It doesn’t take much these days to knock investors off balance. This week it was Trump’s 25% on auto tariffs and a slightly hotter-than-expected inflation print. Tariffs are inflationary… a tax on the consumer. And with (services) inflation remaining stubborn… it gives the Fed very little wiggle room to cut rates. In combination with various geopolitical developments and aggressive government spending cuts from the Department of Government Efficiency (DOGE) – this has pushed policy uncertainty to its highest levels since late 2020.
Asset Allocation
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Markets Hedge as Momentum Wanes
As an investor – it’s very important to know the rules. For example, if the rules are constantly influx – it leads to uncertainty. With heightened uncertainty – you pull back. That’s what faces investors. For example, consider the following: (i) direction of monetary policy (e.g., as Powell raised concerns on inflation); (ii) A torrent of policy shifts from the White House; and (iii) major disruption with artificial intelligence – as investors question return on capital invested. Uncertainty in each of these buckets makes it hard to commit to stocks with conviction.
2025 – Finding Quality at Reasonable Prices
The S&P 500 recorded a 23.3% gain for 2024. For the first time since 1998 – posted two consecutive years of gains above 20%. Not bad right? Well if we extend our time horizon to include 2022 – the market’s CAGR is just 7.2% (below its long-term average of ~8.0% exc dividends) Mmm. Not as good. And over 5 years – the S&P 500 CAGR is is 12.7%; and over 10 years its 12.4%. It’s important we measure results over a period of at least 5 years (preferably 10). 2-3 years is a very short amount of time… where all kinds of distortions will happen. But over time – these distortions are always corrected. My point? Things always mean revert… and one should never ‘cherry pick’ dates to fit a narrative.