Cross Currents
U.S. markets started the year on a positive note with the S&P 500 reaching a peak of 6,978 in January, up 1.95% from the 2025 close. Sector rotation was the most notable market activity in the first quarter as investors exited software and Magnificent 7 stocks in favor of old economy sectors such as energy, materials, and industrials. As a result, the Dow Jones Industrial Average delivered much better results, reaching a peak of 50,188 in early February, up over 13% for the year.
The U.S. economic outlook anticipated increased consumer spending after tax refunds, strong earnings growth due to corporate tax cuts, stable inflation, and falling interest rates, all positive elements for stock prices. But, in March, the war in Iran changed everything. Rapidly rising oil prices in response to energy infrastructure bombings and the closure of the Strait of Hormuz raised inflation fears for the global economy, and stocks fell worldwide. By the end of March, the S&P 500 was down 4.6% for the year and down 6.6% from the January highs. For now, the markets remain in a watchful waiting mode.
Our portfolios were up nicely for the first two months of the year, and even the significant reversal in March was not enough to erase all of those gains. The recent two-week ceasefire plan, if it holds, may help stocks in April.
The current global backdrop leaves us with a familiar dilemma. The sharp moves in markets reflect the tensions we see in geopolitics: it is difficult to be fully invested when further escalation of the Iran war remains a real risk. With generally sticky inflation and oil prices likely to stay elevated, cash and bonds are less effective hedges than they once were. Stocks and bonds are no longer reliably inversely correlated. Professor Jeremy Siegel of Wharton has recently noted that 70/30 portfolios may be the new 60/40 for this reason. Gold, which we have long used as an uncorrelated asset, has also become correlated with equities more recently. Its historic rise, brief meme-like status, and the very real need for countries to sell gold to pay for war have all affected its safe-haven role in the current conflict.
Faced with uncertainty, divergent outcomes, and few reliable stabilizers, what are we thinking?
We have tried to make sure our clients have enough cash on hand for the next two to three years to support withdrawal requirements without needing to sell stocks. That cash is invested in very short-term instruments so it can still earn a return without taking undue price risk.
In our mutual fund and ETF portfolios, we reduced software, gold, and S&P 500 index exposure in early January. We put the proceeds into industrial materials, Asian and Emerging market equities instead. To date, those markets are outperforming the S&P 500. In March, we took gains in individual stock portfolios where single positions had become too large or had risen an extraordinary amount. Paying taxes is preferable to losing money.
Market Sectors
Materials - We increased our exposure to materials, especially copper and food-related commodities, and we continue to hold a large position in a physical gold ETF and gold equities. While gold is currently outperforming stocks and bonds, we recognize that another correction is always possible. We remain concerned about inflation and the U.S. dollar declining in its status as the global reserve currency, so gold is a core long-term investment.
Energy - We remain overweight energy stocks. We do not believe oil prices are going back to prewar levels any time soon. It will take many months to recover from the halt in oil shipments and even more time for Qatar to get their natural gas infrastructure up and running again. For years, we have argued that oil supply/demand is less elastic than even the IEA has suggested. In time, solar, wind, nuclear, and battery storage may truly help insulate us from oil price shocks, but the recent conflict has shown that we are not there yet. Many parts of the world are far behind in alternative energy, and policy decisions, such as shutting down nuclear plants in Germany and refinery regulation in California have made the situation worse. We have never owned refineries, but plan to as opportunities present themselves. The current war has severely damaged refinery capacity in a number of countries, and many believe it will take years for that capacity to come back online.
Consumer Discretionary - We have lowered consumer discretionary exposure because of the effects of war and the threatened job loss from artificial intelligence.
Financials - We remain selective in financial exposure because we are wary of the risks in private credit funds. Today, the problems in private credit seem to be contained, but wandering into that minefield is meant for braver folks.
Technology - We remain underweight technology, specifically software, as AI threatens to reshape that space. No doubt there will be winners, but they will take time to emerge. While the Magnificent 7 have lost their luster, we still like Apple and Google.
International
We continue to look for ways to increase our international exposure. The need for energy in some parts of the world has complicated this desire. We like Brazil because it has inexpensive energy, cheap land near major cities, and the country’s commitment to data centers make it especially interesting. We have long loved Korea for its exposure to semiconductor manufacturing outside Taiwan. Its dependence on the Middle East for energy has made us more cautious in the near term.
Bonds
Earlier this year we changed our bond exposure to shorter maturity investments that have low price risk. Inflation remains sticky, Treasury issuance continues to run high, and the supply of government debt must find buyers in a market that is increasingly sensitive to fiscal strain and term premium risk. In this environment, the duration risk of long-dated bonds makes them a poor fit for our portfolios. We prefer to preserve flexibility, maintain liquidity, and reduce the potential damage from further rate volatility.
Our hearts and thoughts go out to those who have lost friends and family members in this conflict, the Iranian people, and others oppressed throughout the unstable world we live in. We long for the days when people look for what we have in common rather than hating our differences. Diversity can be a strength, both in portfolios and in people.
2025 began with markets walking a tightrope between optimism and anxiety. Investors were asked to believe in rapid technological progress while navigating geopolitical flashpoints, stubborn inflation, and historically high government debt. Against that backdrop, our investment themes leaned toward quality and earnings growth. As the year unfolded, markets delivered a clear verdict on our ideas, rewarding assets tied to real value, earnings power, and structural change rather than speculation or valuation excess.
