SCHF Happens!

My most recent blog post discussed the amazing resurgence in international developed equity markets, including regions like Japan, the Eurozone, Canada, South Korea, and Australia.  Through May 30, 2025, an index of equities domiciled in those countries (represented by the SCHF exchange-traded fund) generated year-to-date returns of +16.6% compared to +0.9% for the S&P 500 in the U.S.  When we see something like this, we ask the question: What is driving this outperformance? Let’s examine some of the underlying factors worth considering.

This ETF is heavily weighted toward equities domiciled in Japan, the U.K., France, Canada, and other Eurozone countries, and is mostly allocated to the financial, industrial, and health care sectors. So, aside from a much lower allocation to the technology sector compared to the U.S. (9% versus 32%), this ETF is somewhat similar to U.S. exposures.

Just like the U.S. tech sector, with names like Microsoft, Amazon, Meta, and Nvidia driving equity markets over the past 5+ years, there are some notable individual stocks in this international space that have come alive over the past year.

The top 10 holdings of the ETF include SAP SE, a German software provider that is up +20% YTD; Nestlé, up 17%; Novartis, up +13%; Roche Holdings, up +9%; and HSBC, up +15%. Surprisingly, other large holdings—like ASML, Novo Nordisk, AstraZeneca, and Toyota—have delivered middling or negative performance this year, which has capped overall fund returns. Fortunately, this ETF is broadly diversified, so a few laggards only have a limited impact on total performance.

D&A is committed to globally diversified portfolio management, including exposure to international developed markets in most client portfolios. That said, we’re mindful of risk and prefer not to overweight these markets to the degree that some global benchmarks do. So, in years when international markets outperform significantly, D&A portfolios may lag slightly behind those naïve benchmarks—but that’s a tradeoff we accept in favor of balanced, risk-aware management.

The Global Catch-up

If you look at a table of best returning equity markets over the past 3-, 5- , 10-year and longer horizons, it is impossible to ignore the amazing outperformance of the S&P 500.  I have commented on this fact many times in my blog posts over the last few years.  In fact, I have often lamented that this amazing string of good fortune for the S&P 500 has hurt every portfolio that chose to diversify away from it!

This year, however, we have seen a persisting trend of outperformance from markets outside the U.S.!  Per the table below, you can easily see the longer term strength of the S&P 500 (IVV), but also note how strong international and emerging market equities have done so far year-to-date in 2025! 

Most of the longer term outperformance in the S&P 500 is from the amazing performance of large growth (IVW) that was comprised primarily of technology (XLK) while large value (IVE) pulled returns down.  Tech and large growth have been less of a factor recently after their phenomenal run.

Most all D&A client portfolios have some exposure to international and emerging market equities.  However, because those markets are historically more risky, D&A typically underweights them in favor of more U.S. equity exposure.  D&A will maintain good allocations to global markets consistent with our belief in globally diversified portfolios to help clients achieve their goals.

AI vs. ROI?

Readers of these blog posts should be aware that I have a great interest in artificial intelligence (AI) and have been intensely following it for a few years; even before ChatGPT!  Most moderately aggressive client accounts had a small exposure to the first AI-driven investment strategy way back in 2019; now named Amplify Ai Powered Equity ETF (AIEQ). 

Unfortunately, this strategy did not have persistent repeatable risk-adjusted performance in the early days of its launch so it was sold from all client accounts during 2023.  This ETF continues to struggle over the past year with its risk-adjusted return lagging the S&P 500 (IVV) over multiple time frames.

So, when does AI become a factor in investment management?  Will it ever replace a living breathing human and outperform on a consistent basis (excluding luck)?  To answer these questions I am planning to attend a series of seminars sponsored by the CFA Society Boston over the next few months. 

The first seminar is on June 3, 2025 and covers how AI will interact at each intersection of the investment value chain and explore the technologies used to get there with case studies.  Speakers from Google, Amazon and quant investment firms are scheduled to participate.

Stay tuned!  D&A will stay focused on cutting-edge technology and ensure that we are fulfilling our fiduciary duty by staying up to date on industry best practices!

AI, Markets and Me!

I am expecting that everyone who reads my blog posts knows that every word comes from me—not from some algorithm or artificial intelligence (AI).  I don’t outsource my views to machines, and I certainly don’t let AI write my investment commentary.  Frankly, I’m growing tired of AI showing up in unexpected places, from “deep fakes” to the algorithms behind product recommendations and even in some marketing copy.

