What We’re Thinking

Last week, the S&P 500 declined to 10.1% below its high on February 19, pushing it into a correction – a term for when an index falls 10 percent or more from its most recent peak.

Further, President Trump and his advisors have stated in recent weeks that the short-term pain of a potential recession may be necessary for longer-term economic gains.

Regardless of whether you agree with the administration’s sentiment or policies, the recent correction and talk of a recession may feel unnerving. Maybe you’ve even wondered if now would be a good time to sell stocks.

Park Piedmont’s work with investors stretches back decades – which means we have lived through difficult times, for markets and the economy, and our American and global societies more broadly.

Although this particular moment in time may feel unique in its uncertainty, and although the past doesn’t necessarily inform the future, it’s helpful to remember that markets have historically recovered from periods of downward volatility.

In that spirit, we thought the advice we’ve given during other challenging periods might provide some helpful perspective. To quote Nobel laureate Paul Samuelson: “We have but one sample of history. Yet you must start with the past in order to understand the future.”

In January 2009, amid the depths of the Great Recession, we wrote:

It is highly appealing to think that you can simply exit the riskiest asset classes (i.e., stocks) when they are going down and return when they are going back up. Exiting is in fact the easy part. The difficult part is knowing when to get back in, because if you are out when the market begins to rebound, you miss much of the return from any recovery that occurs…

The current bear market (defined as down 20% from the recent peak), which started in October 2007, provides an excellent example of the difficulty of market timing. From the lows of late November 2008, the S&P 500 rose 25% through January 6, 2009. Someone who sold as the market was declining would have had to decide whether the rally from the November lows was the time to get back in. If they did, particularly late in that brief rally period, they would have been looking at significant additional declines by the end of January. And if they did stay on the sidelines, guessing right that time, when would they get back in, assuming they want to at least try to participate in the price gains that come with a recovery?

Please note that we don’t know when the recovery is coming any more than the next person, or that it is a given that a recovery is coming. Since it’s always uncertain whether or when the recovery is coming, we advocate maintaining some ongoing position in stocks and other risky assets, so as to be able to participate when and if the recovery does occur.

From our vantage point 16 years later, it’s clear that staying the course in 2009 would have meant participating in the substantial stock market gains in the years since. Yet we acknowledge it isn’t easy to focus on the long term in the middle of uncertainty and instability.

In June 2012, when the Dow lost all its gains for the year, we again advised to focus on the long-term and to trust your personalized asset allocation, providing life circumstances hadn’t changed:

At Park Piedmont, we advocate thinking about your investments in time frames relevant to you and your specific needs. Even people in retirement may need to use their money for twenty or more years, and many people have family and charitable goals that may make the relevant time frames even longer.

Given the apparent need for a long-term perspective, the tendency for people to react to day-to-day news events and daily market fluctuations presents an ongoing dilemma for investors and advisors. Adding to the uncertainty are periods like 2008 and early 2009, when the declines in many asset categories became extreme. Investors who should think long term began to distrust this advice, believing that the markets would not recover this time, and that even if they did, the entire activity of investing was tarnished beyond repair.

Even though there has been an approximate doubling of stock prices [in June 2012] from the 2009 lows, every period of decline since those lows (May-August 2010; May-September 2011; May 2012) has generated great anxiety among investors, fearing a repeat of 2008. And since no one can say with certainty that a repeat will not occur, there is a delicate balance to be struck between remaining in the riskier markets to pursue long-term gains, and moving to less risky, income-producing investments to preserve capital. This balance is what asset allocations are all about. We believe that each client’s personal allocation decision, once made (and accounting for any major changes in the client’s lives), should be maintained even when markets turn down.

As you’ve likely read, this week President Trump imposed a 25% tariff on Canada and Mexico and an additional 10% tariff on China, on top of the 10% tariff imposed on Chinese goods in February.

Here’s a sampling of headlines since Monday, March 3, regarding their impact on the markets:

• “Nasdaq Slides as Investors Brace for Mexico, Canada Tariffs” – Wall Street Journal
• “Markets Fall After New U.S. Tariffs Prompt Retaliations” – New York Times
• “Stocks Extend Tumble as Trump’s Tariffs Spark Retaliation” – Wall Street Journal
• “Market Slide Reflects Tariff Fears Rippling Through Economy” – Wall Street Journal

As regular Life with Money readers know, Park Piedmont is almost always skeptical of the media’s efforts to overstate market moves, and to attribute single causes to market changes that are driven by many factors.

