March 2025 Market Commentary

As you can see in the chart below, the S&P 500 has had approximately a 12% annualized return 1980 through 2024. During that time period, the average inner year drawdown was negative 14%. Said another way, drawdowns are not an unusual scenario.

Now to put this into the context of the current year, we have the YTD price chart and drawdown from market peak to the close yesterday for the S&P 500, Mag 7 and the Russell 1000 Value. As you can now see on the YTD Returns and Drawdown slide, is that the max drawdown so far this year is just over -10% for the S&P 500. Now the drawdown on the Mag 7 has been much more sever at -17.9%. Due to the high level of following among retail investors of the Mag 7 and NVDA in particular, this may feel much more severe than it actually is.

What we can see in the bottom third of this slide is the current drawdown of the Russell 1000 Value. Yes, the old stodgy R1V. But this also highlights an important picture on diversification. We are currently overweight growth in our multi-style equity strategies but always retain some exposure for some of the unforeseen situations that are seen. In a strong cap driven up market this can serve as some drag on a portfolio but also helps retain capital in a drawdown scenario.

Tariffs have not caused the current market volatility, in our opinion. But tariffs, or more accurately, the uncertainty of the timing and level of tariffs, are a major catalyst in causing investors to reassess long-term positioning. At the start of the year, stocks were not cheap. The most expensive cohort of the S&P was expensive relative to almost any historical metric. Yes, the growth characteristics of many of these companies is highly compelling, but we also remember the dot com boom where eyes on a page were considered an appropriate valuation metric.

In isolation, tariffs do serve as a tax or a one-time price increase as opposed to outright inflationary pressure. But, when faced with already higher trend inflation, overall higher interest rates than seen since 2008, solid but slowing overall GDP growth and overall high equity valuations, this does make one pause to think if we can continue to see multiple expansion based on future growth expectations. This is not to say we think all stocks are over-valued or do not exhibit attractive growth characteristics but it is more a matter of time horizon. The tech rally seen in 2023 and 2024 was large but was not as dramatic when you add the 2022 bookend to the return stream to make it a trailing 3 year number. In our opinion, equities had gotten ahead of themselves and the combination of tariffs, valuation, etc. is resulting in a healthy consolidation. For long-term investors and even intermediate term investors, this is an overall blip in the horizon. For short-term investors, we do not believe they should have equity exposure as continued shortening of the time period results in outcomes more akin to gambling. Given, equity returns are a lot more exciting than pulling the arm of a slot machine though.

Now, what does this mean for equity investors? When we are looking at the market and different dynamics within the market, we look at different quantitative factors or attributes of individual stocks. I am not going to bore everyone with a deep discussion of quant factors but we do find that a quick summary is the best way to articulate our views on the market. We remain bullish on growth factors intermediate and long-term but continue to emphasize other areas of the style box shorter-term. Given the overall strong earnings power of many growth companies, we continue to purchase in this area of the market but do expect ongoing volatility. As a compliment to this, we continue to emphasize a lower but meaningful exposure to companies exhibiting attractive valuations coupled with quality and the ability to produce sustainable income streams. Given additional data, we may increase our emphasis on these factors for our multi-style strategies but do not yet see justification to do so on the data.

The Fed left rates unchanged for the second meeting in a row on Wednesday. While the equity market reacted positively to Chairman Powell's press conference following the meeting, overall there does remain some level of concern how much dry powder the Fed has to cut rates to spur the economy weakens significantly in the face of inflationary pressures. The Fed did pair their overall GDP projections for the year and Powell's comments solidly referred to the inflationary impact of tariffs as transitory.

We have continued to see lower yields across all but the nearest term tenors of the curve. The yield movements in isolation are not flashing red flags of ongoing inflation or economic growth.

Chairman Powell also clearly indicated the Fed's belief that any inflationary impact of tariffs to be transitory. In other words, any inflationary impact will move back to trend without Fed intervention. As we mentioned earlier on this call, we do in fact tend to agree with this statement as overall inflation prior to tariff concern was trending lower and we view the implementation of a tariff as a one time price increase as opposed to ongoing upward price pressures i.e. inflation. The question here is whether inflation is transitory and how transitory. In other words, to recycle my personal favorite Bill Clinton quote, it depends on what your definition of is is.

We do see a fairly wide disparity between consumer views on inflation and what we are seeing in terms of market expectations. The 5 Year/5 Year seen in the chart below shows that pricing in effectively normal levels of inflation. Consumer expectations is that of significantly higher trend levels of inflation as represented in the University of Michigan Inflation Expectation survey. The consumer is the primary driver of the US economy and changes in behavior can be impactful.

We continue to closely monitor consumer sentiment, which has been declining of late even with overall moderation of inflation. The consumer is highly sensitive to inflation as well as the job market but we are not seeing major cracks in the job market. There has been concern of labor market dislocations related to DOGE related job cuts but so far we are not seeing this in the job numbers; either the job losers are finding new jobs quickly or are not filing for initial jobless claims. Either way, we continue to monitor this closely.

There is a lot of uncertainty in the markets right now and tariffs are a major factor in that. The uncertainty of timing and amounts of tariffs is in our opinion more important than the actual outcome. Markets do not like uncertainty; as investors we can handicap different scenarios fairly effectively once facts are known and companies can very efficiently make decisions to maximize profits once there is more certainty. We would like this uncertainty to also be transitory.

Given all that we have discussed, it is worth pointing out several key things related to larger portfolio construction. Broad diversification and targeted risk exposures remain crucial in this environment.