Key Takeaways:

• Fasten your seatbelts.  Markets react to uncertainty by exhibiting higher highs and lower lows which may feel catastrophic but presents opportunities to profit for those with the stomach.
• Beyond tariffs: the market is a leading indicator for deeper economic problems.
• Position for this new environment using advanced portfolio management processes.  You can help by sticking to your financial plan, particularly the budgeting piece.

Uncertainty is the defining theme, with the dominant path of strong growth forking into 2 more trails called recession and stagflation.  Looking at the data, the economy looks strong.  Growth in GDP is still expected to be some of the highest in the developed world.  Inflation is still a threat but in aggregate has moderated (albeit at much higher price levels that are not rising as fast as they have been, which is called disinflation).

However, last quarter, markets looked ahead at threats from inflation and potential stagnation because of tariffs, prices, layoffs, and their interplay with corporate fiscal and consumer finances.  Businesses crave stability in their costs and customers.  If inflation, tariffs, and wage pressure place uncertainty on their cost lines, they can only plan for the short run and will go with the worst-case scenario in the longer term.  This contrasts with the optimistic business outlook of the past few years.  Accordingly, lower earnings estimates reduced the value of stocks.

The S&P 500 lost 4.59%, its worst quarterly performance in 3 years.  Ostensibly, it sold off due to tariffs and geopolitical uncertainty, but this isn’t the whole story. There is a deeper and more troubling dynamic if we think about the stock market as an actual market of stocks.  In other words, what companies did the losing?  In that, we learn that the AI led magnificent 7 stocks showed distress out of scale with their exposure to tariffs etc. These stocks declined almost double that of the rest of the S&P 500.  Looked at another way, industrials, presumably in the bullseye of tariffs, lost almost nothing at -0.50%.  Tech lost almost 16 times as much, down 8.30%.  Is this merely a cooling on the already stretched AI trade or is it a bellwether of deeper fissures in the economy?  For short-term guidance, we watch technical indicators, this helps us know how to deploy new cash etc.  I was shocked to see that technical analysts are alert to the idea that we might be seeing something called a “bear flag” in the S&P 500.  If that is the case – and the data is still out – they believe the broad market could drop another 10% from here.  We don’t have a crystal ball, but all this goes to say that the risk of a selloff at some point is higher.

In conversations I have with clients and the media, two basic questions emerge: first, how is Camelotta dealing with all of this?  Second, is there anything our clients should be doing in response to the current economic climate?

In past years, we wondered when international equities would start to add value and last quarter, at 4.59%, it took the crown as best stock class.  It's taking off because suddenly G7 leaders are realizing they might have to defend themselves militarily and therefore, they have begun spending money preparing for war.  This boosts their corporations’ earnings.  As for commodities, gold gained 19% and even bonds gave us a 2.61% plus solid stable income.

As for investing: focus on maximizing dollars over percentage returns.  The aim being to have more money at risk in upward cycles and less in downward turns.  Does that mean one can see the downturns coming and pull out?  Of course not.  But rather, aim to reduce exposure to down markets (losing less) to have the cash and skill to put more money at risk when the upcycle returns (make more).  In an up and down cycle with a percentage return of zero, the aim is to show income that is greater than zero.

Beyond this, for clients, we bring a level of expertise not normally found in the domain of financial advisors, but my background is rare amongst my peers and leaves me in a position to set us up for success.  Around the office they say, “let Dana cook!”

What can you be doing? I’m often asked, given all of this – the concerns, market corrections, and uncertainties – should I make changes to my spending habits?  Now more than ever it is important for you to stick to your budget and save as much as possible, ideally, against a solid financial plan as we provide to our clients.

We thank our loyal clients and followers for all of their confidence in our work during these volatile market conditions.

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