April 7, 2025

“All past market volatility looks like an opportunity, and all future market
volatility looks like a risk”

Morgan Housel

Panic is not an investment strategy, that said here is the scary results from last week (actually the last two trading days). The S&P 500 lost 8.21% for the week, the Dow Jones Industrial Average down 7.41%, the Nasdaq fell 8.55%, Internationally, The FTSE 100 felt the pain down 9.97 and the MSCI-EAFE surrendered 9.0%. The 2-year Treasury paid 3.644% and the 10-year 4.00%.

Is there any good news? As the media, opposition party and the public scream the sky is falling, let me remind you we have been here before many times. As I just sent out our quarterly reports for a losing quarter, our asset allocation proved defensive investing worked. All our clients enjoyed a slight gain or a very slight loss for the first quarter. So, we are definitely in the opportunity camp as this market will settle down. Two facts, large institutions have been squirreling away money and the 10-year treasury is sending good vibes to the market. That plus a very good jobs report and the fact that over 5 trillion of investments coming to the US does not translate into a disaster for the US Economy. The Government policy is concerned with the economy, not Wall Street. That being the case, expect a recovery if these trade policies work, (most politicians haven’t a clue). The business people and money people understand what President Trump is doing.  Hence, we see the opportunity going forward. The fundamentals of reducing government spending, tax cuts, and leveling the trade field should pay significant dividends. However, in the meantime, these gyrations in the market will continue in the short term.

The important thing to understand is this administration is attempting to reverse the ship not only in the US but around the world. The political risk is enormous and why no former administration dared to upset the game that has benefited a small number, and forced the rest of us to grab the scraps from the table. But economically, this administration is betting this is the solution to the decline in America’s middle class and the US Economy in general. We should not have long to wait to see if the Administration is right.

In the meantime, here is what happened last week. First the good news, As Barron’s reports, The U.S. economy added 228,000 jobs in March, according to data published Friday by the Bureau of Labor Statistics, surpassing economists’ consensus estimates for 130,000 new jobs. Hiring was particularly robust in the services sector, with healthcare, retail, and transportation leading last month’s gains. The increase should provide some level of optimism about the strength of the labor market, but it wasn’t enough to stop the selloff. For long term clients who can tolerate this volatility, and who can tolerate possibly a little bit more pain, this is a buying opportunity. There’s no question. Before these self-inflicted wounds began, the prognosis was pretty good across several sectors in terms of potential growth opportunities that were out there. The challenges that we were having with some of those great growth sectors were that they were very overpriced and we were buying even in that in that environment.

“Liberation Day” came and went but tariffs will still dominate the headlines and drive much of the market action next week. The baseline 10% tariffs on all countries goes into effect April 5, but Wednesday brings higher rates for certain countries including China, the European Union, Japan, South Korea, and Taiwan. Thursday is when China’s 34% retaliatory duties on all imported U.S. goods take effect. It is important to remember we buy far more than we sell to China, so the effect is far greater on China than the US. Offsetting this will be how quickly these countries come to the bargaining table to reduce tariffs on US goods. We will soon see if this leveraged strategy being employed is successful, early returns are positive, with Vietnam, India and even Canada calling to make a deal. Expect all the “experts” to continue to rail against the tariff policies and remember these are the same people who benefitted from the old order that drove the US economy to its current state. Criticism must be followed with solutions, not more of the same, so far crickets.

Small caps also entered Bear territory.  History suggests that, since 1987, small-cap stocks have typically extended their losses in the week after the Russell 2000 fell into a bear market, with average declines of 1.9% in the following seven days, according to Dow Jones Market Data.  But that weakness has proven temporary. The small-cap index has historically rebounded with average gains of 6.8% over the three months after entering a bear market, and nearly 12% over the following six months, according to Dow Jones Market Data.

What is the Fed up to? The size and breath of the tariffs has also made Federal Reserve Chairman Jerome Powell’s life more interesting. As Market Watch notes, Trump wants the Fed to cut rates quickly to help the economy get through what officials have referred to as a “detox period.” White House economic adviser Kevin Hassett laid out the White House thinking in a recent interview on Fox Business Network. “The economy is doing well. I think that long-term rates are coming down, which is doing a lot of the hard work of the Fed for it. And I think inflation has come down a lot,” Hassett said. He said he thought the Fed would soon start talking about how to go from a little tight to cruise control. “My guess is that will happen over the next few meetings,” he said. One thing more, Mortgage rates continue to slip adding to the optimism home buyers will find more hospitable terms when trying buy a home.

In closing, I realize these weekly comments have become more political, unfortunately the politics of all these policy changes cannot be ignored, to that end I reiterate we believe this is the right course, as bumpy as it may be, but so far most of America is willing to let this Administration try a new approach.

Mike