Completing the March 2025 note seems irrelevant as we conclude the first week of April. Everything changed over the course of a handful of days.
While the S&P500 was down over 5.5% in March, and -4.27% YTD, the declines on the days following Trump’s “liberation” day tariff announcements are worth noting.
TWG growth, moderate and conservative portfolio respective March declines of 4.1%, 3.5% and 2.7% were reasonable, but we feel that this communication should focus on the early days of April and what may happen next.
On April 2nd, Trump announced his tariff plans to the world – a flat 10% tariff across the board and a reciprocal tariff against each country that assesses tariffs on the U.S. Of all the speculation as to what his tariff policy may look like, which no one outside a small inner circle knew in advance, the final decisions have been described by numerous economists as the worst-case scenario. Stocks sold off 5% on April 3rd and another 6% on April 4th, one of the worst two-day stretches since 2020.
The magnitude and knock-on effects of these tariffs have significant potential ramifications to every corner of global economic activity. The sell-off is justified given the potential and overall uncertainty as to the outcome of said tariff policy.
Uncertainty surrounding the expected tariffs has already roiled financial markets. While we now know the level of tariffs, there is still a high degree of uncertainty that must be sorted out for the market to regain its footing.
The perceived rationale for implementing said tariffs is to create a more “fair” trade environment between the U.S. and other countries. Furthermore, a goal of the administration is to bring jobs back to the U.S., with their logic implying that if goods are made in the U.S. instead of abroad, manufacturing jobs will be plentiful and create additional opportunity for the U.S. population.
Tariffs are effectively a tax, or an additional “cost” of doing business. Without getting into the details of who pays the tariffs (the exporting company or the end purchaser), tariffs will have an adverse impact on growth, all things equal. Lower growth yields lower profit, lower margins, and lower earnings. Lower expected earnings lead to lower stock prices, and valuations need to come down in the face of lower expected earnings.
As we have written many times over the past year, valuations for most stocks were already stretched, and well above historical averages. Throw in the expectation of lower earnings, and stock prices need to adjust downward to reflect this expectation. On a fundamental level, this is the reason for the market sell-off.
We recognize that the decline in every stock is unnerving. We are a bit frazzled ourselves but are adjusting your portfolios in response to the price movement of the markets. We came into April with a much lower risk profile than just a month prior and have even raised around 10% cash given the declines from mid-February to late March. However, during bear markets, most stocks are highly correlated to the downside, and there are very few places to hide other than cash, and often U.S. treasuries.
It is imperative to understand that one rarely succeeds in trying to “time” the market. Fully abandoning risk and moving to cash, in our opinion, and as fiduciaries, is not an option. Markets go up, and markets go down. It is over time that taking risks are rewarded with gains.
However, adjustments can be made to minimize risk. We are moving away from assets that are seeing steeper declines (ie: growth, small caps) than the broad market and moving to assets that are declining less (ie: foreign, value/quality). However, accounts are still going down, just at a lower rate than the overall market.
To realize long-term gains, it is necessary to be in the market during its best days. However, the best days are often near the worst days. When the market does eventually find a bottom, gains tend to be strong, and participation in market bottoms often determines one’s future returns. Thus, while we can move to as much as 60% cash, we will NEVER be 100% cash due to the above reasoning.
So, what may enable the market to stop going down?
- Negotiations – If countries agree to reduce or eliminate their tariffs on us then Trump may reciprocate and reduce or eliminate tariffs on them.
- If Trump decides that the short-term pain is greater than the potential long-term benefits of onshoring production and bringing jobs back home, then he could change course on his tariff policy.
- If stock prices become so depressed that valuations become too compelling to ignore, then demand for high quality stocks could return to the market, driving up stock prices.
- If every potential seller of stocks has sold, leaving no sellers left, then buyers of stocks will again take control and bid stock prices higher.
- The Fed could cut rates to create liquidity, spurring lower cost economic activity and create demand in the stock market.
There are other scenarios, but we will start with the easy ones. Point being, markets will not go down to zero. There is too much capital around the world that needs to be allocated for long term productivity, that there will be a bottom at some point. We just do not have any visibility when that may occur.
However, since our process is based on price observation, when markets do bottom and begin to go up again, we will home in on the more productive areas of the market to enter. Typical during bear markets are false breakouts, followed by another leg down. Markets rarely go straight up or straight down, so we anticipate some false breakouts and additional breakdowns in the market. We will be proactive in adjusting the amount of risk we will take with your investment portfolios.
We are all in this together – remember, we are investing right alongside you and are not investing any differently than how we are investing your accounts. We sympathize with your concerns and are here for you as an objective voice of reason.
We WILL get through these troubling times. We are committed to preserving capital and managing risk in times like these, and sunny skies will again return.
