Tariffs:

President Trump made tariffs a key policy issue during his campaign and clearly articulated that he wants to eliminate “unfair trade” and bring back production and jobs to the US. The magnitude of the tariffs and speed at which they were implemented caught many investors off guard sending unprepared investors into panic mode.

Despite the negative market reaction and public backlash, Tariffs seem to be working, and Trump may achieve some of his intended goals. Trading partners one after the other have announced the complete elimination of tariffs on the US, including Vietnam, Cambodia, India, Zambia, Israel, and a few others. More than 50 nations have already requested to engage in trade talks with the US to discuss the situation. The trading partners of the US want to negotiate and seem prepared to adjust their side for the U.S., except China and Europe.

China has retaliated and increased their tariffs on US imports, and the EU is expected too also. Trump will likely continue to apply pressure until he can achieve a better deal. This means the uncertainty could remain in place until they can sit down and negotiate what the US expects to be a fairer trade arrangement.

This market selloff is not a surprise, as we expected such a scenario at some point with the overvalued market conditions. A concern that remains is the extreme concentration that still exists in just ten stocks. Over concentration leads to a bigger decline during a correction because of their massive market capitalization heavily influences their performance.

We have been warning that the overvaluation and concentration risk in the S&P 500 is unprecedented.

Overvaluation: We use several indicators to review market valuation.

The Buffet Indicator

The Buffett Indicator is a market cap to GDP ratio that compares the total stock market value to the GDP, economies actual output. It helps investors gauge the overall health and potential returns of the stock market. The current Buffett Indicator indicating the market is SIGNIFICANTLY OVERVALUED. See chart below:

The S&P Median PE

The S&P Median PE ratio done by Ned Davis Research shows the current overvaluation level in the chart below

Concentration Risk

Concentration risk: The top 10 stocks has accounted for a record 39% of the S&P 500 in January 2025, compared to 29% in the dotcom bubble and 34% during the Nifty 50 era of the early 1970s. Now the same investments that drove the 2023 and 2024 S&P 500 performance are weighing the market down.

^{Source: NDR}

Market Correction or Recession?

A Market Correction is defined as a 10% drawdown but no more than -20%.

This pullback is currently a Market Correction.
Market Corrections are a part of the economic cycle and historically happen every year.
Market Corrections can be triggered by overvaluation and uncertainty.
Historically the stock market recovers quickly from corrections.
Numerous studies have concluded that investors who remain to their investment plans typically fare better than those who withdraw money during corrections.
Market corrections tend to go through a four-step bottoming process:

Oversold 2. Rally 3. Retest 4. Breadth thrusts which determine market momentum

No one can know the outcome. What we do know is that what the U.S. leaders have been doing in the last twenty years is not working, U.S. debt is through the roof and growing to an unsustainable level. If we fail to address this, the US could face fiscal crises potentially impacting economic growth and living standards.

Positives: The economy is strong and could continue to grow.

From: Schwab Market Perspective: Bracing for Tariffs February 14, 2025 Liz Ann Sonders , Kathy Jones ,Jeffrey Kleintop ,Kevin Gordon

The Institute for Supply Management (ISM) Manufacturing Purchasing Managers' Index (PMI)

The Institute for Supply Management (ISM) Manufacturing Purchasing Managers' Index (PMI) rose in January, climbing into expansion territory for the first time since October 2022 (the 50 level separates expansion from contraction). See Chart.
The economy for now continues to be on a solid growth path, powered by ongoing robust consumer spending.
The labor market remains strong with the unemployment rate at 4.0% and average wage growth at 4.1%.
Inflation has stalled in the 2.5% to 3.0% region, above the Fed's 2% target rate. See Chart below:

^{Source: Charles Schwab, Bloomberg, as of 1/31/2025.}

Inflation has stalled in the 2.5% to 3% area

^{Source: Bloomberg.}

Concerns

U.S. Trade Policy Uncertainty Index

As shown in the chart below, the U.S. Trade Policy Uncertainty Index spiked to the second-highest level on record in January. As long as trade pressures persist, uncertainty could remain elevated, potentially acting as a wet blanket on business spending and confidence (an environment similar to the 2018-2019 trade war with China).

