Madness of Fools

March Madness! April Fools’! Both are fun – but combined, they could be dangerous. We love the madness of the NCAA basketball tournament in March, and it is fun (sometimes) to either play a prank on someone or have someone play one on you on April 1^st as you celebrate April Fools’ Day (assuming it is harmless fun). But the combination of the two terms is concerning. As it says in Ecclesiastes 10:13 (speaking of a fool), “the beginning of his talking is folly and the end of it is wicked madness.”  While this could easily delve into a political discussion (sorry, but the argument could be made on both sides), the intent here is to focus on investors and how foolish actions and choices can cause destructive behavior like selling at the wrong time, not having a plan, or getting caught up in market hysteria lead to the proverb “a fool and his money are easily parted.”  This is a paraphrase of Proverbs 13:22 that speaks as much to the wise man about money as the fool, “There is precious treasure and oil in the dwelling of the wise, but the foolish man swallows it up.”  Certainly, we want to delve into the realm of the wise and avoid the madness of the fool. While no one knows the future with certainty, getting caught up in the hysteria and deciding to give up on a long-term investment plan might qualify as a foolish move. Study after study after study has shown that missing just a few days in the markets versus staying fully invested can hammer your long-term results. Likewise, one is better off turning off the news and social media that are selling hype (both good and bad) and avoiding the urge to look at one’s portfolio on a daily or weekly basis. Like the studies about missing out on the best days in the markets, studies have shown that investors who review their portfolios on a monthly basis are happier than those who look daily or weekly, those who look quarterly are happier than those who look monthly, and those who look annually are happier than those who look quarterly.  The basis for this is that we do have corrections and bear markets on a semi-consistent basis, but they don’t always last very long and the longer time between poring over your investments allows time to work in your favor.  The result is that those investors are happier no matter what happens in the markets. 

While this commentary normally follows a consistent format, considering the market volatility, it will be modified slightly.

Financial Markets Results

As discussed last month, uncertainty prevails in the markets right now, largely due to the tariff issue, and it hit home in March and continued into April as well. But, along with that uncertainty, has come an unexpected benefit (looking for a silver lining here) that hasn’t worked as well over the last several years, and that is diversification.  The 60/40 (stocks percentage to bonds) portfolio has been a consistent winner because stocks go up roughly 75% of the time and, when they do not, bonds have always been there to minimize the damage. But, with interest rates getting pushed dramatically higher by the Fed and the Magnificent Seven stocks dominating equity returns, that 60/40 mix did not work as well as in the past (see 2022 results for example). It turns out that the announcement of the death of the 60/40 portfolio was a bit premature, as diversification – both in equities and in the utilization of bonds – is working again. Look at the EAFE and its 6.15% year to date return through the end of March versus domestic indexes that all show negative numbers. Plus, the Bloomberg US Agg Bond index is up 2.78% this year, helping to mitigate the damage as well. More proof that diversification is working is that the equal weighted version of the S&P 500 index is down just 0.61% year to date, while the standard S&P 500 index is down 4.27%. This means that, through the end of March, a portfolio that leans towards a balanced approach is treading water versus those that are less diversified. For more details see the chart below.

The Economy

Heading into 2025, there was limited talk of a recession happening this year, with most economists we follow placing the odds around 20% or so. Expectations were relatively low due to strong employment data, strong consumer confidence, and expectations for economic growth policies from Washington that included tax cuts. While the topic of tariffs will be discussed below, recessionary expectations are rising, as many have raised the odds to 50% or so for one within the next year. The stock market reaction to the tariffs only adds fuel to the recession talk.  With markets overvalued to start the year, traders were looking for a catalyst to sell and the tariffs became that reason. GDPNow, the Atlanta Fed’s forecasting tool, is estimating first quarter GDP at -2.8% as of April 3^rd. While this does not mean a recession is at hand (typically, though not officially, it takes two quarters of negative GDP growth to indicate a recession), the optics are bad. Other forecasters are looking at a GDP reading nearer to 0% in the first quarter, and many see limited growth for the rest of the year.

Employment data has continued to surprise to the upside and helps to calm fears of a recession. In March, the economy added 228,000 jobs (well above forecasts) even as federal government payrolls declined. The unemployment rate sits at 4.2%, still near the Fed’s full employment goal. Wisconsin’s unemployment rate is 3.2% through February, while Madison’s rate is 2.6% through January. Both numbers have moved slightly higher over the past couple of months. Inflation is a sticking point. After a decent reading or two to start the year, the fear is that tariffs will cause inflation to tick higher and remain higher for longer. The current CPI number is 2.8% after rising 0.2% in February. Truflation’s estimate is 1.46% as of April 7, 2025, but is ticking higher.

A slowing economy combined with sticky inflation, is causing some to start to whisper the word “stagflation”.  All of this, and other data, have made the Fed’s job more difficult and means the Fed is on hold for the time being. Barring a significant slowdown in the economy over the next couple of months, we do not expect the Fed to act until June at the earliest.

Tariffs

Now to the topic of the day/week/month – tariffs. One of the big problems right now goes back to the original topic of this commentary … the madness of fools. In this case, it is mixed messaging from Washington. Some within the administration are talking about pausing the tariffs for a period of time, others are saying no, and a third message is being presented that the President does not want to make deals. This uncertainty is what is roiling the markets. If that uncertainty were to get settled, the markets would be able to deal with things and move forward. Unfortunately, that is not the case at the moment, but, perhaps, by the time you read this, some clarity will be provided.

