There’s an old saying that bull markets “climb a wall of worry.” (I don’t think Alfred E Neuman said that one.) And there has been plenty to worry about. The economy appears to be slowing, while inflation persists. The dollar has fallen sharply against other currencies. The deficit continues to grow. The government is shut down. President Trump’s tariffs were struck down by a federal appeals court and will be reviewed by the Supreme Court. And economists are in no-man’s-land as far as being able to accurately predict what the net effect of tariffs will be on the economy, assuming they are upheld.
Despite all that US Equities set all-time highs in 1 out of every 3 days during the quarter.
The S&P 500 (Total Return) Index gained 8.12% in the quarter and is up 14.83% YTD. International Developed Markets gained 5.33%. While Emerging Markets led the pack with a gain of 10.64%.
Bonds continued to rally on falling rates, with the Bloomberg US Aggregate Bond Index rising 2.03%.
Gold is on a tear; having more than doubled in price since November, 2022. Whether this is based upon some theoretical fundamental value or just caught up in yet another speculative frenzy is anyone’s guess. I would never discourage someone from owning a bit of gold as a hedge against the current financial regime. But, in what form, in what denominations and how/where to store it is always going to be a challenge.
As usual, you can dig into all the data provided by our friends at Dimensional Funds in their Quarterly Market Review.
AI (Artificial Intelligence) is Everything, Everywhere, All at Once
AI is undoubtedly going to change the world. In both good ways and bad. Millions of jobs will be lost. But millions of others will be gained. Productivity (output per worker) would explode. The leading AI companies and their backers have committed to investing hundreds of billions of dollars over the next few years into everything from chip design and fabrication, data centers, power plants and more. Investors are betting that these investments will pay off, leading to ever increasing prices of the stocks of these companies.
Bubble, Bubble Toil and Trouble?
Are We in a Bubble? The short answer is: Nobody knows. There are certainly similarities to the what turned out to be a bubble formed by internet technology stocks in the year 2000. Like then, the market is being dominated by a few technology stocks whose valuations are stretched on a price/earnings basis. But they are not quite as stretched as the high flyers were back then. In addition, we don’t now have dozens of companies with no earnings – think Pets.com and the like – trading at prices that they would never grow into.
But without a working crystal ball, bubbles are only identifiable in retrospect. So it’s worth considering that a significant correction is a possibility at any time and planning accordingly; by taking only so much risk as you need to take given your unique circumstances.
Stay diversified. You can control how much exposure to have of the large-cap technology growth stocks that are driving the market by rebalancing into value and small caps, into international and into bonds. And you should do this systematically, not tactically. Periodically reducing some exposure to the high-flyers may cause you to miss out on some future gains, but may protect you in the event of a change in sentiment. Such a strategy helped investors following the dot.com crash. And balanced portfolios tend to hold up well over long periods of time.
Limit speculation. Stock and bond investing are based on fundamentals. Both have expected returns on account of projected actual future cash flows. But currently popular things like gold, crypto, sports betting, prediction markets and meme stocks (just to name a few) are based entirely on a hope that prices will rise in the future or that you will be on the right side of a wager. While these activities may be fun or exciting, it would be foolish to stake your financial future on them
Stick to Your Knitting
Nobody really knows the origin of this expression. In the context of financial planning, I take it to mean focusing on the things you can control and don’t be distracted by all the craziness that’s going on in the world. The Fed is or isn’t going to lower rates. The Supreme Court may or may not uphold President Trumps’s tariffs. While the resolution of these questions may have an effect on the outcome of your plan; a) you don’t have any control over that and b) if you put your mind to it, you can have a plan that will work either way.
You can decide how much to save and spend or how much debt to carry. You can choose an investment strategy that is likely to support your long-term needs, but also allows you to sleep at night.
Knit one, Purl two.
