversified factors to navigate complex market structures.
• Diversification: Adapting sector exposures in response to market trends is crucial for maintaining robust portfolios.
• Risk Management: Emphasizing risk over market predictions fosters resilience and long-term success in investing.

Notable Quotes Compilation:

• Josh Brown [20:42]: "I look at sentiment and I look at positioning...you are very judicious in how you're allocating into the markets because you have that extreme surrounding sentiment."
• Joe Terranova [07:12]: "Because households are so exposed to equities, this could be dangerous."
• Josh Brown [44:08]: "Your first loss is your best loss."

This episode of The Compound and Friends offers a comprehensive analysis of current market corrections, the intricacies of momentum investing, the economic implications of the wealth effect, and the evolving landscape of investment strategies. The dialogue between Josh Brown, Michael Batnick, and Joe Terranova provides listeners with valuable insights into navigating the complexities of today's financial markets.