Alone with My Thoughts – 5/2/25
If March has lions and lambs, then April 2025 had its own bulls and bears. A falling market picked up momentum on April 2nd, and hit new recent lows the following week, only to now have rallied about 14% from the bottom, with the Nasdaq actually positive for the month. Investors were again rewarded (or not punished) for maintaining a long-term view and for being diversified. In the coming months, Wall Street will obviously be paying close attention to tariff news. With oil prices in the mid to high $50’s per barrel, the ten-year bond at 4.1%, and the looming possibility of permanent tax cuts, what would happen if a trade deal is announced with someone like India? Stay tuned…
The Power of Diversification in a Volatile Market
The first quarter is over for 2025. We started off the year with a positive January (which has historically boded well for the full year) followed by new record highs in mid-February. Then the proverbial wheels fell off, and we just booked the worst quarter for US stocks since 2022. This early action does prove two things, first, markets can go up and down, which is a reminder after two consecutive years of 20% plus growth in the S&P 500. Secondly, in a global economy, money tends to flow to where it is treated best, which again makes the case for portfolio diversification. Market participants all expected some volatility to begin the year as the new White House Administration charged ahead with their aggressive initiatives. Another thing likely proven then is that equity markets typically do not like uncertainty, and we are now living in Uncertainty Land. For the record, the S&P 500 is down by about 4.6%, the Nasdaq has fallen close to 10% (and is in correction territory), and the venerable Dow is lower by about 1.5%. Tech stocks are now a bit out of fashion. Quietly, while all eyes remain fixed on US stocks, other markets have done surprisingly well. In fact, the performance divergence between the S&P 500 and international stocks, represented by the EAFE index, may be one of the widest ever as the EAFE is up about 10% year to date. In the background, interest rates are trending lower, and the bond market (US Aggregate index) is up about 2.5%. The recent losses in the more aggressive stock indexes have been somewhat muted by gains in asset classes like international and fixed income. Our final proof then is that a well-diversified portfolio, designed to withstand periods of volatility, can be a potent tool to help investors stay on course with their financial plan. Looking ahead, the possibility of turmoil and potential trade wars has sparked a transformation of European economies. For example, Germany has initiated over 1 trillion (Euros) in new infrastructure and defense spending and has triggered similar stimulus spreading throughout Europe. This government spending combined with low equity valuations, could be a recipe for money flowing to where it is treated best. We appreciate your continued support and confidence in our firm, and we look forward to discussing the design of your portfolio and how we can help you to achieve your financial goals.
Alone with My Thoughts – 3/20/25
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.
Alone with My Thoughts – 2/06/25
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”.
Alone with My Thoughts – 1/05/25
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.
Confidence Sells
There is an adage that says, “confidence sells” and Wall Street is confidently in a sales mode right now. For the record, the S&P 500 closed out the fourth quarter of 2024 with a 20%+ gain, which marks the second straight year of twenty percent gains. This is interesting because it has only happened two other times in the last hundred or so years, 1935 and 1936 (followed by a 39% drop in 1937) and then in the years 1995, 1996, 1997, and 1998 (1999 was very close to being up 20%). Not to be outdone, the tech heavy Nasdaq, led by the magnificent 7, rallied about 30%. In addition, Gold and Bitcoin both made new record highs, small cap stocks bounced, and Apple moved towards a $4 trillion dollar valuation. With 2024 now in the books then, what does the future hold for investors in the year or years to come? If we look back at the previously mentioned period of the mid-nineties, those incredible gains, year after year, were due in large part to the world transitioning to the internet and a new technology driven society. The question then becomes, with AI obviously the headline in 2024, is this new technology the next big thing. We believe there is more to this story, both good and bad, which could potentially stimulate the economy and financial markets as we head into 2025. We also have a Fed that has dropped interest rates by a percentage point which could be supportive to stocks and bonds. Finally, on the political front there is a sense that we could have less corporate regulation and possibly lower taxes that could help companies meet the consensus of 15% earnings growth. On the negative side, stock valuations by several standards are looking rich. The threat of a trade war with China, et al could also weigh on the markets, as would a wide variety of other political and economic events. We continue to review and position portfolios to benefit when the markets do well and to withstand those periods of time when the market either pauses to refresh or as can often happen when confidence is high, suddenly and violently revert to the mean. As for confidence, we truly appreciate your confidence in our firm, and we want to wish everyone a healthy and prosperous 2025 and beyond.