For example, there have been a number of other policy changes this week, including pausing military aid to Ukraine and threats to cut federal funding to universities that allow “illegal protests.”

However, headlines aside, we do feel it is worth having a basic understanding of tariffs, some of their effects on consumers, and their potential impacts on financial markets.

What are tariffs?

Tariffs are a tax, mostly on goods, that are imported from another country.

If the U.S. puts a 20% tariff on steel coming into the U.S. from China, it is making that steel more expensive. The intended impact is to raise the price of imported steel in the U.S., thereby reducing American demand for this steel and making steel manufactured in the U.S. more competitively priced.

At first glance, it is clear that the U.S. manufacturer of steel is benefitted, and the Chinese manufacturer is hurt. But the higher price for steel should also likely increase prices for U.S. goods made with that steel, so other businesses in the supply chain and/or the end consumer in the U.S. is likely to pay more for the goods made from steel.

Who pays for tariffs?

A recent article from The Wall Street Journal breaks down the potential impact of tariffs on individuals:

“How much more will consumers pay? The question is surprisingly hard to answer. For example, a 10% tariff on shoes from China would raise their sticker price 4% or so, but on wine or olive oil from Italy, almost 10%.

“Why the difference? Tariffs aren’t the only factor at work. Currency changes, the availability of alternatives, and the pricing strategies of producers and importers all play a part. All of this affects ‘pass-through’ – how much of a tariff reaches the consumer.”

As the article notes: “Tariffs are most keenly felt when imported or domestic alternatives are unavailable, or the affected product commands a significant premium. Even if tariffs raise the price of the latest iPhone, Apple fans would probably still buy it.”

Here’s another example of when a consumer might feel the impact of tariffs:

“Mexico is the top foreign supplier of passenger cars and sport-utility vehicles into the U.S., accounting for 23% of imports in 2024. Tariffs on Mexican-made cars would likely mean not just higher prices for vehicles shipped across the border, but on all cars as other manufacturers and dealers see a chance to eke out more profit while gaining market share.”

What do the new tariffs mean for your portfolio?

As mentioned above, it’s difficult if not impossible to assign a single cause to market changes, either up or down. But the threat of tariffs last week, and their imposition this week, appear to be major factors in the recent stock market declines. These have erased much of the gains made since the election in November.

As reported in The New York Times on Tuesday, “The S&P 500 fell over 1 percent, adding to Monday’s 1.8 percent loss, which was its sharpest decline this year. The Nasdaq Composite index dropped roughly 1 percent, putting it briefly in what is known as a correction — a drop of 10 percent or more from its recent peak.”

Interest rates have also declined significantly in recent weeks, with prices increasing (rates and bond prices move in opposite directions). These changes likely reflect a “flight to safety,” as demand for relatively less risky bonds increases as stock prices decline.

Should you take any action steps based on market declines?

At Park Piedmont, we view the tariff issue as one of many factors that affect the economy and the financial markets, with highly uncertain impacts going forward. We do not know what will happen in the future, nor do we ever attempt to guess, but we do know that focusing on the long-term is the surest way to stay the course.

As always, unless your life circumstances have recently changed (separate from the change in presidential administrations), we suggest maintaining your previously established asset allocation, even when volatility can make it tempting to reconsider the thoughtful decisions you made during less stressful times.

Attempting to “time” the markets (i.e., being “in” when prices are rising and “out” when they’re declining) is typically a losing game, since you have to be right twice: once in selling before the large part of the downturn, and again in buying back into the markets so you don’t miss a potential recovery.

The other practical issue when considering major changes in your asset allocation is capital gains taxes. Stocks and stock funds are typically held in “taxable” individual, Joint, and Trust accounts (as opposed to “tax-deferred” retirement accounts). Depending on how long you’ve owned these positions, you might have significant gains. This is generally favorable, but can generate a significant tax bill if you make sales.

Please don’t hesitate to reach out to your advisor for further discussion, especially during this chaotic, confusing period. We’re always here to help.

