Market Volatility –

A Temporary Dip or Something More?

For the past few years, we’ve been saying that parts of the stock market seem overvalued and likely to correct. Fortunately, we were wrong, and stocks havecontinued to climb.  Now, however, volatility has returned.  Could this be the start of a real downturn or just another temporary pullback in the ongoing bull market?

The S&P 500 has entered correction territory, down about 10% from its high. While market pullbacks can feel unsettling, they’re not uncommon. In fact, since1985, the median intra-year decline for the S&P 500 has been 10%, meaning what we’re experiencing now is well within the range of normal market behavior.

What makes this period feel different, and a little scary, is the underlying cause. With a new President, a new administration, and shifting economic policies,uncertainty has increased. President Trump has taken a slash-and-burn approach to reducing the size of government, used the threat of tariffs as a key foreign policy tool, and has not exactly been nuanced in his dealings with the press.

Regardless of who won the election, government spending needed to be addressed. Our spending has been out of control, borrowing is at record levels, and consequently our debt-to-GDP ratio is beyond what is sustainable without an economic contraction. Interest alone on our government debt is one of the largest line items in the federal budget, even surpassing spending on our national defense.

Even more concerning, this debt burden will continue to grow. The previous administration primarily financed its spending with short-term debt. While interest rates were low for much of that time, issuing more long-term bonds to lock in favorable rates would have been a more strategic approach. Because that didn’t happen, a significant portion of this debt will roll over in the coming years at much higher rates, leading to even greater interest payments. We can quibble over how spending cuts are implemented and communicated to the public, but there is not a credible argument for maintaining federal spending at current levels.

Tariffs have also caused concern among economists, as they are generally seen as detrimental when viewed in isolation. However, we do not expect long-term, large-scale tariffs. Rather, they appear to be a negotiating tool—albeit a blunt one—aimed at securing more favorable trade terms for the U.S. Even if higher tariffs become a lasting reality, potential offsets, such as tax cuts or other economic measures, could help mitigate their impact.

The new administration has proposed significant income tax reductions, with discussions even suggesting the possibility of eliminating taxes for individualsearning less than $150,000 annually. While a complete elimination of personal income tax is unlikely, substantial cuts could help offset potential cost increases from tariffs. Many tariff impact analyses tend to overlook these potential tax benefits, which could leave most households financially ahead despite rising prices on certain goods.

President Trump is a disruptor, and the next four years are likely to bring significant surprises. The stock market tends to react negatively to uncertainty,making volatility almost inevitable. However, this does not necessarily signal an economic downturn. Reducing government spending could help lower interest rates, including mortgage rates. Tax cuts for middle-class families may boost consumer demand, while deregulation could enhance corporate profitability. Together, these factors support a case for continued strength in stock market valuations.

We believe a rotation in stock market leadership has been long overdue, and we are now starting to see that shift. Large-cap tech stocks, which have driven much of the market’s gains in recent years, are showing signs of weakness, while other segments—such as lower-volatility stocks and international equities—are gaining strength. While concentration in the ‘Magnificent Seven’ fueled outsized returns in the past, diversification is once again proving its value. Our portfolio strategy has held up well during this downturn, generally outperforming the broader market over the past six months. The tide appears to be turning.

There will continue to be outlandish talk about taking over Canada or Greenland, and bold and unconventional policy discussions will likely continue. The mediareaction will be swift and dire. However, such rhetoric is unlikely to materially impact the underlying fundamentals of our economy. While market volatility may persist, we do not anticipate a full-blown crisis.  Even if the worst comes to pass, our portfolios are generally more defensive than the overall market, positioning us to navigate downturns successfully.

As always, please feel free to reach out if you have any concerns or would like to discuss your portfolio in more detail. We’re here to provide clarity and guide you through these uncertain times.

www.rdgcapitalmanagement.com
aryan@rdgcm.com
585.673.2683