What Did We See?
- 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.