The artificial intelligence boom is reaching a critical juncture. After years of explosive growth, the economics of AI are shifting in ways that could upend who actually profits from the technology. While investors have poured billions into building the infrastructure behind AI, history suggests that the biggest winners may once again be the users—not the makers—of this new form of intelligence. Please see our initial blog on AI entitled, AI: The Intelligence Revolution
The coming AI revolution is going to be 100 times bigger than the industrial revolution – 10 times bigger and maybe 10 times faster, says Demis Hassabis, the CEO of DeepMind, the artificial intelligence arm of Google, and Noble Prize winner. We’ve received many questions from our clients about the impact of AI and how best to invest in it. Our first attempt at tackling this important topic follows.
Traditionally, the answer for most investors has been a resounding yes. For decades, many benefited from the positive performance of the standard 60/40 portfolio (60% equities/40% bonds). But times change, and bonds may not provide the security they used to. We review the primary benefits of bonds, discuss which types are the best portfolio diversifiers, and when bonds can be most effective.
There is no ‘one-size fits all’ answer to this question. Every recession or bear market is driven by a unique set of events, and the portfolio strategies that work best depend on the specific causes and the prevailing political and economic circumstances leading to the downturn.
Markets around the world are down today due to Trump’s unexpectedly punitive tariffs. These tariffs are feared to be inflationary and may cause a recession in the U.S. and abroad.
As Lenin famously said,” there are decades where nothing happens and weeks where decades happen.” We find ourselves in the thick of chaos, with daily political announcements and stock market gyrations. We anticipated volatility, but we got more than we bargained for.We work hard at fighting confirmation bias. In this blog, we attempt to understand different points of view and explain the steps we have taken in the current environment.
Deep Thoughts and DeepSeek
In 2024, much of the 25% equity market return came from multiple expansion. Earnings for S&P 500 companies only grew about 10%, but the amount investors were willing to pay for those earnings (P/E multiple) expanded by about 16%. Thus, about two thirds of 2024 equity performance came from multiple expansion.
In memory of famous investor Byron Wien, who was known for his list of 10 surprises each year, we provide our own list of potential economic, financial, and political surprises for 2025.
Is the Recent Runup in Chinese Stocks a Durable Rally or a Flash in the Pan?
In August of 2021, we decided China was un-investable and reduced our exposure to Chinese equities. In our blog “From Beijing to Wall Street” (here), we detailed our rationale.
Halloween Came Early
Ouch. Since August 1, the S&P 500 has fallen over 7%, a dramatic move, but not yet a correction from the July highs. However, the NASDAQ is down over 10% and firmly in correction territory.
What’s Happening Under the Covers
Why the U.S. Economy Has Remained Resilient in Spite of the Fed Raising Interest Rates and Reducing Their Balance Sheet
In memory of famous investor Byron Wien, who was known for his list of 10 surprises each year, we provide our own list of potential economic, financial, and political surprises for 2024.
If you just landed from Mars and we told you that three good sized U.S. banks had failed, the Federal Reserve had raised rates 5% in 13 months, the yield curve had been inverted since last year, the latest Senior Loan Officer’s Survey showed banks less willing to lend while already at recessionary lending levels, and according to Treasury Secretary Janet Yellen, we are within two weeks of the government running out of money to pay its obligations, would you believe the S&P 500 is up about 9% thus far this year?
How Banks Work
What Causes Banks to Fail
How the Government is Responding
How Bank and Brokerage Accounts May Be Protected
Dilemma for the Federal Reserve
We suspect most people think getting inebriated is more fun than sobering up.
We hate to sound like a broken record and ruin the party, but inflation presents a problem which won’t be easily fixed.
The four most dangerous words in investing are “this time is different”.
A Tongue in Cheek Guide to the Latest Investment Concepts
Mine your reward coins as you read our blog!
Who doesn’t love the story of David’s triumph over Goliath? This past week a group of “small” investors made tremendous amounts of money (on paper at least) by buying stocks that were heavily shorted by large, sophisticated hedge funds.
Markets hate uncertainty, and we can’t remember an election with such potential disparate outcomes. As we speak, the presidential race looks closer than ever, and the Senate majority is in question. Meanwhile the pandemic rages, and the President and Congress can’t agree on a stimulus plan. It’s no surprise stock market volatility has risen.
Fires are burning. The presidential election has never been more heated, and our whole election process is repeatedly questioned. The cold war with China continues to brew regardless of the political party in power. A global pandemic has taken hundreds of thousands of lives and jobs, created loneliness for our seniors, and caused those entering hospitals for medical procedures to endure alone.
He woke up today and asked us for an update. We explained there was a global pandemic that had claimed almost 400,000 lives worldwide and more than 100,000 in the United States.
How can we treat our ailing financial markets?
Medical experts say widespread lockdowns and social distancing must happen to contain the coronavirus and avoid overwhelming our hospital system.
the Coronavirus
Bombs and tweets couldn’t sink the S&P 500, but Covid-19 did.
While there is a role for gold in a diversified portfolio, gold is not universally liked or owned by investors and wealth managers.
The rates on overnight repurchase agreements, known as repos, suddenly rose above 9% last week.
We never really know where markets and the economy are headed, but market participants constantly look for clues.
Why does the current market tone feel different from the February and March stock market selloffs?
When do they protect you? When do they hurt you?
Worst Day Ever for the Dow Jones Industrial Average!
Perspective As the current bull market ages (from the bear market end in March 2009) investors are increasingly worried about buying at the peak.
The basic difference between a mutual fund and an exchange traded fund (ETF) is that an ETF trades like a common stock as its price changes throughout the trading day.
Brexit is spurring a flight to quality move into US Treasuries.
The short answer is yes.
