Month: March 2025

It’s generally advisable for investors to be long-term bullish because the average bull market has lasted longer than the average bear market over time, and because average bull market gains have exceeded average bear market losses. As famed investor, Sir John Templeton, wisely advised, “Never stay bearish too long”. That said, certain drawdowns occur which require heightened capital discipline by the investor, in the absence of which great financial pain may be administered. What are the risks and probabilities of what is now an escalating ‘trade spat’, and how might these risks be mitigated?

The risks include:

• Widespread fretting over tariff-related uncertainty in impacted industries. This week the Federal Reserve Bank of Dallas shared survey results of 25 American energy companies, every one of which expressed tariff fretting.¹ Following new auto tariffs and the associated drop in stock prices, U.S. auto executives likely joined the gloom this week. Even consumer sentiment is reported to be taking a hit. Universally dismal sentiment can become a self-fulfilling economic prophecy.

• The immediate inflationary price increases resulting from new tariffs. One energy executive from the Dallas Fed survey said, “The administration’s tariffs immediately increased the cost of our casing and tubing by 25 percent even though inventory costs our pipe brokers less, and U.S. tubular manufacturers immediately raised their prices to reflect the anticipated tariffs on steel”.²

• Inflationary pressure means higher interest rates, which reduces consumer spending, which lowers economic activity, which reduces corporate earnings and causes job losses. A full-blown trade war can quickly introduce stagflation, or high inflation in a stagnant economy with high unemployment.

• The S&P 500 entered ‘Trump’s Trade Spat’ from historically lofty valuations and is now pricing-in tariff risks. It’s been reported retail investors, the worst on earth, are ‘buying the dip’ while savvy institutional investors are ‘selling the rally’ hand over fist.³ The S&P 500 is below the 200 DMA and is in a technically vulnerable position.

The probability these risks will derail the economy and introduce a bear market recession are challenging to discern. Will President Trump get the concessions he wants, put a halt on tariffs, and avert a trade war? If not, won’t he look weak and foolish pulling back without benefit? Might he push the issue without resolution, single-handedly ushering in a global bear market recession and causing financial hardship to potentially millions of people?

As investors, it seems to me we’ll be wise to recognize three things: 1) a trade war can potentially burn our economic house down and murder the bull market, 2) this may or may not happen, and 3) market participants are pricing in this new risk.

Prudent responses might include:

• Focus on high quality businesses least likely to experience tariff-related price increases, and businesses easily able to pass price increases on to consumers.

• Consider adding an inflation hedge or two to your portfolio.

• Raise some cash and reduce risk in your portfolio by slimming highly inflated and highly exposed positions.

• Increase holdings in defensive sectors with lower valuations and more reliable earnings.

• Place a higher value on income today than the promise of income tomorrow. Reinvest investment income to compound returns over time.

Think about it, Shaun.

“Give a portion to seven, or even to eight, for you know not what disaster may happen on earth”. ~Ecclesiastes 11:2

1,2 Stansberry Research, “The Stansberry Digest”, March 27, 2025

3 Bloomberg, “Retail Investors Are Buying the Dip as Stocks Slide”, March 28, 2025 https://www.bloomberg.com/news/newsletters/2025-03-21/retail-investors-are-buying-the-dip-as-stocks-slide

The opinions voiced in this material are general and are not intended to provide specific recommendations. The economic forecasts set forth in this commentary may not develop as predicted. Dividends are not guaranteed, can stop at any time, and will not necessarily enhance investment performance or returns.

Good can always be found in even the harshest of life’s misfortunes and experiences. While it’s not generally my inclination to see that good, I have faithful friends who routinely point it out. I remember having lunch at Iceberg Lake on Mt. Whitney in 2010, when suddenly before our eyes an avalanche released on the very slope we were to ascend! Moments later, while I was a bit panicked about the possibility other parts of the mountain would start falling off, my climbing buddy shed light on the truth a far lower probability existed for another avalanche to release on our route given the development. This is, in respects, a relevant analogy to the ongoing slide in stock prices, and as a fearful sentiment builds in this market, this may prove a beneficial time to identify the good in it.

• We remain in a solid ‘earnings-growth’ market. S&P 500 businesses have seen 8% average earnings growth in the last decade, only 7% annually long-term, and yet the forecast for 2025 is 9.5%. Fidelity sees 14% earnings growth ahead and thinks the estimate is too low!¹ A bear market in stocks will not likely accompany such earnings growth.

• Most measured sell-off’s are corrections (drop of 10%-20%), not bear markets (drop of 20%+), especially during the blow-off tops of highly speculative advancements (AI). Remember, the market is highly contrarian by nature, equipped to inflict the maximum amount of pain on the greatest number of investors possible. It’s also true the financial pain of selling in a bull market that hasn’t yet run its course can exceed that of selling too late in an oncoming bear market.

• The media sells hysteria, and its reporting does not constitute investment research, but it can be thanked for contributing to what has quickly become the poorest market sentiment since a month before the 2022 bear market bottom,² evidence also suggesting we are in a mere correction.

• Market declines generally bear broadly lower stock valuations, and lower P/E ratios mean there is less froth built into stock prices, meaning less debris to dodge, like the terrain on a slope following an avalanche.

Just as our best decision from Iceberg Lake clearly was to ascend the already-released hill, wise reactions to the present sell-off might include:

• Do not panic! When fear is identified immediately take a long walk in nature and think about something entirely different. Do not think about investment decisions until calm is restored.

• Have your bear market ‘stop-loss’ program in place and rely exclusively on pre-positioned tools, not your emotions or intellect, to instigate action.

• Focus on high quality businesses with gushing free cash flow and sustainable retained earnings; ride the earnings wave.

• Don’t approach the slope until the avalanche stops! You don’t need to pinpoint the bottom, but you do need to avoid doubling down before the house burns down, and a full-blown trade war can burn the house down.

May God bless our investing efforts and intentions, Shaun.

“Do not lay up for yourselves treasures on earth, where moth and rust destroy and where thieves break in and steal, but lay up for yourselves treasures in heaven, where neither moth nor rust destroys and where thieves do not break in and steal.  ~Mathew 6:19-21

1 FPA (Financial Planning Association) Live Lunch Presentation, Iron Works, Warwick, RI, January 8, 2025, Fidelity Investments 2025 Outlook

2 Dr. Eifrig’s Health & Wealth Bulletin, “The Market Won’t Stay Down for Long, March 12, 2025

The opinions voiced in this material are general and are not intended to provide specific recommendations. The economic forecasts set forth in this commentary may not develop as predicted.