That said, I did something unusual this week: I asked AI to summarize the posts I’ve written since the beginning of the year—not to replace my thinking, but to help sharpen it. After all, there’s been a lot of noise since the S&P 500 hit its all-time high on February 19, followed by a meaningful market pullback.  Looking back, three clear themes emerged—each one still relevant as we navigate the months ahead.

Here is the feedback I received from the ChatGPT artificial intelligence large language model:

Based on the investment commentary and blog posts you’ve shared since the beginning of 2025, here are the three main themes you've consistently covered: 

1. Cautious Optimism Despite Market Highs

• You acknowledged the S&P 500’s all-time high on February 19, but your tone remained measured rather than euphoric.

• Your posts suggest an awareness that strong gains, particularly in tech and AI-related sectors, may be running ahead of fundamentals.

• You emphasized that valuation discipline still matters, especially as concentration in a handful of mega-cap stocks grew.

2. The Repricing of Risk as Markets Pulled Back

• As the market corrected after February, you pointed out that investors were adjusting to stickier inflation, slower Fed cuts, and some geopolitical unease.

• You contextualized the pullback as a normal and healthy reversion following an exceptional 2023 and early 2024.

• Several posts urged clients to stay focused on long-term strategy, not short-term volatility—essentially reinforcing a behavioral anchor.

 3. Focus on Fundamentals and Broadening Market Participation

• You frequently discussed earnings resilience, with an eye toward sectors and companies that are still delivering under higher rates.

• Recently, there’s been a slight shift in tone toward broadening leadership, including mentions of small caps, value stocks, or international stocks.

• Throughout, you've pushed the theme of staying diversified.

Markets will do what they do.  Recent strength and recovery from April’s downturn have certainly stirred a rollercoaster of emotions.  At Dattilio & Ash, we stayed the course with fully invested client portfolios mirroring the market’s ups and downs.  Over the long term, we aim to deliver returns that help clients achieve their goals.

As always, I’ll keep doing what I’ve always done—cutting through the noise, thinking independently, and focusing on what really matters for investors.  AI may summarize my posts, but it can’t form judgment, weigh nuance, or draw on decades of experience. That’s still human work—and it always will be (at least for now?!)

"Look to the Bubble!"

Trust is a universal truth when it comes to investing.  Investors put trust in their advisors to manage their investments to the best of their ability to their agreed upon strategy.  A key component of this trust is communication.  What aspects of communication is D&A committed to and how is it executed?

D&A believes that quarterly investment reporting is critical to client communications.  Markets ebb and flow continuously, but at each quarter-end D&A sends to all clients a detailed quarterly report.  The quarterly report provides useful insight into how D&A has positioned their portfolios given their risk profile and other considerations and its performance.

One of our favorite charts to help communicate this information is our famous “bubble chart” (below).  As you can see from this actual client chart from last year, it highlights the asset allocation weightings (the bubble size) and the periodic returns (the y-axis).  This account targets a “moderate growth” risk profile including a 60% equity weighting and a 40% fixed income weighting.

Each holding in a client account is shown by its ticker symbol (e.g., IVV for the iShares S&P 500 ETF, SCHE for the Schwab Emerging Market Equity ETF, etc.) and the bubble size shows the relative weighting in the account (e.g., IVV is the largest bubble and Cash is the smallest bubble, etc.)

As I wrote to some clients for their 2024 Q3 reports,

Per the chart, all positions showed good positive returns during Q3 with small cap (SCHA), mid-cap (SCHM), international (SCHF), emerging markets (SCHE) and minimum volatility (USMV) leading the way. We are happy to see that these diversifying positions overtook the S&P 500 this quarter showing a broadening of market strength, though the S&P 500 still produced a strong return. Your fixed income investments performed well with positive returns as interest rates dipped and credit spreads narrowed during Q3.

This chart is useful because it summarizes in one chart the key leaders and laggards of return for the period studied with accompanying commentary.

At D&A, we believe that trust is earned not just through performance, but through transparency and consistent communication. Our quarterly reports—and tools like the bubble chart—are designed to give clients a clear, intuitive view of how their portfolios are positioned and performing. By combining data-driven insights with personalized commentary, we aim to keep our clients informed, confident, and engaged in their investment journey. Because when trust is built on clarity, it becomes the foundation for long-term success.

