Review & Outlook
April 10, 2025
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%.
While our preferred strategy of holding a diversified basket of Quality Growth issues has held up relatively better than the S&P Index thus far, we fully understand the importance of absolute returns and for your portfolio to have as much price stability as possible during times like these. Therefore, for now, our focus is not just defending your portfolio but also looking for attractive opportunities once we have more clarity on the path forward.
To wit, our recent activity can be summarized as follows:
- As mentioned, we have increased our cash reserve targets to 20%, a step up from a historically low 10% because of increased volatility in stocks.
- Selling has outpaced buying at a ratio of 1.25 to 1, which will likely continue as valuations come down in the face of declining earnings.
- Portfolio turnover will increase somewhat, as we seek to rebalance stock portfolios in a tax-considerate manner.
- We will continue to utilize treasury bills to supplement higher cash reserves in your portfolio.
Looking forward, we expect the following themes to drive our decision making over the remainder of the year:
- Economic growth will be blunted by higher tariffs, raising consumer prices and thus lowering demand and investment.
- Artificial Intelligence (“AI”) investment has defied high interest rates and buoyed construction spending, but there are signs that the Technology sector is dialing down investments in the face of more efficient ways of building models.
- More than two interest rate cuts look increasingly likely as the Federal Reserve must deal with a slower growth environment. Though we recognize inflation would need to moderate for rates to go lower.
- Labor markets will soften throughout the year as growth slows down, with government, consumer-oriented and cyclical sectors taking the brunt of the impact.
- Continued war in the Middle East and Ukraine will add to headline and geopolitical risk.
While we prepared for a slowdown to start the year, few anticipated the extent of the damage that would be inflicted due to the current slate of proposed policies. Fortunately, our long history of managing Quality Growth portfolios through volatile periods prevented us from going “all in” on the issues that are declining the most so far this year. Our firm’s investment discipline and 1market experience over the past 39 years will help guide us through times like these.
As always, feel free to call us with any questions or concerns you may have regarding your portfolio.
Daniel A. Kane, CFA
President
Stephen F. Knapp, CFA
Director of Research
Jeanne C. Goedecke, CFA
Portfolio Manager