There are several issues at play here that affect the economy, and more importantly, individuals. First, the tariffs were put in place to offset imbalances in how our trading partners treat us. This is an important point to remember.  We, perhaps because of the strength of our economy and dollar, have been put at a disadvantage with many (most?) of our trading partners and that does affect the types of companies and jobs that we have here in the U.S. Rightly or wrongly, that is one of the reasons President Trump has instituted the types, and levels, of tariffs he has.  Second, tariffs can be used to push manufacturers to move production back here. This can be good for the economy and workers, as new jobs can be created, but the problem is that it can take some time for this to happen. Rome was not built in one night and neither will American manufacturing. Third, tariffs can be used as a source of revenue. While this is true, what is not so readily apparent is that there could be a cost to the consumer as well. If there is, it will work as a tax and that would likely cause the consumer to slow spending causing economic harm. All three of these issues could work, all three could fail, or any combination thereof.

What seems most likely, however, is to go back to President Trump’s nature and that is one of making deals. He is, after all, the author of the book, Trump: The Art of the Deal. If his nature holds true, then he is likely to seek a deal with other nations that offer better trade terms that benefit both American workers and consumers and, by extension, our economy, the largest and strongest in the world.  That would mean all three of the potential uses for tariffs instituted by the President could work. It will just take some time.

To that end, we are already seeing over seventy (yes, 70! – what does that tell you?) nations (including Japan, Israel, the UK, etc.) reaching out to try and make a deal. Obviously, if they are reaching out, it is because they are fearful of the ramifications of not making a deal and several of these countries are proposing zero tariffs as well. The biggest fight is with China, and that could get uglier before it gets resolved. Again, though, if clarity in the messaging improves, the markets will be able to deal with things and that will benefit investors.

Outlook/Summary

Market volatility is nothing new. We saw it in 1987, 2000 and 2001, 2008, 2009, 2010, 2011, 2018, 2020, and 2022 (among others – you get the picture) where the market faced a drawdown of greater than 15%.  This year is nothing new in that regard.  While there are a plethora of headlines out there trying to make sense of the issues and how they correlate with history, unfortunately, this crisis is different, just as each one was before. This year’s turmoil was/is compounded, from a market perspective, because the S&P 500 was/is overvalued. Stocks were due for a sell-off if earnings did not expand well beyond expectations.  So, the tariff uncertainty helped instigate the market sell-off and it was (or is) made worse because stocks had further to fall this time because they were overvalued. Uncertainty plays a major role, and the markets do not like uncertainty.  Until clarity returns in relation to the tariffs, inflation, and other issues, the markets will remain volatile.

We would not be surprised to see the economy fall into a recession at some point over the next year but the depth of it should be relatively shallow as one cause is a somewhat fearful and cautious consumer. Once things settle down in the markets and tariff issues become more stable, we feel things should improve as the consumer fears subside. Post recession, if there is one, will see a recovery that will be nothing to write home about (growth of just 2% or so) and if we avoid a recession, economic growth will be similar and, again, nothing to get too excited about.

From an investment standpoint, it is helpful, in the long term, that valuations have come down helping to set the stage for future growth.  The time is approaching when stocks will bottom (not saying we are there yet) and offer an attractive buying opportunity. There are sectors that are doing well (consumer staples, international stocks), just as there are sectors that are cheering the tariffs (ranchers, etc.). What does that mean? Diversification works. Yes, things get out of whack a bit when a minor group of stocks dominate for as long as the Magnificent Seven stocks have, but eventually things revert to the mean and undervalued sectors improve and overvalued sectors weaken. We will stick to our defensive posture and do our best to protect the downside first and then work for upside growth. We do not want to play the fool by changing our approach at the wrong time. Bonds are working again, cash is still yielding a decent return, and certain market sectors are working (international, low volatility equities like dividend payers, etc.). It is encouraging that the markets are broadening out from just those Seven stocks. It is also interesting that other advisors are now talking about being more balanced, more diversified, and taking a “back to the basics” approach. Sounds like us! This does not mean volatility in returns or negative numbers can be avoided, but it does mean that the ride is smoother than taking large bets on certain types of investments. We also favor taking an active approach versus a passive one, especially at times like these, and look for active management by our investment providers.

Sticking to a plan, investing to the level of risk you are comfortable with, and not letting the bouncing ball or short-term momentum drive you crazy is the best way to be successful over time. We understand that this is an unsettling time, and to that end if you would like to discuss your portfolio or strategy, please call the Wealth Management division of Lake Ridge Bank at (608)826-3570. We look forward to speaking with you.

Market/Economic Data

As of March 31st, 2025…. Unemployment data is through March for national, Madison (preliminary) is through January, while Wisconsin (preliminary) is through February, and inflation data is through February:

Thank you for your business – we look forward to speaking with you soon. (Note – this commentary used various articles from JP Morgan, Morningstar, the Wall Street Journal, Investor’s Business Daily, Northern Trust, CNNMoney.com, msn.com, Kiplingers.com, nytimes.com, Fidelity Investments, American Funds, LPL Financial and other tools as sources of information.