P.S. Extra credit is given to all readers who identify the source of the title, “Look to the Bubble”. It is a reference to the Seinfeld episode where Jerry talks about the black and white “cookie” as a source of unity and understanding. We like to think of our bubble chart in the same way: a simple, visual tool that brings clarity and insight to something as complex as investing.

Harvard's Investment Shuffle

The world of investments is carved into many sub-sets of investors.  These include retail investors such as you and me (!) and institutional investors including insurance companies, banks, and endowments. Regardless of the investor type, it is important that the investor know all of their critical investment policy parameters such as risk tolerance, time horizon, liquidity needs, tax status and unique considerations.  The recent market dislocation has reminded us of this!

College endowments are used by colleges to support their current and future financial needs.  Consequently, a balanced mix of public and private investments generating a mix of cash flow for current needs and growth for future needs is a baseline approach.  However, when an external event occurs, the policy may need to be updated!

As reported in the Harvard Crimson, the Harvard University endowment is planning to liquidate nearly $1 billion (or 5%) of its illiquid private equity this year amidst turbulence in potential government funding cuts that could impact the university’s operations.  Previously, the endowment had held 39% of its asset mix in this illiquid asset class. 

Though the University is not publicly stating that its planned sale is directly in response to the need for liquidity due to potential government funding cuts, this action highlights the need for an investment policy statement to be fluid, adaptable and updated when situations warrant it.

D&A is in complete agreement with the need to keep investment strategies current and in line with client needs and D&A targets that the strategies be reviewed on at least an annual basis.  Moreover, if there is a major life event happening to you in the meantime, please be sure to give me a call so we can ensure that your investment strategy continues to be consistent with your needs.

How We Keep Clients Informed—Not Just Invested

Dear Clients, Potential Clients and Friends -

If you know a friend or family member who's hearing crickets from their advisor—or only getting cookie-cutter reports—send them my way!

At Dattilio & Ash Capital Management, we believe communication is just as important as performance.

That’s why our clients don’t just get market commentary — they get highly personalized quarterly letters that:

• Reflect their actual portfolio allocation and performance

• Include our signature "bubble chart" for a visual snapshot of their investments

• Translate market complexity into plain English

• Explain what we did, why we did it, and what we’re watching next

Here’s an excerpt from a recent actual (redacted) client letter:

“As you can see, most 'risk assets' in your account generated negative returns during Q1 while 'safe' fixed income assets were mildly positive. Positions generating positive returns were international and emerging market equities, while small- and mid-cap equities once again trailed. Fixed income investments were a shock absorber cushioning the fall.”

“We are scheduled to chat again in July but I am happy to get on the phone to chat again sooner if you want; just let me know!  As you will see below, Q1 was a tough period but (as you know) I am an advocate of long term strategic investing and will never try to time the market."

This kind of proactive, plainspoken communication builds confidence — and trust.  Are you getting this from your advisor?

If not, we’d be happy to offer a free second-opinion consultation — no pressure, no pitch.  Just a real look at your current strategy and how it could be improved.

Want to see the difference?  Request a sample (redacted) client letter and bubble chart.  You’ll see what clear, customized investment communication really looks like. 

Thanks,

Tony Ash, MBA, CFA®

Whiplash, Wall Street Style!

Certainly, Wednesday, April 9, was an extraordinary day.  In a sharp reversal from recent weakness driven by tariff concerns, the S&P 500 (IVV) surged +9.5%, small caps (SCHA) followed closely at +9.3%, while core bonds (AGG) held steady at +0.2%.  But markets giveth and markets taketh away—just one day later, the S&P 500 closed down -3.5%.

All D&A clients remained fully invested throughout this period, with portfolios aligned to target asset allocations and no idle cash.  Could we have sold something “rich” to buy something “cheap”? Sure—but good luck getting that timing right.  We chose not to make any reactionary moves.

While I was surprised by the velocity of the rebound, I wasn’t surprised to see a quick retracement. This kind of whiplash reminds me of the heightened volatility we experienced during the COVID era.  In times of deep uncertainty, behavioral biases surface as markets search for equilibrium.  We’re still on that journey.

