• U.S. Large Cap stocks, or the S&P 500 index, were down about 4.3% in Q1.
• Japan (TOPIX) was the best-performing major equity market, up about 3.6%.
• Europe ex-UK was down about 2.3%; the UK (FTSE All-Share) up about 2.4%, aided by its commodity tilt.
• Emerging Markets were roughly flat at down 0.1%; Asia ex-Japan was down about 1.1%.
• The Bloomberg Commodity Index was the standout performer of the quarter, up 24.4%.
• Brent crude surged 63% in March alone — the largest single-month increase in four decades.
• U.S. Treasuries held their ground, roughly flat for the quarter. Global bonds sold off broadly.
• Value stocks (+1.3%) significantly outperformed growth stocks (-8.4%).

Where Do We Stand?

• The outbreak of war in the Middle East and the closure of the Strait of Hormuz was the defining event of Q1 — and it is far from resolved.
• Markets are resting on a handful of supportive pillars, and more than one is showing cracks.
• Inflation risks have re-emerged, but history suggests oil shocks don’t automatically translate into sustained broad inflation.
• The consumer and labor market are softening quietly beneath the surface.
• Diversified portfolios with commodity and value exposure were rewarded this quarter — a reminder of why broad diversification exists.

The first quarter of 2026 was not a quarter that rewarded complacency. After two consecutive years in which the U.S. market posted outsized gains and defied nearly every bearish forecast, Q1 delivered a more complicated reality: war in the Middle East, an energy shock, a Supreme Court ruling that reshuffled the tariff landscape, and a technology sector that found itself under the microscope just as its spending commitments were reaching new heights. The result was a volatile, uneven quarter in which the usual winners stumbled and an unlikely asset class — commodities — ran the table.

The Strait of Hormuz and the Energy Shock

More than 20% of the world’s oil and gas flows through the Strait of Hormuz. With the conflict effectively closing it, Brent crude — which began the year near $70 per barrel — surged 63% in March alone. At the pump, the national average for regular unleaded climbed to $4.00 per gallon by the end of March, up more than a dollar in a single month. The indirect effects run deeper: energy is an input into virtually everything — transportation, manufacturing, agriculture, distribution.

The obvious fear is that broad inflation follows. History, however, offers some reassurance. Looking back at ten oil price shocks since 1986, the average increase in oil prices was 115%, yet the net change in core PCE inflation from start to finish of those episodes was essentially zero. What happens is that energy prices spike, consumers cut back on discretionary spending, and those offsetting forces keep broad inflation relatively contained. The pain is real, particularly for lower-income households. The inflationary panic, historically, has tended to exceed what the data ultimately delivers.

Commodities Win. Tech Stumbles. Value Makes a Comeback.

The rotation was stark. Technology had a rough quarter as investors questioned whether the hyperscalers could actually demonstrate returns on enormous AI capital expenditures. U.S. software stocks fell 23% from January through late February. Value stocks finished up 1.3% while growth stocks were down 8.4%. Portfolios with commodity exposure, energy, and value orientation were well-positioned — not because anyone predicted war, but because diversification doesn’t require prediction.

The Supporting Pillars Are Wobbling

Markets were being held up by four factors heading into the year: solid Goldilocks economic data, AI enthusiasm, expected Fed rate cuts, and a tolerant attitude toward policy noise. All four came under pressure simultaneously in Q1.

The labor market is softening. December job growth came in at just 50,000, with prior months revised lower. Real disposable income per capita grew by only $233 over the past year — essentially flat. Consumer sentiment, while recently ticking up to 57.3, remains well below the long-run average of 84.7 and at levels historically associated with recession. The Fed held rates steady at its March meeting with just one cut penciled in for the year. And with Kevin Warsh likely to become the next Fed Chair, the political pressure on the central bank is only going to intensify.

Pullbacks Are Normal. The Chart Proves It.

The S&P 500 is down about 4% for the year with an intra-year drawdown near 9% through early April. Uncomfortable, yes. Unprecedented, no. As the chart below shows, significant intra-year declines are entirely normal — even in years that finish positive. In 2025, the index experienced six separate pullbacks of 5% or worse and still delivered 16% for the year. Knowing when to get out is hard. Knowing when to get back in is harder. The market’s best days cluster near its worst, which means stepping aside often means missing the rebound you were waiting for.

In Conclusion

The first quarter of 2026 was a reminder that markets don’t travel in straight lines, and that the supports holding valuations aloft at any given moment are not permanent fixtures. War in the Middle East, an energy shock, a Supreme Court ruling on tariffs, softening labor data, and a technology sector wrestling with its own expectations — that is a lot to process in one quarter.

What it calls for is not dramatic action, but clear thinking. Portfolios built with diversification across asset classes, including commodities, value exposure, and fixed income — were positioned better for this quarter than those concentrated in the trends that dominated 2024 and 2025. That positioning wasn’t a prediction of war; it was the structure that proper planning provides when you don’t know exactly what comes next.

The fog is thick right now. The Middle East situation is fluid. The AI earnings cycle has more chapters to write. The labor market bears close watching. And the Fed faces more political pressure than it has in some time. We are monitoring all of it and will keep you informed as the picture develops.

In the meantime, the plan holds. That’s what it was built for.

If you have any questions or have experienced any changes in your financial situation please do not hesitate to Contact Me

We appreciate you being a part of the Shorepine Wealth Management family!

Investment Products are Not FDIC Insured. No Bank Guarantee. May Lose Value. Investing involves risk. All written content on this website is for information purposes only. Opinions expressed herein are solely those of Shorepine Wealth Management, unless otherwise specifically cited. This is neither a solicitation of offers to buy securities nor an offer to sell securities. Past performance is no guarantee of future results. Material shown here is believed to be from reliable sources however, no representations are made by our firm as to another parties’ accuracy or completeness. All information or ideas provided should be discussed in detail with an advisor, accountant or legal counsel prior to implementation. Shorepine Wealth Management, LLC is a registered investment adviser offering advisory services in the State of California and in other jurisdictions where registered or exempted.

The post Market Update, First Quarter 2026 – Through the Straits… appeared first on Shorepine Wealth Management.

• U.S. Large Cap stocks, or the S&P 500 index, were up about 2.7% in Q4.
• The developed market of Japan was up about 8.8%.
• Europe and the U.K. were up about 5.9% and about 6.4% respectively.
• Emerging Markets and Asia (Ex-Japan) were up about 4.8% and 4.3% respectively.
• Global fixed income returns ended the quarter all up from 0.3% (Euro Gov.) to 3.0% (EM Debt).

Where Do We Stand?

• While the pace of gains has slowed, the markets continued to defy the odds to again reach all time highs.
• Valuations moved higher and still remain elevated versus historic averages with earnings growth still needed to support further gains.
• Market participants continue to ignore the volatility around tariffs, global unrest and Fed Policy for the time being, which leads one to caution for what 2026 may have in store.
• We remain in a position to weather future volatility with client holdings in Gold and U.S. Treasuries while looking to be more active in opportunities when they present themselves.

The fourth quarter of 2025 capped a year in which markets and the broader economy repeatedly defied consensus expectations. Despite tariffs, fiscal expansion, and a series of unorthodox policy interventions from Washington, the U.S. economy performed substantially better than many anticipated, and equity markets finished the year with positive results across major asset classes—a phenomenon some describe as an “everything rally,” the first since the pandemic era where virtually all major asset classes delivered gains.

