The Fed remains reluctant to lower short-term interest rates, as the inflation outlook heads back up towards 3%. Slowing economic growth and sustained employment weakness would prompt rate cuts.
The technical chart below reflects that the bond market is expecting slower economic growth. Projections are for two interest rate cuts before the end of the year.
Equity markets are signaling the opposite, by valuing cyclical stocks higher than defensive stocks. This happens when the broad market expects an acceleration of economic growth (which leads to higher rates).
Both cannot be right. Either the bond market is wrong and interest rates will move higher, or the stock market is wrong and will see declines. No one knows which it will be. This is the dilemma investors face when positioning their portfolios.
At Integras Partners, we recently increased our more defensive allocations. Markets are shrugging off multiple concerning trends. There are downside risks in a cautious U.S. consumer, slowing economic growth, and weaker employment data not yet reflected in market valuations.
We have concentrated our growth allocations in those sectors less likely to be negatively impacted – sectors where strong secular growth trends remain in place.
It is our nature to err on the side of caution. Chasing returns is not our primary objective. We are motivated every day to ensure that our clients are positioned to enjoy their lifestyle, without worrying about what’s going on short-term in the markets.
If this approach sounds like a good fit for you, please reach out to learn how we can help!
There is an old Wall Street saying that ‘the market goes down in an elevator and rises on an escalator’. The market did indeed fall like an elevator in March but then took the elevator right back up. As tariff postponements soothed markets, stocks staged a major relief rally that continues as of this writing. Simultaneously, the superiority race over artificial intelligence, onshoring production of essential products and increasing operational efficiencies continues unabated across virtually all industries.
After a 19.5% decline which extended through the first week of April, the S&P 500 Index® rebounded a surprising 9.8% during the remainder of the 2nd quarter. The best performance was garnered overseas as the MSCI EAFE Index® finished the quarter up 10.7% and is up 20% YTD. We were glad to see markets finally recognize the cheaper and stronger dividend-paying foreign companies, which we think will continue near-term.
While the détente in the most punitive tariffs sparked the April recovery, the prospect of tariffs has not disappeared. They negatively impact corporate earnings, employment, and inflation. Some companies’ stocks have already been squeezed. The market response to these companies’ quarterly reports will be an interesting indicator of what may manifest later this year.
Future earnings are what matter when valuing a company.
Tariffs will likely remain in place to some degree across most industries, so how companies handle increased costs will sway stock prices.
Economic growth is slowing slightly, and we will closely monitor U.S. consumer strength as data is released over the next months. Anecdotal evidence implies that consumer spending remains strong but is beginning to slow. Employment remains firm as businesses are retaining employees but not hiring many new ones. Strong employment kept us from recession a couple of years ago as consumers had the confidence to continue spending. We don’t expect a major shift, but with today’s elevated stock prices any consumer weakness could cool investor optimism. Unless companies can show earnings growth in a slowing economy, markets will decline. Sectors and industries making major capital expenditures aimed at artificial intelligence and supply chain realignment should be fine, but for others, it will be a challenge.
2025 is a tumultuous year for financial markets, which understandably is rattling even the most experienced investors. While we can’t control investment returns or government policy, focusing on things that you can control may alleviate some of the anxiety.
1. Don’t panic, and remember, this too shall pass. There are scores of historical examples where surges in negative sentiment preceded above-average market returns. In the eight times when sentiment fell by 10% or more in a month, forward returns were higher is seven of them. Average returns 6 months later were +12%, and 12 months later +22%. No one knows that today’s declines will result in a similar experience, but markets usually find a way to rally over walls of worry.
2. Ensure savings accounts are working for you. As you are able, keep some extra cash on hand. Most big bank accounts have pitiful interest rates. Consider a high-yield money market, paying 3.50% or more, and link it to you checking account for ease of moving between accounts when needed.
3. Are your investments actively managed? This is not the best time to be a passive investor, or hold mostly index funds. Continued tariffs will create winners and losers. Market research will be very important to identify vulnerability and opportunity.
The financial markets have been rattled by tariffs. As investors, we reserve judgement on policy and seek to interpret economic impacts on companies we might invest in. We have to assume that tariffs, in some form, will go into effect. A pickup in inflation and lower economic growth is on the table. The impact of this uncertainty is bearish for stocks. The only certainties are that economic and market risk is high, we are in an extremely dynamic situation, and there will be rarely-seen investment opportunities.
As the credit (bond) markets often foretell economic deterioration, when the warnings appeared, we took action. At the end of March, we reduced holdings of more vulnerable sectors in our strategies, like tech and mega-cap stocks. Then when the S&P 500 Index® failed to hold its 200-day moving average (known as a “death cross”), we again took some stock exposure off the table.
Market volatility spikes like this are likely to prove short-lived. When it does settle, we are in position to reinvest parked cash with a constructive long-term perspective. While stocks are random in the short term, they always reward investors over longer periods of time.
Our clients take comfort in knowing that they have truly diversified portfolios. We insulate projected spending for the next few years from market gyrations, so the bulk of investments can remain in stocks for many years to capture gains. So, whether we see a bear market or even an economic recession, our clients are able to continue living life as normal.
Call us today to learn how we can help. 404-941-2800
Media personalities often recommend investing in the S&P 500 Index®. Since the indexes are really a list of stocks, you can only invest in mutual funds or Exchange-Traded Funds (ETFs) like SPY and VOO that own the list of stocks. Index funds are often chosen for their low fees.
Investors may not realize that index funds don’t own equal amounts of the stocks in the index. The ‘500’, for example, is weighted so that the most valuable companies represent the largest percentages of the index. Today, with the acceleration of AI, stock indexes and the corresponding ETFs have become increasingly concentrated in the biggest names. Investors pushed up the price of stocks like Tesla, Meta, Nvidia and Google, to the point where the top 10 stocks made up almost 40% of the index, and therefore the index-tracking ETFs.
The problem comes when these mega-stocks lose favor and drive the index lower, even if the other 490 companies hold their value. Index investors are experiencing this today as the top 10 stocks fell 17% this month. An index investor who needs to access their money can’t sell the stocks holding their value without selling some of the rest as well.
Integras Partners has written about excess valuations several times over the past two years, and we have an answer. Our Dividend Growth Strategy holds strong companies with solid balance sheets, high returns on capital and consistently growing dividends. As investors sell overvalued stocks, they often put their money into these types of companies with more stable growth prospects. So, there is a better solution!
Call us today to learn how we can help. 404-941-2800
Today, U.S. stocks are relatively concentrated. An investor in the S&P 500 is putting 40% of their money in the 10 largest companies. Historically, such concentration doesn’t work out well. The S&P 500 is also expensive. Such a concentrated and expensive market requires corporate earnings to continue growing unabated (to support the prices).
There is rarely economic certainty but until new government policy and the resulting economic impacts are understood, you should expect fairly big market swings. It’s been an unusually long time without a market correction (a 10% decline). One or more market corrections this year would not be surprising, so you should be thoughtful about how your portfolio is invested.
Market corrections can come and go in short order. More protracted declines take longer to develop and recover from. It isn’t so much the loss of value that has the most impact on your portfolio, and your well-being. It is the loss of time. Value will rebuild itself. The question is, do the growth assets in your portfolio have that time?
Integras Partners’ Time Horizon Investment Process can help. You can sustain your lifestyle with the money we set aside in Income Strategies, which provides the time needed for our Growth Strategies to capture the growth rewarded by volatile markets. You’re always welcome to speak with us about how we might guide you. The greatest value we can provide clients is the ability to not worry about money, and to go live life!
Call us today to learn how we can help. 404-941-2800
