April 7, 2025 – Incremental and Slow
Submitted by Alsworth Capital Management, LLC on April 7th, 2025
It has been a remarkably volatile stock market so far in 2025. As of this writing (mid-day), the S&P 500 Index of large US companies has dropped 11% in value over just two trading days and is trading down 19% from its recent high. I’ve had many conversations this year about volatile markets, which are heavily influenced by our individual views of politics. If you are supportive of President Trump and the new administration, those conversations have generally been positive and hopeful. Recent volatility is often described as a necessary pain for future gain. If you are not supportive of the current administration, the conversation is often fearful and full of exasperation. Recent volatility is frequently compared to a canary in a coal mine. It is completely understandable. Unlike prior market corrections, this one is not caused by war, pandemic, or a credit event. This is the result of political action.
For me, not belonging to a political party is helpful in remaining less emotional and more data dependent in my work. Of course, I have my own personal political opinions and bias. I vote. I am an active consumer of political news. I have opinions about certain politicians and political trends. However, I believe that none of the political parties are consistent in reflecting my personal views and much of the political spin strikes me as entertainingly hypocritical. I believe in being fiscally conservative with how we manage our finances and set our budget. I also believe in making it a priority to advocate for the poor and underprivileged. However, these personal opinions are in no way relevant when it comes to making financial decisions about your portfolio. I work hard to identify my bias, struggle with the counter argument and try as best as I can to come to a balanced decision. I find it helpful to chart out a written decision tree and then over-analyze everything! Part of understanding is identifying bias, especially simplistic cable news political spin narratives, and stress testing both sides of the story line.
First, we need to objectively identify the problem. The stock market has sold off in dramatic fashion, reflecting increasingly common forecasts of an economic slowdown. The cause of these forecasts has been a political decision to aggressively pursue tariffs as a strategy to achieve a political objective. The political objective has been stated as the desire to bring manufacturing back to the US and away from cheap labor countries around the world. The theory is that bringing manufacturing back to the US will give those jobs back to US workers and more broadly share prosperity across the country to more rural areas. The strategy has been to shock the CEO’s that make decisions on where to locate manufacturing facilities and to coerce other countries into accepting redrawn trade deals that will force their hands. The implementation of the strategy is critically important and recent market volatility is reflecting vacillating confidence in the strategy and the probable results for the economy.
We can’t predict the future. We can’t know for sure, if this strategy will result in the intended goal or if that goal would ultimately lead to the intended redistribution of prosperity. However, it is in play now and I don’t see the Genie going back in the bottle. The stock market was trading at a bubble level of valuations last year, largely reflecting excitement about the “new economy” growth opportunities in Artificial Intelligence and decades of deficit government spending. Much like prior bubbles, any disruption in the optimistic story line exposes investors that didn’t do the math with realistic assumptions. Those valuations had to come down to better reflect life as it actually happens. It’s messy, uneven and risky. Tariffs were just the needle.
At this stage, the bubble has popped, in my opinion. Confidence in the prior narrative has been upended, and I don’t think relative valuation multiples are going back to peak levels. Looking forward from here, I expect that the market is going to be much more focused on economic growth and earnings forecasts. Fundamentally, the US stock market still doesn’t look cheap. We came into the new year with a conservative allocation, having shifted out of US high valuation stocks and increasing our allocation to Gold, as well as short term treasury bonds. We initially expected US economic growth to be solid, giving special opportunities for smaller US stocks, since they were trading relatively cheap. As the tariff policy has unfolded, we have reassessed our confidence in those growth assumptions. The risk of recession has increased and smaller companies could be vulnerable if there is a protracted economic decline. We made some allocation changes prior to the announcement of tariff policy and we continue to make adjustments, based on new information as it comes. As always, any portfolio changes will be incremental and slow. We do not recommend making large emotion driven reactionary changes to your investment strategy.
Every investment strategy should include tolerance for some downside in daily market valuations. We can only expect to earn positive market returns over time, in exchange for accepting the risk of downside price movements. That is a fact of investing, and it is not avoidable. While we do try to time market movements and add value to your portfolio over time, that is only one small part of our job. We will never be able to predict the future, time markets perfectly or give you positive returns while never experiencing downside price movements. Nobody will be able to deliver that. Our main job is to match the downside risk of a portfolio with the upside return targets you personally need for your financial plan. We also seek to match the magnitude of inevitable price declines with your tolerance for sticking it out, without making dramatic deviations from the investment plan. If we got it wrong and you don’t think our allocation reflects your needs and risk tolerance, please contact us and set up a meeting to review it. First, however, please look at how your actual portfolio is behaving, versus the volume and tone of the news. All of the portfolios that we manage have varying degrees of diversification to assets other than US stocks. This diversification has helped our portfolios behave markedly differently than the S&P 500 Index or Dow Jones Industrial Average Index, which are most often quoted in the news.
As always, please contact us anytime with any questions.
Cordially,
Shane M. Alsworth, MBA, CFP®, CLU®, CIMA®
The views and opinions presented in this article are those of Shane Alsworth only