This resilience reflects a confluence of factors: falling short-term interest rates, strong corporate earnings, optimism around technology and artificial intelligence, and market expectations that policy extremes will moderate. Global returns were broad-based, with U.S. sectors, emerging markets, and commodities all contributing.

U.S. equities posted modest but positive returns in Q4. Large-cap technology and communication services sustained momentum, while value and international stocks participated meaningfully. Emerging markets performed strongly, driven by Asia and Latin America. Fixed income contributed positively but unevenly. Falling Fed rates provided support, while rising long-term yields offset some gains, shaping a complex rate environment.

Economic Signals: Data Dichotomy & Labor Market Weakness

Third-quarter GDP growth was recently announced at 4.3%, yet unemployment is rising, hours worked are flat, and ADP saw a September and November payroll contraction. For the year, ADP saw a modest gain in employment of only about 430,000 jobs. Temporary distortions such as tariffs or EV sales timing may contribute, but rising productivity from AI adoption may also be a factor.

Layoffs were notable: 202,118 in 3Q25, the highest third-quarter total since 2020. Year-to-date cuts reached 946,426 (+55% YoY), the fifth-highest YTD total in 36 years, indicating a soft labor market even amid strong GDP growth.

Interest Rates and Policy Confidence

Since the Fed’s first rate cut on 9/18/24, the 10-year Treasury has risen ~50bps, contrary to historical patterns of lower yields following cuts. This may reflect investor concerns over fiscal sustainability, tariffs, or Fed independence. Policy shifts across major economies have further contributed to a complex global rate environment. This bear close watching.

Narratives in Focus: AI, Productivity, and Risk Assessment

AI and technology investments remain dominant. Institutional commentary suggests this trend is structural, though near-term repricing risks exist. Corporate Capex on AI has surged even as labor gains lag, highlighting a potential decoupling between investment and hiring.

Volatility and Market Behavior

It is important to remember that markets are not written in straight lines. In the 2022 Bear Market, the S&P 500 experienced significant volatility and declines due to high inflation, Federal Reserve interest rate hikes, and global economic concerns, marking a bear market (down 20%+) but not a sustained 25%+ drop for the whole year. Then again in April of 2025, a sudden, sharp drop occurred following new US tariffs, with the S&P briefly down over 23% from its February 2025 peak before a rapid recovery within weeks, noted as the largest decline since the COVID crash.

If you consider the 2025 drop to be an anomaly, we are now about 3½ years from the most recent “bear market”. However, we have some time before the 5-7 year cycle of 25% declines is upon us.

Historical S&P 500 declines since 1928:

• 1% declines: 50–60 times/year
• 3% declines: 7–8 times/year
• 5% declines: 3–4 times/year
• 10% declines: every 1.1 years
• 15% declines: every 2 years
• 20% declines: every 3½ years
• 25% declines: every 5–7 years

In Conclusion

We are in a new world of productivity transformations as AI-driven efficiencies take root in the broader economy. At the same time, GDP growth can coexist with softening labor markets for a time. The lag between AI investments (happening now) and the earnings gains from AI adoption (down the road) will likely determine whether or not the markets need to reset or not. The market is riding high on the investment cycle IN Artificial Intelligence right now. At some point we will need broader economic earnings to move higher FROM the adoption of AI. At the same time, rising long-term yields warrant close attention and could derail both cycles.

The fourth quarter of 2025 closed a year defined by resilience, narrative evolution, and macroeconomic divergence, underscoring the importance of disciplined planning, risk management, and diversified positioning.

If you have any questions or have experienced any changes in your financial situation please do not hesitate to Contact Me.

We appreciate you being a part of the Shorepine Wealth Management family!

Investment Products are Not FDIC Insured. No Bank Guarantee. May Lose Value. Investing involves risk. All written content on this website is for information purposes only. Opinions expressed herein are solely those of Shorepine Wealth Management, unless otherwise specifically cited. This is neither a solicitation of offers to buy securities nor an offer to sell securities. Past performance is no guarantee of future results. Material shown here is believed to be from reliable sources however, no representations are made by our firm as to another parties’ accuracy or completeness. All information or ideas provided should be discussed in detail with an advisor, accountant or legal counsel prior to implementation. Shorepine Wealth Management, LLC is a registered investment adviser offering advisory services in the State of California and in other jurisdictions where registered or exempted.

The post Market Update, Fourth Quarter 2025 – Resilience, Divergence, and Evolving Narratives appeared first on Shorepine Wealth Management.

• U.S. Large Cap stocks, or the S&P 500 index, were up about 8.1% in Q2.
• The developed market of Japan was up about 11%.
• Europe and the U.K. were up about 2.8% and about 6.9% respectively.
• Emerging Markets and Asia (Ex-Japan) were up about 10.9% and 11.1% respectively.
• Global fixed income returns ended the quarter mixed from up 4.4% (Emerging Markets) to down 0.2% (Euro Gov).

Where Do We Stand?

• The market has now reached 28 new all time highs during 2025 in a continued recovery from the Q1 mini bear market.
• Valuations moved higher and still remain elevated versus historic averages with earnings growth still needed to support further gains.
• Market participants have seemingly ignored the volatility around tariffs and Fed Policy for the time being, which leads one to caution for the remainder of the year.
• We remain in a position to weather future volatility with client holdings in Gold and Cash while looking to be more active in opportunities when they present themselves.

Patient investors were rewarded with a calmer and better third quarter after suffering through the market volatility we saw in the first half of 2025. Despite those volatile markets earlier in the year, the overall market was able to reach 28 record highs thus far in 2025. This has caused some investors to worry that the inevitable pullback is due. However, markets can trend in one direction or another for much longer than anyone expects.

For example, in 2021 the market saw 70 all time highs before correcting through much of 2022. With the Federal Reserve expected to provide about 100 basis points of rate cuts over the next 12 months, markets seem “priced to perfection” right now. Anything that could de-rail those rate cuts could have an adverse effect on equities and change the market narrative with extreme expediency. Reaching new highs is a normal part of any market cycle and not necessarily a harbinger of a downturn ahead. 

The Divergence

The economy is seemingly on a different path than market expectations. Suddenly weaker labor markets over the past few months is the main culprit. We are seeing waning labor demand, lower numbers of job openings, lower numbers of people finding jobs, slower wage growth and a general malaise in the job market. Whether that is due to a lack of demand for workers by companies or a lack of supply due to new immigration policies is yet to be determined. One thing is sure. Job growth is one of the pillars of a growing economy and it has begun to show some cracks. Demand is softening and one can only hope it is temporary.

Data Shutdown

Further exacerbating the issues at hand is the more recent government shutdown. Due to the shutdown, the systems and people that normally provide market participants with economic data are no longer doing that work. Thus, the markets are flying a little bit blind right now. Should the government re-open in a few weeks or more there will be a glut of delayed data that markets will have to digest all at once.  If the data (that is eventually released) is mostly weak we could see a quick, overly emotional reaction in the markets. Something that bears watching.

Protective Measures

If we are in fact in an economic slowdown it will likely not result in the same environment we have seen in prior slow or recessionary periods. That is because the Federal Reserve today has a lot of tools at its hand to protect the economy. The Federal Reserve’s target rate is now set at 4.25% – 4.5%. Hence. there is still a lot of room to cut rates and spur on economic growth, barring any other major issues.

Even more promising, economic slowdowns in conjunction with a rate cutting environment (like we see today), is great for equities. That is assuming there is no profit recession at the same time. Even if revenues were to go flat for a period, corporations can leverage their balance sheets while enjoying falling borrowing costs. This would allow them to still provide shareholder returns until the economy improves. This is likely a primary driver of the disconnect we see between stocks and the economy.