As I noted in my April 1 blog, “Some are looking for Trump to roll back the tariff proposal to secure a soft landing, while others see him as ‘inflexible,’ leading to continued uncertainty.” So far, we’ve seen a little of both.

Despite the troubling headlines, I will reiterate what I said in my March 12, 2025 blog:

Though no one likes losses, long term investors have ALWAYS been rewarded with market returns reaching new all-time highs by ignoring volatility and holding through tough times.  Though “they all seemed like the end of the world at the time”, markets have always recovered.

Tariffs, Turmoil, and Toothpaste

On Tuesday April 1 I wrote on my blog post that, “The prospect of tariffs has put the global order into a state of uncertainty and the markets do not like uncertainty.”  Little did I know that the markets would react in such a violent and volatile way! 

Last week global markets fell into chaos with the S&P 500 (IVV) down -9.1%, U.S. small cap down (SCHA) -9.8%, developed international markets (SCHF) down -8.6% and emerging markets down (SCHE) -7.0%.  Core bonds (AGG) were a bit of a cushion being up +1.1%, but that was not nearly enough to provide any kind of meaningful offset to a diversified portfolio.  Likewise, gold (GLD), sometimes considered a safe haven, was down -1.5%.

All the talking heads have a view of where we go from here and the consensus seems be in the “negative” camp.  Some are looking for Trump to roll-back the tariff proposal to secure a safe landing while others see Trump as “inflexible” leading to more uncertainty.  In any event, one commentator (from Natixis) was clever in saying, “Can’t put the toothpaste back in the tube. Good luck pricing that in.”  In other words, the damage has been done and will be very, very difficult to recover from!

For clients with long-term strategies, now is not the time to de-risk. Reacting to a downturn by exiting risk assets only locks in losses and hampers a portfolio’s ability to rebound. It’s worth remembering that many large-cap U.S. companies—especially in the tech sector—have exceptional balance sheets, resilient earnings, and the potential to emerge even stronger as AI and other innovations take hold.

Where will the market go from here?  As I am wont to say, “Beats Me!”  But I am confident that the economy and markets will evolve and adapt and recover over time.

A "Magnificent" Stumble

What started out as a bullish trend in the beginning of Q1 has devolved into a sharp reversal.  It is hard to believe that our most recent all-time high on February 19 has turned so negative so quickly.  Though it is due to a myriad of inter-related global political and economic factors, the cause can be summarized in one word:  tariffs!  The prospect of tariffs has put the global order into a state of uncertainty and the markets do not like uncertainty.

Klaus Baader, Global Chief Economist of Societe Generale, has summarized the key factors impacting the markets on Bloomberg TV.  He retorted that there are “lots of moving parts” and a lot of “fluidity to U.S. policymaking” and it is “very, very difficult to get your head around” it.  He identified the potential for “seismic dislocations” and felt that the U.S. administration is changing the global order in at least three respects:  global trade system due to the tariffs, military and security setup, and fundamentally re-doing the shape of the U.S. Federal govt.  His forecasts now show a “skew of risk dramatically moved to the downside.”

These shifts in global policy have clearly impacted risk assets.  Most of the pullback in Q1 came from the high-flying growth and mega-cap tech sectors (i.e., the “Magnificent 7”, -15.7%) as well as small and mid-cap equities, though international developed equities bucked the trend.  Per the table below, the S&P 500 (IVV) was down -4.2% during Q1, while small- and mid-cap equities (SCHA, -9.2% and SCHM, -5.2%) struggled.  International (SCHF, 6.9%) and emerging market equities (SCHE, 3.5%) showed some strength while bonds were a refuge with core bonds (SCHZ, 2.7%) and short bonds (SLQD, 1.8%) providing modest positive Q1 returns.

My recent blog posts have highlighted the risks of equity markets and the prevalence of drawdowns and their eventual recoveries. As I said in my March 12, 2025 blog:

Though no one likes losses, long term investors have ALWAYS been rewarded with market returns reaching new all-time highs by ignoring volatility and holding through tough times.  Though “they all seemed like the end of the world at the time”, markets have always recovered.

