Alone With My Thoughts

The first quarter of 2025 has been marked by volatility and turbulence as Wall Street comes to grips with wide ranging new government mandates. From tariffs and cost cutting, to interest rates and inflation, there is plenty of headline risk to go around. Take a moment, go to a Zen like place, and remember that the markets have been on a tear, what with two years in a row of 20% up moves for the S&P 500 and high valuations. Interest rate cuts have been paused and March can be a historically rough month for stocks all the while we haven’t had a 10% drop since the summer of 2023. The turbulence should be kind of expected then and a well-diversified portfolio with some exposure to fixed income, is probably faring better than the media talking heads would have you believe.

According to a recent research report from JPMorgan, the largest tech companies, aptly named the “magnificent seven” now make up 32% of the S&P 500 and another 19% of the index are technology companies in general. That means that more than 50% of the market is tech related and very much in a space race to capture investor’s hearts with AI. It seems like quite a concentration in a passive index investment. With recent volatility that can at times accentuate this concentration, 2025 may be the year for active asset management and possibly tip toeing away from being “all in”.

Are Wall Street traders and economies from all around the world telling us to have more babies? For example, Barron’s recently reported that the 3.7 million births in the 27 European Union countries in 2023 was the largest annual decline (-5.5% a new record) ever. They also reported in another recent issue that there were 33 major European corporate defaults so far in 2024, which is the second highest number of failures since 2008. Maybe we need to follow Elon Musk’s lead (he has 12 children) when it comes to his concerns about the lower population rates and the resultant effects on world finances and civilization. Investors take note.

Famed hedge fund manager, Paul Tudor Jones, remarked recently on CNBC that with respect to the upcoming election, all roads point to inflation. In other words, neither of the candidates is known to be or is even suggesting to be an inflation fighter. Whether it be the usual suspects of pre-voting giveaways like no taxes on tips, no college loans, money for start-ups, or deductions for car loan interest, they all are inflationary. Throw in some tariffs and infrastructure spending under the guise of the Inflation Reduction Act and you get the picture. Paul Tudor Jones’ main concern is that prices will seemingly go higher as our national debt, and more importantly, our national debt interest costs go up exponentially, which will keep rates higher and costs higher, etc. The ten year is ending the week at about 4.24%, while gold is setting new records. We are positioning for a potential soft landing with the possibility of some Halloween surprises over in the bond patch.

Iconic Wall Street observer Jeremy Siegel reminds us in a recent Barron’s article that stock investing is the most volatile asset in the short-term and the most stable asset in the long-term.  Most volatile in the short-term and most stable in the long-term.  Traders are chasing the next great earnings opportunity or corporate development.  Investors, in contrast, are more concerned with compounding earnings, dividends, and share buybacks because that is where wealth is created.  This message is so simple, yet so many fail to understand it.

Last Thursday, the Wall Street Journal reported that France was facing disciplinary action from the EU for running a high budget deficit. Not only are the French dealing with this deficit, they are also above the EU requirement of no more than 60% of debt above GDP. In the US interestingly, our debt is about 100% of GDP and just this past week our deficit is now projected to be about $2 trillion for the year. Good news, we are not a member of the EU, bad news, our interest on our debt is now almost $1 trillion dollars a year, or about the same as our entire defense budget (or for those keeping score, about 30% of our tax revenues so far this year). Mon Dieu!