Stalled Tariff Inflation

There still remains a real risk that the markets are underestimating the inflationary impact of tariffs. Much of the effect of tariffs are still working through the system to the consumer. In fact, a recent survey by the Federal Reserve shows the persistent risk of spikes in inflation expectations. That is because the estimates for future inflation is not being driven by typically volatile items like food and energy. Households are now worried about the cost of things that are imported, which make up a large portion of US consumer spending. That could be sticky inflation and much harder to tame than the more volatile items like food and energy. If inflation were to remain persistent then the Fed has a much harder time lowering interest rates. Without lower rates, companies may find it harder to produce shareholder returns in a slowing economy. 

In Conclusion

The economic and market landscape remains complex. There are opportunities today in areas such as Artificial Intelligence, Technology, Real Assets and Industrial companies. At the same time tariff effects, consumer sentiment, labor weakness and the oft-cited inflation expectations will remain as a damper on market sentiment. Markets are riding a razors edge of positivity for the time being and those that have remained invested have been rewarded. Looking forward, the rest of the year and beyond will likely bring more of the same. Challenges that need to be addressed and opportunities to be exploited.

A good portfolio in these times will be able to manage both sides of the ongoing story. The key will be having the right portfolio that can benefit from any of the above scenarios, whether it be surviving a downturn or thriving during times of plenty.

If you have any questions or have experienced any changes in your financial situation please do not hesitate to Contact Me.

We appreciate you being a part of the Shorepine Wealth Management family!

Investment Products are Not FDIC Insured. No Bank Guarantee. May Lose Value. Investing involves risk. All written content on this website is for information purposes only. Opinions expressed herein are solely those of Shorepine Wealth Management, unless otherwise specifically cited. This is neither a solicitation of offers to buy securities nor an offer to sell securities. Past performance is no guarantee of future results. Material shown here is believed to be from reliable sources however, no representations are made by our firm as to another parties’ accuracy or completeness. All information or ideas provided should be discussed in detail with an advisor, accountant or legal counsel prior to implementation. Shorepine Wealth Management, LLC is a registered investment adviser offering advisory services in the State of California and in other jurisdictions where registered or exempted.

The post Market Update, Third Quarter 2025 – The Divergence? appeared first on Shorepine Wealth Management.

• U.S. Large Cap stocks, or the S&P 500 index, were up about 10.9% in Q2.
• The developed market of Japan was up about 3.8%.
• Europe and the U.K. were up about 10.2% and about 9.1% respectively.
• Emerging Markets and Asia (Ex-Japan) were up about 15.6% and 14.8% respectively.
• Global fixed income returns ended the quarter all up from 0.8% (US Treasuries) to 4.7% (Global Inflation-Linked).

Where Do We Stand?

• The market recovered from the Q1 mini bear market to reach all time highs.
• Valuations moved higher and still remain elevated versus historic averages with earnings growth still needed to support further gains.
• Market participants have seemingly ignored the volatility around tariffs and Fed Policy for the time being, which leads one to caution for the second half of the year.
• We remain in a position to weather future volatility with client holdings in Gold and Cash while looking to be more active in opportunities when they present themselves.

The second quarter of 2025 saw significant volatility that pulled markets down to multi-quarter lows and then all the way up to all-time highs. Tariff policy uncertainty and war in the Middle East drove markets lower early in the quarter while pauses in tariffs and strong earnings drove markets higher later in the quarter. It was a “tale of two markets” during the quarter that illustrated the variance of risks our markets have and will continue to face in the coming quarters. As we look to the second half of 2025 many questions remain unanswered. Will the full impact of tariffs begin to be felt in Q3? Will the Federal Reserve continue to hold rates higher in the face of looser Fiscal Policy?

Tariff Schmariff

The effective tariff rates on US imports now sits at the highest level since the 40’s. Yet, there is still extreme uncertainty around how these tariff are implemented. For example, in late May a US trade court ruled against the President’s use of emergency powers to enforce reciprocal tariffs. However, there are multiple legal routes for them to still enact these reciprocal tariffs. So, likely they will remain for the time being. Further complicating the issue is the fact that the revenue derived from these tariffs are now in the projections for the One Big Beautiful Bill (OBBB) recently signed into law. 

OBBB-scurification

The OBBB will extend the tax cuts enacted in 2017 and add further fiscal gifts. Based on CBO estimates, the bill will add approximately $5.3 Trillion (with a T) of tax cuts and spending. This is estimated to be offset by about $2.9 Trillion in revenue increases (including the aforementioned tariffs) and spending cuts. With interest, the OBBB is expected to add about $4 Trillion to the national debt over the next 10 years. These are not trifling numbers. Further confusing the analysis, the bill relies on typical budget gimmicks to obscure its potential impact. For example, key tax breaks are set to arbitrarily expire in 2028. If we know anything about our government, once a tax break is given it is rarely taken away. Just look at what this bill did to the 2017 tax cuts that were supposed to expire in 2026.

Truss the Bonds

The Bond Market is understandably weary of the direction our Fiscal and Monetary Policy are heading. 10-Year Treasury Yields rose slightly over the quarter as the implications of the OBBB were digested. Adding $4 Trillion to the debt was seen by many as mis-guided at a time that our debt already represents 100% of GDP. There is a lesson in all this afforded to us by Liz Truss in 2022. Liz Truss became Prime Minister of the UK in late 2022. She immediately enacted substantial tax cuts, extreme deregulation and increased borrowing at a time when their economy was near full employment. Sound familiar? When an economy is near full employment, fiscal loosening only results in higher borrowing costs. The Bond market is telling us this loud and clear.

Currency Risk

In the UK experiment, we saw their currency fall precipitously, government borrowing costs rise and Liz Truss resigning in 49 days. With the US Dollar still reigning as the reserve currency around the world one cannot expect a precipitous fall of the Dollar. However, we have seen the US Dollar fall significantly over the first half of the year. The US Dollar index fell more than 10% over the first six months capping its worst first half performance since 1973. The US Dollar will not lose its status as a reserve currency overnight but it is certainly trading much more like a “risky” country than a stable one.

Inflation Revisited

The global economy remains for the time being on relatively stable footing. In the face of soaring inflation and high interest rates over the past few years, households and companies have managed to maintain strong balance sheets. However, from a spending perspective households and companies are leaning more towards “wait and see” than “party like it’s 1999”. This will likely lead to a slowing of the US economy rather than recession. However, migration policies could very well lead to a supply shock (less labor force growth equals pressure on wages to move higher and less goods being created all equals higher inflation). In conjunction with a demand shock from looser fiscal policy, we may be on the precipice of another inflation boom.

Bearing Caution

This is the real risk today to the US economy. Higher inflation, slowing growth and a waste of $4 Trillion. While much of this may sound like armageddon, the ship is not sinking. Strength around the world remains. China has been able to navigate the tariff storms while Europe remains in recovery mode. The UK has several tailwinds including a huge amount of savings and favorable trade backdrops. Furthermore, Bonds, while volatile at times recently, remain a considerable downside protector that also happens to pay us while we wait for sunnier days ahead. This all speaks to maintaining a strong asset allocation to many different investment opportunities as we are presently at Shorepine Wealth Management.

If you have any questions or have experienced any changes in your financial situation please do not hesitate to Contact Me.

We appreciate you being a part of the Shorepine Wealth Management family!