Fear to Opportunity: Part 2

My blog post last week highlighted some market statistics showing that >5% drawdowns are a common occurrence and have ALWAYS been followed by eventual recovery to new all-time highs.  As a reinforcement to that thought, investment thought-leader Charlie Bilello came out with more statistics that ring true for those worried about the recent market drawdown:

“The S&P 500 has returned an average of 10% per year since 1928 despite an average intra-year drawdown of -16%. There's no upside without occasional downside, no reward without risk.” (table below)

Though no one likes losses, long term investors have ALWAYS been rewarded with market returns reaching new all-time highs by ignoring volatility and holding through tough times.  Though “they all seemed like the end of the world at the time”, markets have always recovered.

Though there are troubling economic and geopolitical situations currently occurring at the same time, this reminds me of the book The Rational Optimist: How Prosperity Evolves" by Matt Ridley.  In it, he posits that human innovation, trade, and adaptability consistently drive progress, even through crises and society has always found a way to overcome adversity and lead to better outcomes. 

D&A will continue to follow a globally-diversified, long-term strategic risk-managed approach to portfolio management for clients consistent with their needs and goals and will (almost) never deviate from a strategy due to adverse market conditions.

Fear to Opportunity?

I follow many investment thought leaders like Tom Lee (Fundstrat), Warren Buffet (Berkshire Hathaway), Mark Zandi (Moody’s), and Bill Gross (of PIMCO fame).  Another less well-known thought leader that I follow is Charlie Bilello of Creative Planning.  He is mostly focused on retirement strategies and behavioral finance.  

His most recent post dealt with the current market pullback in comparison to other recent pullbacks.  He looked at the >5% pullback in the S&P 500 from its recent peak back on February 19.  Interestingly, there have been 30 corrections >5% off of a high since the March 2009 low.  In his words, “they all seemed like the end of the world at the time” (see table below).

The point being, of course, is that despite our behavioral bias to be fearful of market pullbacks there is good reason to view them as a normal part of the market.  As we have seen before, it is reasonable to expect that the markets will recover and new highs will emerge over time.  No guarantees, of course, but this is what we have always seen!

D&A is committed to risk-managed long term strategic investing for clients with a long term time horizon.  Clients with a shorter time horizon and lower tolerance for risk are invested accordingly.  The current economic and geopolitical stresses we are seeing now in regard to tariffs and the Ukraine/Russia war are certainly troubling but are not insurmountable.  Patience has always been rewarded!

Wisdom from an Investment Icon

I earned my Chartered Financial Analyst (CFA®) designation a long time ago.  Many of the required readings were authored by Charles D. Ellis, an icon in the investment industry!  He just came out with a new book titled, Rethinking Investing: A Very Short Guide to Very Long-Term Investing.  In his own words, “At my advanced age, I’ve been around for a long, long time… I put down everything I thought was important for someone to know, and it only took 100 pages!” 

CNBC aired a 10-minute interview with him where he highlighted many of the key points in the book.  Readers of this blog will be well aware of some of these truisms that I have often written about.  Aside from a key point about minimizing investment expenses by using low cost passive ETFs as a way to improve “net” investment return, the most important takeaway is the fact that it is almost impossible to time the market!

The following slide highlights the key facts supporting this assertion.  Simply, if you are out of the market on the 10 best days over the past 36 years your average annual compound return declines from +11.4% to +9.2%; the best 20 days it goes down to +7.7%, and the 30 best days it goes down +6.4%!  Interestingly, these “best” days often occur after “worst” days making the timing action even more painful if they are missed. And, no one knows when the “best” days will occur!

Ellis went on to highlight the behavioral biases that negatively impact investment success.  These include things like overconfidence, jumping to conclusions, herd mentality, anchoring, and the endowment effect.  Listen to the video link for more info on these.

Finally, the following bullets summarize his keys to successful investing:

·        Personal discipline to save

·        Long term focus

·        Benign Neglect:  most actions do more harm than good

·        Act consistently with long term goals

Dattilio & Ash is committed to the highest level of investment professionalism as an investment fiduciary and heartily agrees with the points made; they are well worn and timeless.  D&A works with its clients to understand their financial situation and risk tolerance and then structures an investment portfolio to help them achieve their goals.

Unpacking 2024 Performance Trends

One of my favorite charts is the annual Callan Institute Periodic Table of Investment Returns.  I like it because it shows in one chart how all of the major classes have done over time.  Also, it shows the variability of returns such that the chart almost looks random!