Despite ongoing geopolitical and economic turmoil around the world, the stock and bond markets finished 2024 with substantial gains. Vanguard’s US total stock market fund rose 23.7% for the year, the developed country index fund was up 3.1%, and the developing country index increased 10.6%.

Interest rates also rose, with the benchmark 10-year Treasury up to 4.53% from 3.97% at the end of 2023. Prices on bond funds declined somewhat (interest rates and bond prices move in opposite directions), but with the higher rates, bond funds still gained in 2024. Vanguard’s intermediate-term fund rose 1.5%, while the high-yield bond fund was up 6.4%.

The 2024 gains followed even stronger returns in 2023, continuing the recovery from the dismal returns for both stocks and bonds in 2022.

As you know, Park Piedmont takes a very dim view of predictions, so we won’t make any here. We do know, however, that 2025 will likely present a number of opportunities and challenges, with a new administration in the US pursuing much different policies than its predecessor.

Here are a few of the issues we will be watching closely:

• President Trump’s tariff and tax proposals: What form will these take? Will they be enacted in full or parts? Will whatever passes lead to additional growth in the US, further inflation, or some of both? How will any changes impact economies and markets in the rest of the world?
• Immigration: Will the “mass deportation” proposed by the incoming administration actually happen? How much opposition will there be from business interests and immigrant advocates? What will the impacts be of whatever changes are enacted?
• Federal Reserve independence: Will the Fed continue to pursue interest rate and employment policies without political interference?
• “Magnificent 7”: Apple, Microsoft, Nvidia, Amazon, Google, Meta, and Tesla led the stock market gains in 2024. Will that continue in 2025 and beyond?
• Crypto: Bitcoin soared at the end of 2024 on the hope of reduced regulations and additional support from the new administration. How much volatility will there be in these cryptocurrencies going forward?

As always, please feel free to check in with your Park Piedmont advisor with any questions or concerns as we move into the new year.

During the early part of each year, the financial press is full of predictions for the coming year by “authorities” and “experts.”

Presumably, this material helps fill the large amounts of space devoted to financial matters, but in our view, all these predictions should be ignored. Otherwise, these opinions may induce investors to make changes in their investment portfolios that we believe have no more than a fifty-fifty chance of proving beneficial to their financial wellbeing (i.e., no better than the flip of a coin).

Adopting, then acting upon, these predictions is simply another form of market timing, which we believe does not add to long-term investment results.

For long-time readers of Park Piedmont’s Life with Money and, before it, our Monthly Comments, the above words might sound vaguely familiar. That makes sense, as they were written by firm co-founder Vic Levinson back in December 2011. We revisited this topic more recently in our book, Thinking About Investing – and they feel as relevant today as they were 13 years ago.

Take predictions from early 2024, for example:

“In late January, the average Wall Street forecast called for the S&P 500 to finish this year at just 4,861, which represented essentially flat growth in the index at the time, or just 2% for the year,” according to The Motley Fool. In addition, “Wall Street was still largely forecasting a recession due to the inverted yield curve and hedging its risk for 2024.”

Contrary to predictions, the S&P 500 was over 6,000 at the end of November, with year-to-date returns at 26.5%. The much-anticipated recession hasn’t occurred, either.

Unsurprisingly, this year’s inaccurate predictions are just the latest in a long string of misses. According to The New York Times, “the median Wall Street forecast from 2000 through 2023 missed its target by an average 13.8 percentage points annually.”

And Wall Street forecasters are not alone. As the Wall Street Journal recently reported, active investors have gotten worse at their own investment predictions: “Between 2020 and 2024, such [active] investors have exhibited more detrimental trading behavior than before Covid, taking riskier bets and trading more inefficiently by trying to time market tops and bottoms. The upshot: Billions of dollars in lost portfolio value annually.”

We should acknowledge that the year hasn’t ended yet, and plenty could change in the remaining weeks of 2024. We won’t know final returns until the year has ended.

But that underscores the foundational principle of our investment approach: the future is uncertain. Nobody – including us – should pretend to know what will happen in the coming year, weeks, or even days.

Since we don’t and cannot know the future, how then does Park Piedmont approach investing?