What the Bond Market is Telling Us
A solid third quarter for investors, particularly when it comes to equities, was punctuated by a decrease in interest rates by the Fed, with a big one-half percentage point drop. As the economy continues to expand at a surprising rate, along with near record low unemployment, it feels like an elusive “soft landing” may have been achieved. Prominent in this thesis is that inflation has finally been tamed and all systems are green lit to go. But what is the bond market telling us? Clinton strategist James Carville once said “I used to think that if there was reincarnation, I wanted to come back as the President or the Pope or as a .400 baseball hitter. But now I would want to come back as the bond market. You can intimidate everybody.” Well, the bond market is speaking…since reaching a near-term low in September of about 3.5%, the ten-year interest rate has gone up to over 4.36% on the eve of the 2024 election. As a public service reminder, the Fed controls short term rates while the bond market controls the rates that matter with respect to mortgages and long-term borrowings. Note, the prime rate is 8% prior to the next FOMC meeting on 11-7-24. One of the key issues, which has been barely spoken about by either political party this election season, is the significant amount of debt in the US and around the world. We can avoid talking about it, kind of like some of your family members, but it is still out there. As a nation, we are currently carrying about $68 trillion in debt, with about $36 trillion of it issued by the US government. If we suppose that at an average of 6%, the debt coverage then translates to about $4 trillion a year. If we follow the bouncing ball, the debt coverage is about 14% of our annual GDP. Ultimately, Inflation may be stickier than expected and our portfolios should reflect this. Looking ahead and through the fourth quarter, we do expect some volatility that could be muted by solid quarterly earnings and a dovish Fed. The largest tech firms continue to be firmly committed to expanding their AI offerings and could provide equity support. As for interest rates, we are positioning portfolios to benefit from current yields while simultaneously trying to manage the risk of interest rates dancing to their own tune. We look forward to speaking with you as we head towards the end of 2024 and beyond and we thank you for your continued confidence in our firm.
Alone with My Thoughts – 11/01/24
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.
Alone with My Thoughts – 8/20/24
Time in the Market 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.
Sticking The Landing
As the Olympics play out in Paris this summer, we can witness extremely gifted athletes excel in a countless number of events. As usual, special attention is given to the high-flying gymnasts that can stick incredible landings. On Wall Street, the most important landing of late is whether the economy can have the elusive “soft-landing” after a stretch of Fed tightening and higher interest rates. With the economy only adding 114,000 jobs in July and the unemployment rate moving up to 4.3% (after bottoming at 3.4% last year), there has been some recent concern for the economy, reflected by a relatively short, but dramatic, sell-off to begin August. We believe that the soft-landing scenario is still intact as the economy continues to prove to be quite resilient. First, profit reporting from the previous quarter has been strong, with earnings up about 10.9% from a year ago. This gain in earnings appears to be driven by margin expansion as opposed to revenue growth. Also, according to JPMorgan, 8 out of 11 sectors are expected to contribute to this earnings growth, led once again by AI related capex. Finally, the Fed has indicated that they are ready to lower interest rates beginning in September, which has historically given support to equity prices. On a cautionary note, inflation looks to be rather persistent with several initiatives that could promote higher costs. The deglobalization of industry, bringing manufacturing back home, typically done using aggressive tariffs, may be inflationary. Transforming our energy and infrastructure could also be seen as adding costs for the nation. Inflation is an insidious tax on the middle and lower classes, and there has been some cutting back from consumers. Recent earnings from McDonalds, Starbucks, and Chipotle for example, indicate that people are budgeting more and that may eventually affect the overall economy. Seven months into the year financial markets continue to stride higher led by the Nasdaq (+16%) and the S&P 500 (+15%). In general, fixed income is positive for the year now, if just barely. As we deal with many geopolitical headlines in the weeks and months to come, it is as important as ever that investors establish a game plan to not only meet and exceed personal goals, but also to manage risk and expectations that can keep the plan on track. “I don’t really think about the degree of difficulty or the possibility of making a mistake. I just try to relax and let my preparation and training take over.” — Simone Biles