Market Update

April 2025

Today is shaping up to be another rough day for the stock market. When we went to bed last night, futures contracts—used as an indicator of how markets might open—were down nearly 1,500 points. As we write this morning, things have improved somewhat, with the market down “just” 900 points. So, what’s going on, and how long will it last? Unfortunately, no one knows for sure.

What we can offer is our perspective on the good, the bad, and the ugly.

The good: the stock market rotation away from the highest growth technology stocks seems to have started. Valuation matters again and diversification is being rewarded. That was not true the past few years, and we have discussed how the stock market’s lofty valuation levels were likely not sustainable. There have been tech booms in the past, and they have invariably been followed by tech busts. The bust this time started slowly six to eight months ago, and the new economic uncertainty around tariffs has accelerated the process.

In this new environment, our stock strategy has performed remarkably well. Our stocks are down with the market of course, but generally we’ve declined less thanks to our low volatility and value factor funds. International stocks have also helped after many years of underperformance versus domestic stocks. Our approach has a history of being more defensive in flat and down markets, so it is likely that our stocks won’t decline as much as the overall stock market if the downturn continues.

Our alternative investments and bonds have appreciated in value so far year-to-date. While the outperformance hasn’t been enough inmost cases to fully offset the decline in stocks, it is important to have a risk buffer in your portfolio, especially if you’re living off your investments. It is much easier to ride out a bear market if you have money in safe bonds you can draw from. So again, diversification is an important component in portfolio construction, even if it held us back during the best years of the tech boom.

The bad: stocks are down almost 20% from their high in February. No one likes to lose money, but downturns are part of the investment process. While we’ve enjoyed a strong bull run the past several years, that is not the norm. Most years, stocks see double-digit intra-year declines. That means what we’re experiencing now is just a bit worse than a typical cyclical downturn. It may get worse, but so far there is nothing to panic about.

The ugly: things could get worse. Even with the recent decline, stocks overall appear expensive when compared with historical valuation levels. There are market segments that have appeared more attractive, and we have focused on those the past few years. However, the overall market, as measured by the S&P 500, is still dominated by the largest tech stocks, and their price/earnings ratios remain elevated. Using data from Yale professor and Nobel laureate Robert Shiller, there could be quite a bit more downside to get to “fair” value or to reach levels the market has dipped to in past downturns. This is an imprecise science at best, but based purely on valuation, another 25% stock market drop would not be surprising.

We also think a near-term recession is likely. That doesn’t necessarily mean stocks will fall precipitously, but more bad news could be coming. With all the cuts to government spending and federal employment, we don’t see how a recession can be avoided. Thefederal government accounts for around a third of our GDP. Any significant hit to that spending, no matter how necessary, will be recessionary. We’re of the mind that such a recession likely won’t be terribly deep and may not hit the “productive” economy that much, but it will be big news for the media and there is certainly “headline risk.”

The reason we’re not expecting a worse recession is because employment remains robust in the private sector. It really is just the government that is experiencing job declines, and that may be overdue to help trim a ballooning federal budget deficit. Alsoimportant is that interest rates are falling. A drop in rates will be good for the government as it looks to refinance around $7 trillion in maturing debt this year. It will be good for the corporate sector looking to finance growth, and it will be good for consumers taking out mortgages or refinancing existing debt. That is all stimulative to economic growth.

So, while there is risk of further pessimism and stock market declines, there could also be announcements this week that our trading partners globally have acquiesced to the demands of our current administration, and tariffs could be softened, delayed, or removed in some cases. We believe that could be a catalyst for a stock market rebound, at least in the immediate term. Shorter-term, the market needs to see evidence that we’ll avoid a recession and that the new economic policies are working. And long-term, we may find that what we’re experiencing now is a healthy part of the market and economic cycle.

In the meantime, we’ll be looking for opportunities to take tax losses and to rebalance to take advantage of any bargains that materialize in stocks.

We’ll be writing more about tariffs and the current economic situation in our coming newsletter, which should be out in the two few weeks. In the meantime, if you’re feeling uneasy or need to review your financial plan, feel free to give us a call anytime.

Market Update

April 2025

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