The 2024 Table (below) shows some interesting data points.  First, it is no surprise to anyone who follows the news that the S&P 500 Large Cap Equity index led all major asset classes (again!) in 2024 with a total return of +25.02%!  Trailing behind it by a fair amount was Small Cap Equities at +11.54%.

A surprise is that High Yield bonds came in third at +8.19%; certainly a function of Fed easing during 2024 with the requisite narrowing of credit spreads and bullish economic forecast.  Cash equivalents was in the middle of the pack at 5.25%.  Bringing up the rear was Global Ex-U.S. Fixed Income at -4.22%; partly a result of the strong dollar.

Point in time analysis is nice, but the trends also tell a story.  Certainly, U.S. Large Cap Equity took the lead the most recent two years in a row, but also has been in the top spot 4 of the last 6 years! Moreover, looking over a longer horizon it has a 20-year average annual return of +10.3% and an even higher return over the most recent 10-years at +13.1%!   Emerging Market Equities, the darling with outsized 30%+ returns in the mid-2000’s, continues to labor with middling returns in 2024 and a smallish 20-year average annual return of +5.5%.

Readers of this blog post are well aware of me bemoaning the lack of diversification benefits over the past few years.  Certainly, with the S&P 500 loaded with booming mega-cap tech stocks like Nvidia, Microsoft, Alphabet, Meta, Amazon, Tesla, etc. it is hard to fault that index for leading the pack; well-deserved!  Bonds, meanwhile, have been a necessary evil with middling returns to help smooth the risk profile of diversified portfolios.

To that end, D&A client accounts over the past couple of years and currently have been overweighted in equities with a strong tilt to growth and momentum factors to help capture some of that excess return.  We still favor some exposure to small/mid-cap equities and are overweighted there relative to benchmarks but are less interested in international and emerging market equities where we are underweighted.  On the fixed income side, we continue to keep bond duration short to core bonds in order to protect against interest rate risk while the yield curve remains a bit flat, but steepening.

Smart Financial Habits to Adopt in the New Year

It can be customary in a new year to think about upgrades or enhancements to how we live our lives. In other words, to think about our New Year’s Resolutions!  Following below are a few of my favorite financially-related resolutions that I strongly encourage everyone to adopt.

 1.        Secure Credit Card Usage

Credit card fraud continues to be a large problem in our society.  However, there are ways to help protect yourself against this threat.  First, set up your credit card to notify you via text or email EVERY TIME your card is used!  In this way, you can stop unauthorized use of your card sooner than if you waited until the end of the monthly billing cycle.  Yes, you are not liable for any unauthorized charges, but the sooner you stop them the sooner you can get your credit use back to normal.

Alternatively, you can freeze your card so it can only be used each time you unfreeze it.  This process can be a bit cumbersome but is very effective to limit fraud.

2.        Secure your Credit Identity

Identity theft is the next major problem.  This is the case where someone poses as you and uses your credit identity to open new credit cards and accounts in your name.  Fortunately, there are ways to help prevent identity theft.

The most effective way to limit identity theft is to freeze your credit identity with the three major credit bureaus.  This is called a credit freeze and creditors cannot access your credit report. This will keep them from approving any new credit account in your name, whether it is fraudulent or legitimate.  Best of all, to freeze your credit identity is free!  Simply contact each of the credit bureaus (Equifax, Experian, and Transunion) to get it done.  For more information on how to do this go to the official U.S. Government site:  https://www.usa.gov/credit-freeze.

 3.        Have Emergency Fund

Life is full of uncertainty.  To help smooth out the bumps in the road it is good to have an account that is liquid and ready to go for unexpected bills; things like car and housing repairs, medical bills, etc.  With short term interest rates at a good level now, money market funds today pay about 4.2%, it is easy to earn a decent return with almost zero risk. A quick rule of thumb suggests an emergency fund holding about 3-6 months of after-tax income.

I am happy to discuss these and other topics in more detail at your convenience.  Just let me know and we can set up a time to discuss.  Here’s to a financially secure 2025!!

Market Weather Report: Sunny, with a Chance of Fed!

The trend is your friend! Don’t fight the tape. And, If you don’t like the weather, wait a minute! These familiar idioms are often used to describe the ebb and flow of the markets—and they couldn’t be more fitting for 2024 Q4.