Investment Products are Not FDIC Insured. No Bank Guarantee. May Lose Value. Investing involves risk. All written content on this website is for information purposes only. Opinions expressed herein are solely those of Shorepine Wealth Management, unless otherwise specifically cited. This is neither a solicitation of offers to buy securities nor an offer to sell securities. Past performance is no guarantee of future results. Material shown here is believed to be from reliable sources however, no representations are made by our firm as to another parties’ accuracy or completeness. All information or ideas provided should be discussed in detail with an advisor, accountant or legal counsel prior to implementation. Shorepine Wealth Management, LLC is a registered investment adviser offering advisory services in the State of California and in other jurisdictions where registered or exempted.

The post Market Update, Second Quarter 2025 – One Big Beautiful Market? appeared first on Shorepine Wealth Management.

• U.S. Large Cap stocks, or the S&P 500 index, were down about 4.3% in Q1.
• The developed market of Japan was down about 3.4%.
• Europe and the U.K. were up about 6.4% and about 4.5% respectively.
• Emerging Markets and Asia (Ex-Japan) were up about 3.0% and 1.9% respectively.
• Global fixed income returns ended the quarter mostly up from 0.6% (Europe HY) to 3.4% (Global Inflation-Linked). Europe Gov Bonds were down 1.3%.

Where Do We Stand?

• The market took a pause from the multi quarter rally as uncertainty suppressed market and economic sentiment.
• Valuations moved lower but still remain elevated versus historic averages with earnings growth needed to support further gains.
• The markets are now trading in a more defensive posture as volatility around tariffs and Fed policy take center stage.
• We remain in a position to weather this volatility with client holdings in Gold and Cash while looking to be more active in opportunities when they present themselves.

As the U.S. Economy looks to separate itself from the rest of the world through tariffs and deportations, the markets reacted with volatility and a drop in equity prices. The S&P 500 ended the first quarter down about 4.6%. This was the worst performance for the index in three years. The Nasdaq 100 also shed 8.3% during the quarter as the anxiety about a possible slowdown in data center infrastructure buildouts materialized. At the same time International markets and bonds had a good quarter. 

Growth Risks

For the past few years there has been an excessive amount of optimism around US economic growth. As the private sector exhausted its extraordinary pandemic savings, the realization of this growth has now been diminished. President Trump’s policies have also amplified these risks to growth. Higher uncertainty, a loss of the migrant workforce, tariffs and a lack of fiscal support have deteriorated sentiment to the point where the U.S. now sleeps alone in a bed of its own making.

Have Some Fear

All is not lost, however. The US consumer is still stronger than it was before the Great Financial Recession of 2008/2009. The job market is in a better place and savings, while diminished, are nowhere near the low levels on the mid-2000’s. Furthermore, the wealth effect in the US is now a major driver of the economy. Gains in housing prices and financial assets over the past three years have been astronomical.  Spending by wealthier families have far outstripped that of less wealthy families in the U.S. In fact, in 2023 the top 30% (by wealth) of consumers drove 85% of the growth in consumer spending. This is a factor to watch closely. If the top consumers in the U.S. decide to pull back it could have an outsized effect on the overall health of the economy and hence, the equity markets.

A Tail of Two Economies

A major effect of the past few years has been the bifurcation of the US economy. We now have an environment where the top portion of the earners in the US far outstrip the bottom portion. This is true in earnings as well as overall wealth and both will have an effect going forward. In the meantime, the middle class has been squeezed so much that it is merely a shell of what it once was. A healthy middle class is paramount to a healthy economy. With a dwindling middle class and a lower class merely surviving, the cracks in the economy have been deepened. Just how deep they will become and if the economy hits a tipping point because of this is yet to be seen.

Tariff Tantrum

To make matters worse, the administration has now thrown a monkey wrench into what was arguably the smoothest running global supply chain in the history of the world. Their stated goal was to make it hard to outsource work (at cheaper labor costs) to the rest of the world while making US manufactured goods appear cheaper. While the goals may be honorable in some people’s eyes, the means by which they have gone about it are deeply flawed.

For example, some believe that the decision makers in the White House simply divided our trade deficit with each country by that country’s exports to the US to determine what their “assumed” tariffs are on the US. They then cut that number in half and stated “we are being nice, only adding a tariff of half of what you are tariff-ing the US”. This is flawed on many levels. Just because a country has a trade deficit with the US more than its exports does not mean they are tariff-ing us at extreme levels. There are many reasons why this could occur. Not all the reasons are bad for the US economy.

Leads to Uncertainty

The uncertainty of all of the above has affected the markets. The question now is whether or not this will get deeper. Confidence in business has fallen and consumer confidence has collapsed to levels not seen since the pandemic. Economies around the globe will certainly feel the effects if the US economy falters. More certain is the effect all of this will have in the short term on prices. Even prior to the tariff tantrum, US inflation data was heading in the wrong direction.

The new tariffs will most certainly push prices higher in the short term. This puts even more uncertainty on the Federal Reserve as a slowing economy in conjunction with higher inflation makes their job even harder. They’ll want to cut rates to fight a slowing economy while wanting to raise rates to fight inflation. A deflationary event could solve this problem but that is very ugly from an economic standpoint. They are now between a rock and a hard place in terms of policy decisions.

The Angst of Markets

Market downturns can cause a lot of anxiety to the average investor. Human nature tells us to sell everything to make the anxiety go away. That is a natural feeling. The same thing happened to many people during the drastic market downturn associated with the pandemic. It felt good to sell and be on the sidelines while the world fell apart around them. However, when the markets recovered, many did not get back in and participate in one of the greatest market rallies of our lifetimes. If one could know with certainty how low the markets would decline, how long it would take and exactly when to get back in for the inevitable recovery then it would be a simple decision. Unfortunately, we don’t have the luxury of seeing the future. 

Conclusions

The markets have been generous over the past few years. Markets also tend to take back some of their generosity from time to time. The American economy and markets have gotten through many wars (trade or otherwise) innumerous times in its history. History suggests this time will be no different. The portfolios at Shorepine have been positioned well to weather this storm and in most cases even offer opportunities to benefit from any further volatility. 

If you have any questions or have experienced any changes in your financial situation please do not hesitate to Contact Me.

We appreciate you being a part of the Shorepine Wealth Management family!

Investment Products are Not FDIC Insured. No Bank Guarantee. May Lose Value. Investing involves risk. All written content on this website is for information purposes only. Opinions expressed herein are solely those of Shorepine Wealth Management, unless otherwise specifically cited. This is neither a solicitation of offers to buy securities nor an offer to sell securities. Past performance is no guarantee of future results. Material shown here is believed to be from reliable sources however, no representations are made by our firm as to another parties’ accuracy or completeness. All information or ideas provided should be discussed in detail with an advisor, accountant or legal counsel prior to implementation. Shorepine Wealth Management, LLC is a registered investment adviser offering advisory services in the State of California and in other jurisdictions where registered or exempted.

The post Market Update, First Quarter 2025 – The Maleficent Severance… appeared first on Shorepine Wealth Management.

• U.S. Large Cap stocks, or the S&P 500 index, were up about 2.4% in Q4, 25% in 2024.
• The developed market of Japan was up about 5.4%.
• Europe and the U.K. were down about 3.6% and about 0.4% respectively.
• Emerging Markets and Asia (Ex-Japan) were down about 7.8% and 7.4% respectively.
• Global fixed income returns ended the quarter mixed from +1.7% (Europe) to -6.7% (Global Inflation-Linked).

