- This title applies both to the nature of markets and to that of the current U.S. administration.
- The initial focus on tariffs instead of tax cuts has disappointed markets and they are registering that displeasure the only way they know how – lower prices.
- We continue to see major economic data points like employment suggest a solid economic growth outlook, but the chaos in Washington DC risks shaking investors out of their seats.
- In our experience, these “manufactured crises” can end as quickly as they start, and are rarely a good reason to significantly take down risk.
- Individual investors have a meaningful advantage over institutions in these instances in that we have time on our side, allowing us to ride out the storm without the ultra-short term performance pressures faced by many institutional investors.
- Investors with balanced and diversified portfolios have fared far better than the moves in the major U.S. indices would suggest, demonstrating the merit of a portfolio designed to work in a wide range of economic and market environments.
Predictably unpredictable – for anyone who has been an investor for any length of time, this is an apt descriptor of the stock market at its most maddening, fooling most of the people most of the time. It also seems to be the preferred governing/negotiating style of the current U.S. administration. While markets granted a high degree of patience in the months after the election, it seems it is running thin as the U.S. government’s focus remains on economically challenging policies, while things markets were banking on such as tax cuts seem to be off in the distance.
Politics driving the narrative…
Markets are moving contrary to economic data such as employment which continues to point to a healthy hiring environment, while economists’ expectations for 2025 U.S. economic growth are just off their highest levels. It is obvious that the market’s consternation is driven by the fear of what may happen in the future, and that uncertainty is leading to market volatility. We have seen this happen many times in the past. The difference today is that the uncertainty is firmly in the political realm and clear for all to see versus economic issues that tend to get less media attention until a crisis erupts.
… and it is causing widespread concern
As we discussed two weeks ago, investor sentiment has taken a big hit, and this was before stock market volatility had picked up to levels seen in recent days. This is likely due to the all-encompassing nature of the current political news cycle. It is wearing on the public, and investors are no different. Since that publication, CNN’s “Fear and Greed” indicator has posted new readings of extreme fear our internal investor sentiment indicator remains in deeply depressed territory.
We would note that every market correction is met with the same words – ‘this time is different’. While that is nominally true in that there are often different reasons for market corrections, the way they play out has followed a fairly similar cadence over time.
Keep your seat belt fastened…
With the S&P 500 now down about 9% from its all-time high set in February, we are at the top end of the “mild correction” category, which typically sees stocks fall for a month and then recovering two months later. It remains to be seen if we go further than this but we think there are a few important points to think about.
- First, this sell off is based largely on communications from the White House versus any concrete evidence from economic data. The volume of announcements and the fact that many of these have focused on things markets don’t like such as tariffs, has been the fuel for volatility. When we look at economic data however, the U.S. economy appears to still be growing. Just last week we received a solid non-farm payrolls report that suggested employers are still hiring despite the uncertainty.
- Second, we would note that historically it has been challenging to make asset allocations shifts in an environment that is driven by politics. These tend to be manufactured crises that can be solved with the stroke of a pen, or a social media posting in this case. The resulting bounce back in markets tends to be almost instantaneous, leaving little time to change tack to a more aggressive stance.
Does this mean we should do nothing in portfolios? No – we are actively seeking out opportunities to upgrade the quality of our portfolios and their return potential. However, in our experience, meaningful moves to reduce risk in a volatile market have not typically resulted in a better long-term outcome.
… but don’t get shaken out of your seat
While headlines can be unnerving, we take comfort in the fact that we manage well-diversified, balanced portfolios that are designed to withstand a wide variety of market and economic environments. These portfolios typically won’t be the top performing in a raring bull market, but they also have historically seen less downside when volatility hits. In our experience, there is more money to be made in riding out the downturns and capturing most of the upside than capturing all of the upside and giving it all back when conditions sour. We would note that the dividend paying stocks and fixed income securities that were laggards last year are providing a healthy offset to the move volatile U.S. securities this year, in line with our long-standing strategy.
If history is any guide, the biggest ingredient to work through this market correction is time. As individual investors, this is one advantage we have over institutions that are graded on quarterly, monthly, and even daily performance! We don’t need to react to every wobble in the market as the great majority of our success as investors comes from finding good companies and letting them compound wealth for us over time. Markets were giving the U.S. administration credit for market positives such as tax cuts and waved away tariff risk as a negotiating strategy. That may still be the case, and a resolution there could well lead to a powerful rally in stocks. As it stands today, many investors came into this market with a large overweight in equities, and in speculative ones at that. These investors will need some time to lick their wounds before their confidence is fully restored. Diversified investors (which we consider ourselves to be!) are in a great position to weather the storm and come out stronger on the other side.
The Harbour Group
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