The quarter started strong, with core equities and diversifying asset classes like small- and mid-cap equities leading the charge. Momentum was building, and optimism was in the air. But as the saying goes, All good things must come to an end. In this case, the Fed stepped in with hawkish commentary, signaling that its easing cycle in 2025 might not be as aggressive as investors had hoped. The result? Small- and mid-cap equities lost their edge, and the broader market cooled.

Adding to the uncertainty were mixed economic signals. The U.S. Consumer Confidence Index showed signs of weakness while new fears of inflationary pressures emerged. Long Treasury yields climbed by 100 basis points, despite 100 basis points of Fed rate cuts since September—a counterintuitive and somewhat bearish signal for the markets.

As seen from the table below, 2024 Q4 showed a mixed bag of performance with the S&P 500 (IVV), once again, wresting the performance crown from the other major asset classes with a +2.4% Q4 return and YTD return of +24.9%.  The strong showing of small/mid-cap equities disappeared post-Fed comments but they still eked out a small Q4 return.  International markets continued their multi-year malaise with a very weak Q4 and a positive, but uninspiring, full year 2024.  Long bonds struggled with modest negative returns with long rates rising, while short bonds ended the quarter mostly flat.

In the end, Q4 proved to be a reminder of the unpredictable nature of markets. As we move into 2025, the focus will remain on balancing the optimism of early gains with the caution warranted by a shifting economic and monetary landscape.  As I said back in my blog post in early December,

In the meantime, D&A is sticking with its long-term strategic approach managing client accounts to their customized strategies targeted to their risk profile, time horizon, and their special considerations.  We still mostly prefer globally-diversified portfolios of low-cost passive exchange-traded funds (ETFs) suited to those needs. As I am wont to say when someone asks me what the market will do; I say “Beats Me!”

Market Volatility Returns

Last week’s blog post highlighted the phenomenal market performance of the S&P 500 over the last two years.  Many of the statistics quoted implied that the market is currently considered “rich” and could be ripe for a pullback.  In that blog post I posited that a potential trigger could be “turmoil in the bond market”.  Surprise, surprise - that is what we saw after the Fed meetings and announcement on Wednesday! 

The Fed cut the Fed Funds rate by 0.25% and Chairman Powell indicated that there was a chance for “only” two rate cuts next year instead of the market expectation for four.  This prompted the market to worry about a pickup in inflation, driving long term rates up 0.37% from 4.18% on December 2 to 4.55% today.

 The markets reacted with a significant pullback.  Small cap stocks (SCHA), making a strong push so far during Q4, were down 4.2% in one day while the S&P 500 (IVV) lost 2.9%.  The increase in interest rates caused core bonds (AGG) to lose 0.8% and short bonds, having less interest rate risk, only lost 0.3%.

 So, what does this mean for you? While the market’s reaction may seem abrupt, this level of volatility is normal in investing.  At D&A, our disciplined approach to rebalancing ensures your portfolio remains aligned with your goals despite short-term market movements.  If you have questions about how these developments affect your investments, feel free to reach out—we're here to help.

The Gift That Keeps on Giving: Will the Market Stay Merry?

Market commentators are all abuzz about the phenomenal performance of the S&P 500.  This year the market has reached 56 new all-time highs.  We are on track for the S&P 500 to produce two consecutive years of over 20% returns for the first time since 1998.  It was up +26.1% in 2023 and so far is up +28.1% this year.  The last time this happened was in 1998 and over the last 75 years there were only 8 other times when stocks jumped 20%+ for two years in a row; the index finished positive in six of the following years and fell only in 1977 and 2000.

Also, the S&P 500 price-to-book ratio is at the highest level since March 2000, the peak of the Dot Com Bubble.  Another interesting tidbit; whenever the S&P 500 has been in a bull market this long at 26 months, it has always persisted, sometimes years, longer!

Finally, let’s not forget the rest of the world’s capital markets.  The U.S. is historically “rich” compared to the rest of the world trading at 22x forward earning versus 14x for international stocks; the largest gap in history!

Nothing more needs to be said about how strong the S&P 500 has been the last two years!  Looking into the component stocks, we see the “Magnificent 7” (Nvidia, Apple, Microsoft, Amazon, Alphabet, Meta, Tesla, and Netflix) who have led the charge with an outsized +55% total return this YTD and +126% over the last 2 years (see chart below, red line for Magnificent 7 compared to blue line S&P 500 (IVV).  Other lesser known names like Palantir, Vistra, Texas Pacific, and Axon Enterprises are all up over +145%!