Where Do We Stand?

• The market rally advanced a bit further in Q4 on the results of the US Presidential Election.
• Valuations still remain elevated versus historic averages with earnings growth needed to support further gains.
• The markets will likely now trade upon any policy decisions made in the beginning of the next administration.
• We remain in a position to weather any volatility with client holdings in Gold and Cash while looking to be more active in opportunities when they present themselves.

Here in San Francisco we have a nickname for our beloved fog. We call it “Karl the Fog”. Karl is a symbol of the city’s resilience and adaptive nature. The name is a reference to the giant in the 2003 film Big Fish. In the film, Karl the giant is a misunderstood character. While everyone is afraid of Karl it turns out he is just a big, hungry, lonely tall person. Not much to worry about. Just something that needs to be understood.

Ch, Ch, Ch, Changes…

Much like Karl the Fog, there is a fog around the upcoming political change that 2025 will bring. While the investing public have been given some inclination as to what changes are coming, no one knows which ones will be implemented and what those changes actually will do. Will the threat of tariffs be enacted? Will they wreak havoc on the prices of goods and services? Are they just simply a threat that is being used to implement other global policy changes? Many questions, little answers as we head into the new year. Markets prefer answers.

Beware the Forecasts

One way to get a “potential” answer is through predictions. At the end of every year all of your favorite market prognosticators come out with their prediction asa to what the markets will do in the coming year. As you can see on the chart from Bloomberg below, strategists tend to herd around an easily digestible return expectation for the year. This year is no different, with the majority of forecasts falling in the 5% – 10% range. 

However, I would warn you that these are mostly always wrong. As one can see below, over the past 25 years the predictions were too optimistic nine times, too pessimistic twelve times and pretty close only 4 times. Even more alarming is the fact that for eleven of those years the actual return didn’t even fall into the range of predictions. That means almost half the time, all the forecasters are completely wrong. Keep that in mind as you read the financial news over Q1.

Answers

The answers to many of our questions will be revealed through the passage of time. How long this policy uncertainty will last will be a factor of the administration and how quickly they may or may not implement their plans. From raising tariffs to deportation policies to lowering taxes and loosening regulations. It is difficult to say whether some or all of these goals will be implemented and how long they will take to be effected. One can be sure the Democratic caucus will be there blocking the door on all these goals. These are certainly areas to watch closely. 

Inflation

Inflation is another area to watch closely. While we have seen some easing in inflation over 2024 in some areas, other areas bear watching. Policy on trade, supply chain disruptions due to tariffs and labor constraints could easily re-ignite the inflation problems we are just coming out of. A re-introduction of high inflation would force the Fed to pause all rate cuts for 2025 and certainly have a dampening effect on the euphoria of markets. 

Valuations

The S&P 500 now sits at a Forward Price to Earnings ratio of about 22 times. The last time it was this high was during the pandemic-fueled rally and the only time before that it was this high was right before the 2000 market crash. That doesn’t mean we are due for a crash. It simply lets us know that either earnings (the denominator in P/E) need to continue to grow or else the P (Price) is going to go down. Can earnings grow through all of the policy fog and prospective changes coming in 2025? Some companies will, some may not.

Recent Action

The market has been dropping lately for primarily two reasons. The Federal Reserve is one and Trump is the other. During the December Federal Reserve meeting the committee reduced the number of expected rate cuts in 2025 from four to just two. This, in conjunction with language changes around their commentary has led many investors to believe that the fed may be actually done with rate cuts for now. This has made the markets very sensitive to any data that does not give the Fed fuel to continue cutting rates. If the job market remains strong and inflation factors do not recede, the markets will continue to show weakness at times.

The second factor is President-Elect Trump. The volatility in headlines around tariffs, failed nominations, government shutdowns and potential seizures of canals and countries has undermined the post-election confidence that drove markets higher in November. Renewed inflation concerns did little to help.

Conclusions

In conclusion, the market had another very strong year and a decent fourth quarter. One may question whether this is repeatable for a third year or whether or not the drivers of said perforce will be the same (Mega Cap Tech, AI, etc…) or something else entirely.

Certainly, the US can continue to outperform on an economic basis as the rest of the world catches up to our lead in Tech and AI amongst other areas. However, with very high valuations, policy uncertainty, inflation still in play and high interest rates the expectations may be leaning towards too optimistic. Hopefully, the fog will clear early in 2025.

If you have any questions or have experienced any changes in your financial situation please do not hesitate to Contact Me.

We appreciate you being a part of the Shorepine Wealth Management family!

Investment Products are Not FDIC Insured. No Bank Guarantee. May Lose Value. Investing involves risk. All written content on this website is for information purposes only. Opinions expressed herein are solely those of Shorepine Wealth Management, unless otherwise specifically cited. This is neither a solicitation of offers to buy securities nor an offer to sell securities. Past performance is no guarantee of future results. Material shown here is believed to be from reliable sources however, no representations are made by our firm as to another parties’ accuracy or completeness. All information or ideas provided should be discussed in detail with an advisor, accountant or legal counsel prior to implementation. Shorepine Wealth Management, LLC is a registered investment adviser offering advisory services in the State of California and in other jurisdictions where registered or exempted.

The post Market Update, Fourth Quarter 2024 – Karl The Policy Fog… appeared first on Shorepine Wealth Management.

• U.S. Large Cap stocks, or the S&P 500 index, were up about 5.9% in Q3.
• The developed market of Japan was down about 4.9%.
• Europe and the U.K. were up about 1.6% and up about 2.3% respectively.
• Emerging Markets and Asia (Ex-Japan) were up about 8.9% and up about 10.6% respectively.
• Global fixed income returns ended the quarter positive from +5.2% (Italy) to +1.5% (Japan).

Where Do We Stand?

• The market rally advanced further in Q3 in spite of a bout of volatility in August .
• Valuations remain elevated versus historic averages yet earnings have shown some strength to support this.
• The markets will likely shift focus from the Federal Reserve to the coming Election cycle in Q4.
• We remain in a position to weather any volatility with client holdings in Gold and Cash while looking to be more active in opportunities when they present themselves.

With another quarter of healthy returns under investor’s belts the spectre of a soft landing for the U.S. (and Global) economies is now closer to reality. However, this soft landing scenario has not and will not come without extended bouts of volatility. Much like the bout we saw in Q3 this year. Currently, inflation has returned to tolerable levels while corporate earnings have been able to sustain and grow profits. This has allowed the Federal Reserve to begin cutting interest rates for the first time in four years.

Corrections come

The market began the quarter with a correction driven by a soft jobs report and Japan’s surprise decision to raise rates. By early August the S&P 500 was down by about 8% from recent highs. However, much of the losses had been recovered by the time the Federal Reserve met in mid-September, deciding to cut interest rates by 0.50%. The rate cuts and a less hawkish stance in Japan along with a round of Chinese stimulus calmed investors concerns. The net result for the quarter was another almost 6% added to an already very strong year for stock market returns.

Corrections go

The Federal Reserve has made it clear that any more weak data in the economy will spurn further interest rate cuts. Expectations at the beginning of the quarter for the rate level by the middle of 2025 was 4.4%. Today it stands closer to 3.2%. With a current level of 4.83% that means the market is expecting rates to be cut by 1.6% over the next 6 Fed meetings. That would be a significant move by a Fed that is probably still gun shy from inflation. Furthermore, I would not expect the Federal Reserve to act aggressively at the November meeting with a Presidential Election just two days beforehand. So really, there’s 5 meetings before the end of June 2025 to cut rates further. Unless something drastic happens between now and then the truth probably lies somewhere in between the current 4.83% and the expected 3.2%. Let’s call it 4%.