^{Source: Charles Schwab, Bloomberg, as of 1/31/2025. U.S. Trade Policy Uncertainty Index is one of the category-specific Economic Policy Uncertainty (EPU) indexes developed in "Measuring Economic Policy Uncertainty" by Scott R. Baker, Nick Bloom and Steven J. Davis. It reflects the frequency of articles in American newspapers that discuss policy-related economic uncertainty and contain one or more references to trade policy.}

Minor Breadth Concerns

Minor Breadth Concerns: Shown in chart below, is similar to 2017 heading into 2018. We believe the risks of a bigger pullback could build if policy uncertainty remains elevated in the face of a weak improvement in market breadth.

^{Source: Charles Schwab, Bloomberg, as of 2/7/2025.}

Fixed income: Waiting for clarity

The Federal Reserve signaled it would keep interest rates on hold for the near future, leaving the bond market without clear direction. The Fed also noted that policy uncertainty around tariffs, immigration, regulation, and taxes are reasons to hold off on interest rate cuts. It's too soon to assess the impact of these forces on the economy and inflation.

Treasury yields have been trading in a narrow range. 10-year Treasury yields is around 4.5% and considered near fair value if the Fed cuts rates to the 3.75% to 4.0% range by year-end. If that doesn't happen, then the risk is that 10-year yields retest the 5.0% to 5.25% region.

The 10-year Treasury yield is at 4.5%

With the uncertainty in the bond market, we have been and are continuing to take a cautious view of Fixed Income. Investors currently can earn yields in the 4.0% to 5.0% range in high-credit-quality bonds, Treasuries, and CD’s and without taking excessive risk.

^{Source: Bloomberg. U.S. Generic 10-year Treasury Yield (USGG10YR INDEX). Daily data as of 2/10/2025.}

CONCLUSION:

Many of you are familiar with the saying “no pain no gain.” The United States debt snowball has turned into an avalanche, and this could eventually affect us all and future generations. The measures to control our growing debt will be painful. The short-term negatives like market volatility and economic contraction will look like a cake walk compared to the bear market that could happen if the US debt and spending issues are not fixed. Reducing spending and increasing revenue are the two ways to fix the U.S. growing debt and spending.

The past administrations have historically used raising tax as the main solution without cutting spending. The tax increases seem to have only encouraged our elected officials to engage in even more wasteful spending and not reduce debt. It is going to take some strong medicine to control our spending and increase revenue. We must all be willing to go through what we believe will be short-term pain to get our country’s debt in control for the future of our economy.

Tariffs could threaten the recovery of this correction and potentially cause inflation, a recession or even stagflation. Cash provides options. This is why we have been investing in short term fixed income options. There is a reason Warren Buffett is sitting on record amounts of money. The saying by Charlie Munger: “The big money is not in the buying and selling, but in the waiting.” We agree!

In times of uncertainty, we find it best to zoom out, look at the bigger picture, and put everything into perspective. We see opportunity, not fear! Our approach to risk management and portfolio management is a disciplined process. Because neither getting in nor getting out is an investment strategy. It's just gambling two moments in time and investing should be a disciplined process over time. The S&S Wealth Management team is dedicated to growing and preserving your wealth through different economic and market cycles. We manage your money based on your risk tolerance, goals, and income needs and keep growth and preservation at the top of our mind. Please see Market Update August 2024 for information on our investment process and what we do for you. Please reach out to us if you need us to resend the August Market Update.

Be aware of someone on TV or the radio grabbing your attention with guarantees that are alluring. They don't know your tax circumstances, your income, your financial needs, what state you live in, when you're retiring. So, whatever they are saying is for a general audience, and that's before we get to how wrong the odds their forecast is going to be. Many investment products seem great, until you understand how they work. Typically, whatever they're saying isn't geared towards your personal situation, it is geared to selling a product or service. Also please be aware of scams!

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Market Update April 2025