April Investment Comments
We warned about froth in equities last month, and the S&P 500 responded with a sharp correction. The index experienced a steady slide from its peak of 6,163 on February 19th, closing in correction territory down 10.3%, on March 13th. The more volatile NASDAQ 100 slid 13.5% during the same period. A subsequent bounce left both indexes trading in territory they originally reached six to nine months ago. After starting the year up about 4%, 2025’s market now has a foot in the hole.
It is no surprise that the biggest contributors to the market’s multi-year gains, the so-called Magnificent 7, also paced it on the way down. The March 17 cover of Barron’s Magazine illustrated their pullbacks from respective 52-week highs. Six of seven showed declines in a range of 19%-23%. Tesla showed a 50% decline, returning to its pre-election range. The graphic was printed on a solid red background under the heading “Mag 7 on Sale”. Barrons Cover Curse believers might debate whether the red background portends a green bounce or whether the reference to stocks “on sale” foreshadows another leg down. Either is certainly possible. The S&P 500’s trailing P/E ratio remains in the mid-20s, at the high end of its all-time range. A return to the 20-year average of about 16 would equate to nearly a 40% drawdown from here, give or take earnings growth for the constituent companies. On the other hand, while corrections are historically common and occur about once every two years, bear market drawdowns of 20% or more occur only half as frequently. Treating every correction as a budding bear market is equally likely to be right or wrong.
Walmart’s financial results paint a picture of the average consumer. The company closed Calendar 2024 (its Fiscal 2025) with solid 5% constant currency revenue growth and operating income up 8%. However, the company guided to lower forward growth in the 3%-4% range. Guidance may be conservative, but the company’s reading of the consumer seems to suggest economic conditions are presently about stable, at best. Meanwhile, Dollar General communicated that it is seeing more consumers trading down to the lower end of the market that it serves.
The CPI for all items increased a startling 0.5% for January but eased to 0.2% for February. Changing seasonal effects and normal measurement error can cause the CPI to bounce around. Markets overreact in response. February’s cooler statistic knocked the 12-month reading back down below the 3% figure that was generated by January’s “hot” number. The February reading seemed to push the dollar lower, and gold higher, as traders interpreted lower measured CPI as cover for incrementally more dovish monetary policy. Similarly, slower inflation could hint at emerging economic weakness, which the Federal Reserve generally answers with cheaper money.
Threats of higher tariffs remain in the news, as President Trump strives to elicit foreign policy concessions from the country’s trading partners by using access to the U.S. consumer as a punishment or reward. Economists generally argue for free trade, even advocating one-way free trade when partners impose their own tariffs or controls, a kind of “turn the other cheek” approach. That said, economic models cannot contain the entire messy world of geopolitics. It is always possible to argue that a policy’s hard-to-measure benefits exceed its more easily measurable costs. Indeed, these kinds of arguments seem to dominate many economic debates, much to the chagrin of economists who view and present themselves as politically neutral experts in measuring.
As expected, the Federal Reserve left overnight borrowing rates unchanged at 4.25%-4.50% at its March meeting. The Fed did not change its full-year outlook for rates to fall 0.5% and end 2025 at a lower bound of 3.75%. It announced an approximate 20% decrease in the rate at which it winds down its $6.7 trillion balance sheet, modestly reducing the market supply of U.S. Treasuries during a period when the U.S. government needs to issue lots of new ones to finance deficits.
Long-term U.S. interest rates have eased slightly since the market’s peak. Eurozone long-term rates have nudged higher, driven by the European Central Bank’s decision to reduce the overnight rate from 2.75% to 2.5%. Long-term rates can move opposite short-term rates when the market interprets monetary policy as inflationary and demands a higher long-term interest rate as compensation. The ECB was extremely reluctant to raise rates when inflation reached double-digits in the wake of the pandemic. Now it is extremely keen to lead on the way down. Bundesbank, monetary authority for the most hawkish Eurozone member Germany, criticized the ECB for its pro-inflationary bias.
Gold has continued its year-long ascent, recently trading above $3,000 per ounce and up 50% since February 2024. That is an awfully furious rise. Yet hardly a day goes by it seems without bringing some kind of news that is marginally negative for the faith and credit of sovereign governments, lending a little more luster to the value of the shiny yellow metal.
On a related note, the dollar has been weak against most major foreign currencies so far in 2025, exhibiting a steady, quiet slide which accelerated in March. The dollar’s weakness against both gold and foreign currencies comes despite the aforementioned dovishness from the ECB. The dollar may be suffering from temporarily low demand amidst the pullback in U.S. stock prices and the decline in longer-term U.S. interest rates relative to Europe.
We often remind readers that stocks are, fundamentally, real assets just like gold. They represent ownership in a productive business. Many companies have succeeded and will continue to succeed across all kinds of national economies, across various monetary systems, and across time. A portfolio of reasonably valued, growing companies should outperform most, possibly all, other major asset classes. Investors should try to take advantage of volatility and enjoy the hunt.
Miles Putnam, CFA®