TLA continuously researches and monitors economic and market trends on behalf of the families we serve.
Off to the Races
My grandson is almost two years old. For those who have children or grandchildren of that age, you know that many skipped right past any walking stage. Instead, they went directly from crawling to running. And not running in a straight line. They run in one direction and, without warning, turn in another direction; then fall and get up; and run in another direction. While exciting to watch, it can be both exhausting and nerve-wracking. So can a two-month-old government.
The current administration is trying to do so many things at once that it can sometimes feel like chasing after a toddler running in multiple directions. Federal Reserve Chairman Jerome Powell referenced the policy uncertainty that business decision-makers are now feeling and how difficult it is to plan in this environment.
To be fair, businesses generally see the goals of deregulation, smaller government, and tax minimalization as tailwinds. At the same time, they seem to be most worried about trade policy and sticky inflation. The trade policy, in particular, creates the most uncertainty and seems to change almost daily. In conversations with local bankers, I’m told that business decision-makers who were ramping up their spending and growth plans at year-end are now taking a “wait & see” approach, afraid to get “too far out over their skis.” This has translated into pausing both hiring and cap-ex spending. In this case, rather than the “pause that refreshes,” we may see the pause that stifles. If not resolved soon, the trickle-down effect of this will likely be slower economic growth.
Exuberance and Speculation
One of the advantages of being 1600 miles away from New York City is that we are not caught up in Wall Street’s echo chamber, and therefore can maintain our independent and objective thinking.
At the end of 2024, in a column titled, Curb Your Enthusiasm, we shared our concern over the exuberance and speculation we were seeing in equity markets.
We observed that Wall Street was universally bullish as we entered 2025. Consensus was that despite extraordinary gains in back-to-back years, Wall Street was looking for double-digit returns yet again. Individual investor confidence was also exceedingly optimistic. Billions flowed into high-octane stocks and speculative, leveraged investments. Mega-cap growth stocks were trading at 98th percentile valuations, which means that they have only been more expensive 2% of the time. The most aggressive investors (who likely don’t recognize how aggressive they are) had been almost fearless.
Some recent measures of market sentiment have shown more bullishness than even during the technology bubble. As a reminder, the market 25 years ago was exceptionally narrow, meaning a handful of stocks were driving the majority of the gains, and the greatest fear was the fear of missing out (FOMO). The narrow market back then was represented by what was called “My Disco”- Microsoft, Yahoo, Dell, Intel, Sun-Microsystems, Cisco, and Oracle. MYDISCO! These were considered “blue chip, can’t miss” companies. Once that tech bubble burst, the MYDISCO group was crushed. A full 5 years later, the portfolio of these 7 stocks was still down 60%.
Today’s equivalent of MYDISCO is the Magnificent-7, made up of mega-cap stocks that the financial news outlets talk about all the time. The gains have been nothing less than spectacular, but the risks at these levels may be as well.
25 years ago, the catch phrase for Wall Street speculators was, “This time is different,” which was supposed to mean that earnings and revenue and even products don’t matter anymore; just buy stocks that are going up. We know that didn’t end well.
Reminiscent of that, we recently started hearing that we are now entering the “Golden Age of Investing,” with the implication that a new bull market is about to begin. Sorry to inform those Wall Street cheerleaders, but new bull markets start when stocks are cheap; never when they are expensive, as they are today.
When markets get this narrow, it’s especially important to maintain broad diversification to include companies beyond the AI and tech world, some international, and some non- or less-correlated assets. Putting it all together, when we add the speculative valuations in today’s narrow market to the lack of consistent policy from Washington, D.C., it seems most prudent to remain more defensive and “lean against the wind” by staying broadly diversified and by “buffering” to mitigate downside risk.
– Andrew T. Gardener, CFP®