What could cause the market to selloff?  Maybe turmoil in the bond market, but certainly the bond market has been well-behaved so far this year.  After all, year-to-date core bonds (AGG) are up +3.1% and high yield bonds (HYG), one of the supposedly riskiest fixed income sectors, has done phenomenally well being up +9.0% due to a large narrowing of credit spreads to almost historic lows.  Shorter bonds (NEAR), with less interest rate risk, are up about 5.0% YTD.

Other things that could derail the market are a spike up in inflation, geopolitical turmoil, an oil supply shock, or an “unknown unknown” (a “black swan” event).  We shall see!

In the meantime, D&A is sticking with its long-term strategic approach managing client accounts to their customized strategies targeted to their risk profile, time horizon, and their special considerations.  We still mostly prefer globally-diversified portfolios of low-cost passive exchange-traded funds (ETFs) suited to those needs. As I am wont to say when someone asks me what the market will do; I say “Beats Me!”

While markets remain unpredictable, D&A’s focus on disciplined, long-term strategies ensures our clients stay well-positioned, no matter what lies ahead.

Shrinking Credit Spreads

I was head of U.S. Portfolio Management for Sun Life Financial for twelve years.  In that role I spent a lot of time worrying about interest rates and the fixed income markets.  Whether it was corporate bonds, securitized assets, private debt or commercial mortgages, we always focused in on the “spread to treasuries” as the measure of ‘rich’ or “cheap” and relative value.

Credit spreads today are narrowing in on historical lows.  Per the chart below from the Federal Reserve Bank of St. Louis, you can see that credit spreads for investment grade corporate bonds and high yield bonds are at 10-year lows of 0.80% and 2.72%, respectively.  Though not all-time narrows, this secular shift down can be implying an important message to us.  

Most thought leaders look at the narrowing of credit spreads as a positive indication of economic strength.  Certainly, if businesses have good earnings and are well able to cover their debt service then there should be less chance of default.  Thus, the part of the credit spread reflecting default risk would be reduced.  Narrow credit spreads also reflect a supply and demand factor indicating increased demand for income-generating assets from investors.

This is good news for equities, too, since a narrower credit spread indicates reduced borrowing costs for debt issuers and improved net earnings.  In this regard, equities and fixed income markets are on the same page; all-time highs in the equity markets and 10-year lows in credit spreads both reflect the same positive story.

This single data point supports the thesis that the “bull” case for capital markets remains strong.  Anything can happen, of course, including geopolitical turmoil bubbling up overseas in Ukraine/Russia and Israel.  As always, an investment strategy targeted to an investors risk tolerance and time horizon should help an investor achieve their goals.

Trump Victory and the Market Rally: What’s Next?

My blog posts hardly ever delve into politics.  Today, however, is an exception.  In the wake of Trump’s election victory last night, the pre-markets are rallying strongly.  One thing is clear, Trump’s pro-business, America-first mantra resonated strongly with the electorate and that has translated into a strong market reaction pre-market this morning.

Pre-market, the broad S&P 500 is currently up +1.2% and the NASDAQ is up +1.4% while more focused sub-sectors like small cap is up +1.9% and financials (XLF) are up +5.7% (perhaps due to anticipated increased banking activity in a growing “Trump economy”)!  Signs of a Fed easing earlier this year combined with stable labor markets, good earnings growth and moderated inflation stoked markets leading up to where we are today.

Other diversifying, but more risky, asset classes have also performed well YTD with gold (GLD) up +33% and bitcoin (BITO) up +55% - not counting today’s large pre-market rally! Fixed income markets have been mostly tame, but core bonds have struggled.

As I have reported most of this year, most D&A clients have been overweighted large cap, high quality, growth equities and been short bond duration; a strategic position that has benefited client performance this year.  Most client accounts are easily beating their benchmarks this year.

As I’m accustomed to say, if you ask me where the market is headed, I’ll say ‘Beats me!’ But the anecdotal—and perhaps behavioral—evidence gives us reason for a bullish outlook. For now, this solid strategic positioning benefits clients and aligns with current market conditions. Barring any changes in clients’ goals or needs, we’re sticking with this approach.