Inflation lingers

Driving a lot of these Federal Reserve moves will be the expectations on inflation. It has certainly cooled dramatically from its high of around 8% in 2022. However, we may not be done with the lingering effects of higher inflation. In fact, looking at the drivers of CPI (Consumer Price Index, a measure of inflation) any person on the street likely wouldn’t believe that inflation has “cooled”. Shelter (rent, mortgage, etc), food and transportation make up almost 60% of the index. All three of those items have moved higher and not cooled much. At least it still feels that way. If these items remain sticky and a shock on energy prices were to occur (See “Geopolitics below) then the Federal Reserve would have a much harder time continuing their interest rate cut cycle.

Geopolitics contained?

We have entered a different world as it pertains to geopolitics. The United Nations has been weakening with every new conflict and seems incapable of monitoring or controlling the rogue actors under its purview.  This has led to a leadership vacuum around the world. Regional actors are now beholden to expand their borders (Russia, China) and/or act in their own interests with no deference to global stability (Middle East, Africa). The United States still stands as the “Global Police Force” but can’t be everywhere at once. For now, the conflicts around the world seem to be regionally contained so as to avoid any major economic or market ramifications. However, when it comes to conflicts that can change in an instant.

The U.S. Election

The largest short-term catalyst for the markets right now is the U.S. Presidential Election. At this stage we do not know who will win. Nor do we know how each candidate will affect markets in the longer term. We also have no idea if the winning candidate will have full control of Congress to act on their policy platforms. One can assume a Trump victory would mean lower taxes, lower immigration, higher tariffs, more disputes around global defense costs and higher overall volatility. A Harris victory likely means the opposite. Some of these policy stances are positive for markets, others are negative. On both sides of the political spectrum. The best way to play it is to remain diversified and conservative during the election, which we are.

The Patience Game

The conclusion is that we are in a bit of a waiting game right now. Stocks have done a miraculous job of fending off any negative sentiment that has come their way. Bonds have also done well in their recovery from a tough few years. Furthermore, the correlations between stocks and bonds (how they perform relative to one another) have now returned to the negative correlation that usually prevails in markets. Meaning, when stocks go down, bonds go up and vice-versa. This has positive implications for portfolio construction and portfolio behavior going forward. As always we remain prepared in client portfolios to weather any downturns and take advantage of opportunities as they present themselves.

If you have any questions or have experienced any changes in your financial situation please do not hesitate to Contact Me.

We appreciate you being a part of the Shorepine Wealth Management family!

Investment Products are Not FDIC Insured. No Bank Guarantee. May Lose Value. Investing involves risk. All written content on this website is for information purposes only. Opinions expressed herein are solely those of Shorepine Wealth Management, unless otherwise specifically cited. This is neither a solicitation of offers to buy securities nor an offer to sell securities. Past performance is no guarantee of future results. Material shown here is believed to be from reliable sources however, no representations are made by our firm as to another parties’ accuracy or completeness. All information or ideas provided should be discussed in detail with an advisor, accountant or legal counsel prior to implementation. Shorepine Wealth Management, LLC is a registered investment adviser offering advisory services in the State of California and in other jurisdictions where registered or exempted.

The post Market Update, Third Quarter 2024 – Soft Landings and The Patience Game… appeared first on Shorepine Wealth Management.

• U.S. Large Cap stocks, or the S&P 500 index, were up about 4.3% in Q2.
• The developed market of Japan was up about 1.7%.
• Europe and the U.K. were up about 0.6% and up about 3.7% respectively.
• Emerging Markets and Asia (Ex-Japan) were up about 5.1% and up about 7.3% respectively.
• Global fixed income returns ended the quarter mostly negative from -2.7% (Japan) to flat (U.S.).

Where Do We Stand?

• The market rally continued in 2024 in spite of a reduced number of expected rate cuts.
• Valuations remain elevated versus historic averages yet earnings have shown some strength to support this.
• The markets will likely shift focus from the Federal Reserve to the coming Election cycle.
• We remain in a position to weather any volatility with positions in Gold and Cash while looking to be more active in opportunities when they present themselves.

In the face of continued reductions of the number of rate cuts coming in 2024, the US market showed remarkable resilience in the second quarter. Ongoing optimism around the health of the U.S. Economy supported risk assets once again to the tune of a 4.3% return in the S&P 500 for Q2. The index now sits more than 15% higher than the beginning of the year.  With corporate investments around Artificial Intelligence surging, labor markets tightening and the U.S. consumer continuing to spend, there seems to be little that can stop the current theme of U.S. expansion.

Over the past few months, inflation and geopolitics have taken a back seat to “good enough” corporate earnings, A.I. driven investment and continued expectations of lower interest rates on the horizon. We remain vigilant that any small trigger (can you say “Election Season”?) may pull negative sentiment to the forefront and quickly change attitudes around the U.S. and the Global economy.

Resilience in Growth

The current economic expansion, which began in mid 2020, is now moving past its fourth year anniversary. Driven by fits and starts, this expansion has certainly seen its share of volatility in the last 4 years and it continues to remain a volatile expansion. For example, Real GDP fell from 4.9% annualized in Q3 of 2023 to just 1.3% in Q1 of 2024. Some of this volatility can be attributed to the measurement of exports and inventories, often difficult items to measure. However, the truth remains, this expansion, while strong, has seen its fair share of unpredictability. A possible explanation for this has been the driving force of consumer spending.

While at times fickle, the US consumer has remained strong even as pandemic savings have dwindled. Looking forward, the question remains whether or not wage growth and wealth gains can push the consumer to maintain such high levels of spending. On the corporate side, investment spending has also remained resilient in the face of high interest rates and credit issues borne out of the mini banking crisis in 2023.

Resilience in Labor

The US unemployment rate has remained at or below 4% for the last 10 quarters. That is the longest it has been this low since the late 60’s. Payrolls continue to climb upwards, gaining almost 3 Million over the past year alone. At the same time labor force participation continues to rise surely helped by a surge in new migrants.

Yet, in spite of the surge in new labor force participants, wage growth remains positive, albeit slowing from 4.6 in April of 2023 to 4.1% this year. The net result is the labor markets remain above pre-pandemic levels and look to continue at trend levels after moderating a bit.

The Great Divergence

Economies around the world are beginning to diverge from each other. The US is once again acting as the global growth engine that could, while Europe and China seem to be struggling. India has been a surprise driver of global growth while Japan continues to shows signs of economic tailwinds. In a post-Covid world we are seeing the effects of insular policies around the pandemic continue to play out.

For example. in the U.S. there is a decided push to “onshore” manufacturing and supply chains as much as possible. When the pandemic hit in early 2022 many companies found out just how much they were beholden to a global supply chain. Remember all those new cars sitting in a lot because they were missing one semiconductor chip? They don’t want to be caught again. The result will be a world where cross border growth comes more from finished products. The days of a global supply chain may be limited.

The Big Monkey Wrenches

Monkey Wrench #1 – Consumer Spending

Following the onset of the pandemic recession, households in the U.S. rapidly accumulated excess savings. This was largely due to financial support doled out by the U.S. Government at the same time consumer spending saw a steep decline. It was hard to spend money if you couldn’t travel or go to entertainment venues (movies, bars, restaurants, etc..). These excess savings were estimated to have peaked at around $2.1 Trillion in August of 2021. They have been steadily declining ever since as consumers retuned to “normal life” and spent down their savings. As you can see below, these excess savings are now all completely depleted. This is where your “strong U.S. Consumer” has come from. 

