Morale has taken a quick turn for the worse since the middle of February. The investment beating manifested most in the more highflying, expensively valued, beta-oriented sections of the market. The proximate cause was the realization that actual imposition of tariffs, government downsizing/turmoil, and unpredictable policy could have a destabilizing effect on consumers and businesses planning for the near-term future and fear that rosy projections for an AI future may meet with some surprises along the way.
Stories of some softness. It’s not that the incoming data has been bad, but the economic data has suggested some cooling, and the company guidance has been disappointing. Housing has been weak, employment measures have been ticking to the downside, and retail sales came in light. Consumer sentiment has declined significantly. S&P 500 Companies’ 4Q24 earnings reports generally came in better than expected (in December, the year over year growth was expected to be 12.5%, but it has come in at 18.3%), but guidance for 1Q25 has been notably disappointing with growth now expected to come in at 7.1% down from 11.6%. Expectations for the full calendar year 2025 are currently 11.5% down from 14.8%. The explanations seem to all point to the increased level of uncertainty, along with a certain amount of natural deceleration from elevated levels.
The Switch from Growth to Value/Defensive. Investor sentiment has deteriorated along with stock prices and FOMO has switched from fear of missing out on upside to fear of missing out on capital preservation. The fear of recession has re-entered the imagination with alacrity. Some first quarter GDP estimates are now negative although 2025 is still generally thought to show positive growth. Wall Street strategists are beginning to lower their estimates and target prices. The best performing index in the US year-to-date is now the Russell 1000 Value, reversing positions with the Russell 1000 Growth from earlier this year. Health care and utilities have been two of the better performing sectors while retail and technology have been two of the worst.
How long will it take? Markets don’t move in a straight line and tops and bottoms are processes. The market rapidly moved from overbought to oversold and has bounced a little as of this writing. We have said that we expected growth expectations to come into question and the market to be choppy this year as a number of issues are worked out politically, economically, and in the markets. These issues are complex, intertwined and highly uncertain. The new administration has been clear that they are taking actions with the long term in mind. This could take a while. We do believe, however, that the United States remains one of the most solid economies and societies in the world and, in our view, is likely to remain resilient.
If it’s sloppy, eat it over the sink. Inspiration from author Tom Robbins, who passed away earlier this year. It reminds us to be aware of what we have at hand and be prepared to change as the situation requires (and try to not make a mess). We have been steadily de-risking our portfolios and view our positioning as conservative. We are underweight global equities, diversified among capitalizations and styles, neutral fixed income duration, overweight cash and have a significant position in gold. We believe this leaves us able to adjust to the markets as they develop.
