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.