Certainly there are other places where consumers can spend from. Gains in equities and other assets have been strong. They can be sold to raise spending cash.  Also, credit card debt has been rising and could rise further. However, undoubtedly there is one or two less cylinders firing in the engine that is the U.S. consumer. 

Monkey Wrench #2 – Elections have Consequences

The other large monkey wrench is the U.S. election cycle. Beginning with the debates that have already begun, the U.S. is going into talks period that typically feels very negative. There are periods of volatility around any election and this one will no doubt have its moments. Whether or not those moments go beyond the typical volatility is yet to be seen.

Be prepared for anything and remember the U.S. stock markets have dealt with far worse than a robust and volatile presidential election. Whether it is a “Blue” win or a “Red” win, each result will have benefits for parts of the economy.

Monkey Wrench #3 – Resilience in Inflation

On a more negative front, inflation has also remained resilient. Energy prices recently have rebounded, shelter inflation declines have slowed and things like auto insurance are seeing double digit increases over the past year. After having hit about 9% in the summer of 2022, we are now at a much more reasonable 3.5%.

Yet the headline number has remained at about 3.5% for almost a year now. It is taking much longer than expected to come back down to the Federal Reserve’s desired 2% target. As time moves on the populace is continuing to struggle with higher prices for almost anything and everything. It feels unsustainable for most consumers.

The Challenge Now

As we sit and watch the events unfolding around us the challenge remains to control our emotions. It is easy to project a future world where one party or another takes control of the country and implements policies detrimental to portfolios. Whether it be via tax policies or trade actions, parties in power can oftentimes disrupt industries. Beware the “ides of November”.

Any of the three “monkey wrenches” above could have a negative effect on portfolios at any time. Because of this, Shorepine Wealth maintains some defensive qualities to portfolios that will help assuage volatility in the next few quarters. The challenge will be to allow these volatile periods to play out without doing long term damage to portfolios.

If you have any questions or have experienced any changes in your financial situation please do not hesitate to Contact Me.

We appreciate you being a part of the Shorepine Wealth Management family!

Investment Products are Not FDIC Insured. No Bank Guarantee. May Lose Value. Investing involves risk. All written content on this website is for information purposes only. Opinions expressed herein are solely those of Shorepine Wealth Management, unless otherwise specifically cited. This is neither a solicitation of offers to buy securities nor an offer to sell securities. Past performance is no guarantee of future results. Material shown here is believed to be from reliable sources however, no representations are made by our firm as to another parties’ accuracy or completeness. All information or ideas provided should be discussed in detail with an advisor, accountant or legal counsel prior to implementation. Shorepine Wealth Management, LLC is a registered investment adviser offering advisory services in the State of California and in other jurisdictions where registered or exempted.

The post Market Update, Second Quarter 2024 – Optimism Abounds… appeared first on Shorepine Wealth Management.

• U.S. Large Cap stocks, or the S&P 500 index, were up about 10.6% in Q1.
• The developed market of Japan was up about 18.1%.
• Europe and the U.K. were up about 9.7% and up about 3.6% respectively.
• Emerging Markets and Asia (Ex-Japan) were up about 2.4% each.
• Global fixed income returns ended the quarter from up about 0.8% (Italy) to down about 2.7% (Global Bonds)

Where Do We Stand?

• The 2023 market rally continued into 2024 on the hopes of rate cuts.
• Valuations remain very elevated versus historic averages while earnings have shown strength.
• The markets will likely remain focused on the Federal Reserve as the country awaits rate cuts.
• We remain in a position to weather any volatility with positions in Gold and Cash while looking to be more active in opportunities when they present themselves.

The debate over a hard landing or a soft landing for the US economy has been an obsession of market pundits for some time now. Is economic growth going to hold up or turn lower? Will the labor market collapse under the weight of inflation? Is the Fed making too many mistakes? 

During Q1 the Fed continued to attempt to stabilize inflation while supporting the economy. At the same time, markets continued to rally as if inflation was no longer a concern. These two opposing forces cannot last forever. Resilient economic data pushed investors past the malaise of the most widely anticipated recession that never came. US GDP remained in expansionary mode while macroeconomic data around the world further supported the prospects of a soft landing.

To be fair, evidence of market volatility driven by inflationary pressures, supply chain issues and global dynamics did exist. However, markets reacted with resilience and were able to rebound from any losses. Good corporate earnings, continued support from central banks and general optimism have helped drive the narrative that the economic recovery is on solid footing. 

So where to from here? 

The strong performance of equites probably has traders wondering if we can expect to see some consolidation soon. Many stocks seem rather extended at this point. Recent market performance has been driven by a handful of stocks while many other stocks have been left behind. We would like to see a furthering of breadth (i.e.: more stocks heading in the same direction) before we were to buy into the idea that we are in a brand new bull market. While the economic performance through the volatility has been impressive, we would still warrant caution in blindly chasing returns.

Follow the Earnings

Earnings growth in the S&P 500 since the recent market low (Oct. 11, 2023) has been focused in seven stocks. In aggregate, earnings have grown for the other 493 stocks to the tune of 25% since that date. When you include the “Magnificent 7” stocks that number rises to almost 45%! However, recently that trend has shown signs of a reversal with expectations of that trend continuing.

The Magnificent 7 stocks are expected to slow their earnings growth through the rest of the year. Meanwhile the “other stocks” are actually starting to grow their earnings. By the fourth quarter of 2024, the expectation is these other 493 stocks will be growing faster than the Mag 7. Further helping this is the fact that manufacturing in the US looks to begin expanding again after shrinking for the past few years. This will certainly help the non-Tech portions of the market.

Follow the Conflicts

Geopolitics continued to affect market sentiment in Q1. The continued pressured on global supply chains from the war in Ukraine to the Houthis attacking shipping in the Red Sea certainly have been disruptive. As well, investors have had to remain vigilant in respect to US-China relations and continued Brexit negotiations. And, of course, the conflict in Gaza continues to have a potential to ignite a regional Nevertheless, markets have remained rather sanguine to these potential disruptors. As always is the case with Geopolitics, it doesn’t matter until it doe matter. Meaning, most markets that aren’t directly involved tend to shrug off the negative consequences until they no longer can pretend the 

Follow the Bonds

Fixed income portfolios have remained a challenge for investors. As inflation continues to remain sticky, the Federal Reserve has been forced to backpedal a bit on its dovish stance on forward interest rates. Markets reacted in kind driving the number of expected cuts in 2024 from a high of 7 cuts to no more than 3 cuts. The expectation has remained that any interest rate cuts would begin in the summer of 2024. However, even that expectation may be dashed as recent economic data could lead the Federal Reserve to Reserve to hold on to higher rates for a longer period. The net result of these new expectations was a lower bond market while also pushing rate sensitive areas like Real Estate to lower levels.

Hold on for Longer

In uncertain market environments it’s always best to exude patience. As is often the case, the potential negative influences on the market are numerous right now.  From the Fed not lowering rates, to consumer and earnings slowdowns to Geopolitical concerns, there is always something that the market may react negatively to. However, through time, markets have always found a way to move past the negative.

It has been a nice start to the new year as equity valuations find new higher levels and some markets appear “priced to perfection”. Diversification within portfolios will be key to the remainder of the year as the U.S. moves towards election season and all the volatility that usually brings.

