Today as we write this letter, the S&P 500 Index has declined approximately 15% just over the past week. While the selling started during the 1st Quarter, it has accelerated since the April 2nd announcement that the administration would enact devastating tariffs on foreign trade. Despite widespread belief coming into the year that these tariffs were merely a negotiating tactic, the investment community must now grapple with the economic consequences of untethering trade arrangements with the rest of the world that have been in place since the end of World War II.

Even before the tariff announcement, the S&P 500 index had both a valuation and concentration problem coming into 2025, with a small percentage of issues constituting most of the index’s cumulative gains (41%) over the past two years. At the same time, low quality stocks had been rising on speculative themes with little fundamental weight behind them. We recognized this frothy behavior as a warning sign and became more defensive by slowly raising cash, as markets priced in perfect conditions that were unlikely to materialize. Our current cash reserve from stocks is now 20%.