Please find an excerpt from our March 2025 Newsletter below.

The Stock Market, The Economy, and Unknown Unknowns

In our last newsletter from December 31, 2024, I wrote: 

“Are you ready for a 20% or higher drop in the value of your investment accounts because of a drop in the stock market of 25% or more? In fact, we should always be ready and prepared for such a drop, and we should expect most of the time, for US markets to recover to a new all-time high within two years, though it can and has taken much longer a couple of times in the past 80+ years.”

This is a warning I have highlighted countless times over the years in newsletters, in individual meetings, and something we highlight in our client investment policy statements. Stock markets are volatile. As investors, we take risk of loss in the hope of achieving higher returns. Future expected returns are correlated with risk, the higher the expected return, the higher the risk. Diversification is the only sure way to increase expected return at any given level of risk.

The primary drivers of stock valuations are:

1.      The future profitability of companies (both industry and individual company specific)

2.    The value of those profits relative to the “discount rate” (which is driven off of the Federal Funds rate, and generally higher interest rates correlate with lower stock prices)

3.     The comparative value and risk of other types of investment

4.     Investor sentiment. 

While any of these factors can be impacted by a number of macroeconomic factors, companies and their management have shown tremendous resilience and adaptability to changing environments: whether it is war, climate change, unfriendly governments, pandemic closures, tax changes, or anything else, economic activity, like water flowing downhill, continues to flow.

The latest ~10% drop in the S&P 500 and almost 15% in the Nasdaq [from their recent all-time highs, it is less than this from the beginning of 2025] should come as no surprise other than it took so long since the last time this happened, a couple of years ago. At the same time, we saw some increase in non-US stock markets…followed by a slew of increasingly silly news commentators stating that “American exceptionalism is dead”, “US dollar dominance is finished” and that the decline is “all Biden’s fault”. All of these are equally laughable.

Relative valuations between the US and non-US stock markets had gotten very far out of proportion by the beginning of 2025. The US market downturn with some sharp increases in non-US markets is not because suddenly Europe and Chinese markets have fundamentally changed and very attractive for the long-term, this is likely a one-off effect that will not be sustained long-term, unless we see much larger changes in everything from economic policy, fostering of technology industries to really compete with the US capital markets, and demographics, these will be telegraphed and take years to implement…  

President Trump’s tariff “policies” are the primary catalyst of the US market’s latest rounds of volatility. Remember, investors generally prefer bad news over uncertainty. Right now, we are seeing mostly uncertainty driven volatility about tariff policy. Companies and investors can adapt as needed once there is more certainty. There are also underlying concerns on consumer sentiment, sticky inflation and ultimately, we will see the results in corporate profitability, so far though this seems only mildly impacted, though it is a lagging indicator.

The moves I have seen in the markets show undoubtedly that investors were acting very rationally and without much notion of a panic; more just some heightened concern, there is a big difference. Most of the things that went down a lot recently (think Tesla, Nvidia, and Bitcoin as three examples that are down about 50%, 30%, and 25% from their recent all-time highs) had all had highly sentiment driven rallies much higher than the rest of the market. Some of this selling was met with moving money to non-US markets, bonds, and money market funds, as some highly leveraged funds and individuals stampeded to the exits. Like a windstorm on the Great lakes, the surface waves are very choppy, but the stability of the deep waters is unchanged

If you compare your account values (net of deposits and withdrawals) at the end of the first quarter of 2025, to the end of 2024, most clients will see a slight decline of about 1-2%. The message is “Diversification is working well for you!”. For those outside this range, it could be that your portfolio is a bit more or less risky than our typical client, you were not fully invested, or you had a recent large deposit or withdrawal; these are the main reasons for return deviation that we see.

When stocks drop 10%, 15%, or more, from an all-time high, this is often a very healthy reset, and for those of us fortunate to have some excess cash and with a long investment horizon, this may represent a better entry point, though market timing is not something we advocate as a major driving force of investment strategy. All clients will benefit from these changes too through our regular rebalancing which forces us to sell high and buy low to return portfolios to a target level of risk.

With the last two quarters being relatively flat, it is giving earnings (which are still forecast to grow around 12% this year) a chance to catch up with valuations which, with the rapid stock market increases in the last couple of years, have seen valuations get a bit ahead of themselves.

The economic cycle is not dead, there will be a slowdown eventually, there will be a recession, eventually and after that, there will be another growth period. This has been going on as long as economic market statistics have been tracked. The fundamentals of growth in the US have not changed: demographics, tax policy, a well-functioning financial system, a large degree of respect for contract law, geography, and unquestioned leader in financial markets that attracts capital from around the world and disperses it around the world in search of investment returns.

The unknown unknowns are the path that we take to arrive in the future. Will there be peace and wars? (Well yes, there have been for hundreds of years, why are things different now?) Will there be changes in governments? (Ditto.) Pandemics, bank runs, terrorist attacks, climate change…history tends to repeat itself, but not always in the same way.

Many companies tend to be profitable despite or often because of global challenges. I don’t expect this to change. And yes, I am aware of the non-zero probability of highly catastrophic and sudden events that impact the population of a large part of the planet…in those events, the value of stocks and markets for the people who survive will be the least of their concerns.

We have never taken the approach that large macroeconomic events should change the risk profile and investment strategy for individuals who have a time frame of many years or decades for their investment horizon. By holding, rebalancing, keeping cash reserves and being prepared to wait out a downturn has served investors well since well before I was born. Adopting this approach has served our clients very well. Panic selling is not a strategy, most of you know this very well. 

If you have had or expect a big change in your individual circumstances, job loss, major health change, or other personal situations that have or may significantly change your trajectory, that is always worth having a conversation about with us. At any time, regardless of the state of the world, if your personal circumstances change, this should often be a reminder to reach out to your advisor and our team, understand the importance of our advice and service when you are facing important changes in your lives.  Of course, you can contact us anytime for issues large or small, we enjoy hearing from our clients, what they are thinking, what they are reading and what they are uncertain about.

Our clients find our newsletters to be a valuable part of working with White Lighthouse.
Samples from our previous newsletters can be found below.