Since we can’t predict or control market returns, we focus on what we can control.

First, we create a custom asset allocation for each of our clients, based on your unique goals, risk tolerance, and time horizon.

Second, we can control expenses: we keep our clients’ investing costs low. This includes our advisory fee and using index funds with low fees to minimize the cost of investing and maximize your investment returns.

And what then do we recommend when, in early 2025, you undoubtedly hear “experts” in the financial media making predictions for the upcoming year?

We’ll borrow advice we continue to stand by that we shared in December 2020, another year when the markets had proven to be wildly unpredictable:

First, review your portfolio to ensure that your asset allocation remains consistent with your goals, risk tolerance, and time horizon. If they’re aligned, stay the course. If they’re not – or if you fear they may not be – we can help you make thoughtful, deliberate modifications.

Second, insofar as you’re able, ignore the day-to-day pandemonium and re-allocate that time to the people and activities you most enjoy. That will give you a far better return on investment of one of your most valuable assets: time.

The 2024 presidential election has come and gone.

What was projected to be a very close race turned out to be less so. Republicans have re-taken the US Senate and appear poised to retain control of the House of Representatives as well. Whatever your political preference, it appears clear that there will be very different priorities for the US government starting in January 2025. We of course don’t know how any of this will play out over the next four years, but we will be here as always to help you navigate your life with money.

What is clear so far is that most parts of the US stock market have reacted favorably to President-elect Trump’s victory. Since election night, the S&P 500 has risen almost 4%, while the Dow and NASDAQ are up almost 5%. Parts of the market that Trump promoted heavily (often referred to as the “Trump trade”) have increased even more sharply, with Bitcoin, for example, up more than 25% since the election.

Other markets have not performed so well. International stocks have declined, with developed markets down about 1% and emerging markets off almost 2%. Sectors that Trump appears to oppose, like alternative energy (i.e., non-fossil fuels), have fallen even further, with an alternative energy index down 9%.

As for bonds, rates spiked, and prices declined, significantly the day after the election but have come back down and appear to have stabilized.

What does all of this mean for your portfolios, and should you be considering any major changes?

Our initial response is probably not, but with at least one caveat to be discussed below.

In general, we find ourselves in broad agreement with New York Times columnist Jeff Sommer. His 11/10/24 piece, “Even Now, Slow and Steady Works in the Stock Market,” outlines the uncertain future, given the vagueness, at least in terms of implementation if not rhetoric, of many of Trump’s policy proposals.

“Will the markets rise or fall further… Tax cuts are likely [our note: which could encourage growth as well as inflation], but Trump has also repeatedly vowed that he will impose tariffs on China and many other countries as well, measures that could lead to increased inflation, reduced international trade, and a drag on the global economy.”

“And while Trump has promised to crack down on illegal immigration and to initiate mass deportations, the effects of such policies on the US labor market, and on industries like construction and agriculture that depend on immigrants, can’t be reliably estimated.”

“The Federal Reserve, which cut short-term interest rates by a quarter point on Thursday, can’t be sure, under the current circumstances, what effect the next administration’s still-undetermined policies will have on the economy. What’s more, Trump has already indicated that he has little regard for the traditional independence of the central bank. Fed policy over the next year must be viewed as even less settled than usual.”

Sommer concludes that “no one can reliably predict the future. Worrying about it is entirely natural, and it’s possible that a second Trump presidency will represent a breach with history so great that what’s come before can no longer serve as a reliable guide to investing. Yet I doubt it. There is considerable evidence that you will be better off putting these worries aside, as far as your finances go, while embracing a slow and steady approach.”

Now for the caveat.

One approach that we do advocate is tax-loss harvesting (TLH). This was a big factor in 2022, when both the stock and bond markets declined significantly. TLH allows you to sell investments with losses and use them to offset gains elsewhere in your portfolio, which can be helpful for re-balancing purposes. If your losses exceed “realized” gains (i.e., from actual sales), then you’re also allowed to use them to offset up to $3K of ordinary income each year. And the losses “carry forward” indefinitely under current tax law.

So there might be opportunities before the end of the year to sell bond funds or stock funds that have declined, such as alternative energy, and realize some potentially valuable losses. If so, your advisor will be in touch with you in the coming weeks.