If you have any questions or have experienced any changes in your financial situation please do not hesitate to Contact Me.

We appreciate you being a part of the Shorepine Wealth Management family!

Investment Products are Not FDIC Insured. No Bank Guarantee. May Lose Value. Investing involves risk. All written content on this website is for information purposes only. Opinions expressed herein are solely those of Shorepine Wealth Management, unless otherwise specifically cited. This is neither a solicitation of offers to buy securities nor an offer to sell securities. Past performance is no guarantee of future results. Material shown here is believed to be from reliable sources however, no representations are made by our firm as to another parties’ accuracy or completeness. All information or ideas provided should be discussed in detail with an advisor, accountant or legal counsel prior to implementation. Shorepine Wealth Management, LLC is a registered investment adviser offering advisory services in the State of California and in other jurisdictions where registered or exempted.

The post Market Update, First Quarter 2024 – Holding on for Longer… appeared first on Shorepine Wealth Management.

• U.S. Large Cap stocks, or the S&P 500 index, were up about 11.7% in Q3, about 26% for the year.
• The developed market of Japan was up about 2.0%.
• Europe and the U.K. were up about 6.7% and up about 3.2% respectively.
• Emerging Markets and Asia (Ex-Japan) were up about 7.9 and 6.5% respectively.
• Global fixed income returns ended the quarter from up about 8.6% (UK) to up about 1% (Japan)

Where Do We Stand?

• The very strong 2023 market rally regained steam in Q4.
• Valuations remain very elevated versus historic averages while earnings continue to be at risk.
• The markets will likely remain focused on the Federal Reserve as the economy continues to digest the recent massive interest rate increases.
• We remain in a position to weather any volatility with positions in Gold and Cash while taking advantage of opportunities when they present themselves.

The stock market finished 2023 with a very strong rally that surprised even the most bullish of investors. The Federal Reserve held their last meeting of 2023 during the quarter, holding rates at current levels for the third meeting in a row. The market viewed this as verification that the Fed is done raising rates and could even look to cut rates in 2024. Furthering this point, Chairman Powell sounded much more sanguine on fighting inflation and opened the prospect of a soft landing for the economy.

This fueled a double digit stock market rally that pushed the S&P 500 to a more than 25% return for the year.  It would seem that the idea of rates staying “higher for longer” is a thing of the past as the market is now pricing in a full 6 (yes, six!) rate cuts in 2024. Almost every asset class participated driving markets to a level now considered as priced to perfection. If we don’t get the perfect soft landing the chances for a pullback or even worse are now high.

Leaps of Faith

The big rally to end 2023 was certainly a Leap of Fatih for most investors. Faith that the economy will hold up, faith that inflation will not rise again, faith that structural damage has not yet occurred in the housing markets, faith that there is no credit bubble about to burst. Sometimes all it takes is a little faith for markets to achieve their goals of ever-higher prices. Never forget, the stock market is a humanly-driven emotion meter. But that meter works both ways, positively and negatively. 

The Good

The Federal Reserve may just yet achieve the ever elusive soft landing. That would mean that they were able to get inflation under control without pushing the economy into a recession. According to conventional wisdom, the Federal Reserve has only been able to pull off one soft landing out of 11 tries in the past 60 years (1994-1995). If you loosen the definition of a soft landing then maybe you can say they’ve done it more than once. However, the track record is not great.

Yet, for a moment, let’s assume they can do it this time. If they can, then the economy is not in a terrible place. Corporate balance sheets are stronger today than at any other time during a tightening cycle. Non-financial corporations have about $6.9 Trillion in liquid securities and cash. So if the economy does slow down without hitting recessionary levels, companies can survive (on average). At the same time, the US consumer remains relatively strong further bolstering the foundation for the next bull market.

The Bad

What if everyone is very wrong and the soft landing is in fact a hard landing? Under this scenario, the economy experiences a true credit event. Banks stop lending and the Federal Reserve cannot act fast enough to contain it. Economic weakness hits corporate balance sheets and earnings. Hence, valuations of companies will then be seen as way too high. Today the Forward P/E (Price to Earnings Ratio, a measure of valuation) on the S&P 500 sits above 19. The 30 year average for this measure is about 16.5.  For reference, in 2008 during the Great Recession the forward P/E went below 10.

If the S&P 500 moves back to its long term average even without any loss in earnings, stocks will go down by 15%. If earnings are reduced by 10% and the P/E moves back to that long term average, stocks go down by more than 23%. You get the picture.

However, make no mistake, if the Fed is cutting rates because of slower growth, it’s not a good thing. If employment is in fact slowing one can expect slower economic growth that will eventually lead to lower rates. In conjunction with the extremely high earnings expectations cited above one would expect a repricing of risk assets (stocks, etc…) that fall better in line with a new (lower) valuation. There’s just not a lot of “wiggle room” if this scenario plays out.

The Human Factor

Simply the specter of lower rates does not drive economic growth. Nor do realized (actual) lower rates itself drive economic growth. In order for economic growth to come to fruition there needs to be a willingness to take risk. That willingness is certainly spurned on by lower rates.

For example, a corporation may be willing to borrow money for a new factory at 3% but they may think it not a good business decision to borrow at 9%. Since the new factory may have an inherent return on capital that is lower than 9%, it may not make sense to build the factory.  However, if rates are lower than 9% they still may not want to take the risk of building that factory, if other factors are telling them not to. Other factors such as consumer spending trends, government deficits and the like. It takes a human to make that decision.

As evidenced by the amount of cash sitting on corporate balance sheets cited above, not a lot of humans have been making that decision to deploy capital. What do they see that we don’t see? What are they waiting for?

The Waiting is the Hardest Part

What these corporate managers are waiting for is the Fed to get out of the way. They are waiting to see if in fact the Fed can pull off the greatest magic trick in all of finance. Something that has been done less than 10% of the time in the last 60 years.

If they don’t have any faith that it can be done then why do we as investors? Good question. As always, the market is an anticipatory device. The market is always trying to figure out what comes next. Right now the market is telling us the soft landing happens, earnings continue to grow and the next bull market is here. Investors historically celebrate when they believe the Fed is done raising rates. What happens after that celebration is over is another story yet to be written. It is usually not very pretty.

History suggests that after the Fed pauses for a bit and then begins to cut rates is when the markets come back to reality. In the year after cuts began in 2001, the S&P was down almost 10%. In the year after cuts began in 2007, the S&P was down almost 18%.

It’s a buyer’s beware market for the next 18 months. It may be better to rent your stocks for the next few years.

If you have any questions or have experienced any changes in your financial situation please do not hesitate to Contact Me.

We appreciate you being a part of the Shorepine Wealth Management family!

Investment Products are Not FDIC Insured. No Bank Guarantee. May Lose Value. Investing involves risk. All written content on this website is for information purposes only. Opinions expressed herein are solely those of Shorepine Wealth Management, unless otherwise specifically cited. This is neither a solicitation of offers to buy securities nor an offer to sell securities. Past performance is no guarantee of future results. Material shown here is believed to be from reliable sources however, no representations are made by our firm as to another parties’ accuracy or completeness. All information or ideas provided should be discussed in detail with an advisor, accountant or legal counsel prior to implementation. Shorepine Wealth Management, LLC is a registered investment adviser offering advisory services in the State of California and in other jurisdictions where registered or exempted.

The post Market Update, Fourth Quarter 2023 – Leaps of Faith to Soft Landings? appeared first on Shorepine Wealth Management.