The Bull Thread

Historic Dividend Outperformance
Thu, Mar 20, 2025

In pulling up our Trend Analyzer tool, one thing that is clear when looking at US thematic ETFs is where the damage has been done during the latest correction. For year to date performance, the biggest losers are now mostly growth factors, whereas low volatility and dividend focused ETFs are actually still in the green so far in 2025. Of course, dividend ETFs have a variety of methodologies. Some ETFs only have holdings with the highest yields, whereas others focus on quality of dividends, placing preference on things such as dividend growth and longevity. One of the most well-known dividend strategies is owning Dividend Aristocrats, of which the NOBL ETF tracks. Dividend Aristocrats only includes stocks that have raised their dividend payments for a minimum of 25 straight years.

In the 5 years since the COVID Crash low, growth stocks have been the primary driver of the market, especially since the start of the AI boom beginning in late 2022. However, the performance of the Dividend Aristocrats has still been respectable. Over the past five years, the S&P 500 (SPY) has gained 167% versus the 117% total return for the Dividend Aristocrats ETF (NOBL). Looking more recently, NOBL actually peaked ahead of the market in late November compared to the mid-February high for the broader market. Since their respective 52-week highs, NOBL is down a smaller 5.6% versus 7.12% for SPY. Additionally, looking only at the past month's more tumultuous period since the S&P 500's 2/19 high, NOBL is down only 0.5% to the S&P 500's 7% drop.



In other words, even though they peaked earlier and are down only slightly less from highs, as designed, the Dividend Aristocrats have been much less volatile during the latest stock market rough patch.

While the qualification to be included in the Dividend Aristocrats is to have raised dividend payments for at least 25 years, at the moment the 69 holdings in NOBL have on a median basis raised dividends for 42 consecutive years. In the table below, we show those members that have posted the largest gains year to date in addition to their market caps, current dividend yield (and whether that is a larger or smaller yield than the S&P 500), and length of raised dividends. As shown, utility-provider Con Ed (ED) is up the most with a year-to-date gain of 20.6% while boasting a dividend yield that is more than twice as large as the S&P. It has also passed the half century mark for increased dividends. Other notable Aristocrats that are up more than 10% year-to-date include Chevron (CVX), Johnson & Johnson (JNJ), Coca-Cola (KO), and IBM. You can view a tear sheet that lists all of NOBL's holdings and the number of years in a row that each of them has raised dividends at this PDF.

 

Stocks Rarely Peak in February and Five Other Things to Know Right Now


“If everybody is thinking alike, somebody isn’t thinking.” -General George S. Patton

Last week, we discussed how the S&P 500 officially moved into a correction, which is down 10% from the February 19th peak. We noted then that most years (even some of the best years) see volatility and scary headlines, with many of those years seeing a 10% correction at some point in the year.

So did stocks officially peak for the year on February 19th? We don’t think so and we still expect stocks to come back to new highs at some point during this year. To back this up, only twice over the past 75 years did stocks peak for the year in February. Yes, most years peak in January or December, but for many reasons we’ve noted lately (and more below), we don’t think this will be the third year stocks peak in February.



Two Reasons to Expect New Highs Later This year
We’ve pointed these two things out recently, but wanted to share them again as they are important.

If your head is spinning from being at an all-time high to down more than 10%, then you aren’t alone, as this was one of the quickest trips ever to do just that. In fact, it took only 16 trading days to achieve this dubious feat, but it turns out this isn’t really bad news.

We found six other corrections off an all-time high that took place in less than one calendar month (or about 21 trading days) and the good news is quick snapbacks are quite common. In fact, the S&P 500 has never been lower three and six months later, with an average return six months later of an extremely impressive 14.7%. Who said roller coasters weren’t fun?



We are on record that we don’t believe this one will turn into a full-fledged bear market, which means stocks won’t be down 20% or more. That right there is a reason not to sell, but assuming that is the case, we found 12 other times stocks moved from an all-time high into a correction, but didn’t fall into a bear market. Looking into this showed stocks were higher six and 12 months later every single time, with much better than average returns as well.



What I found incredible is that five of those 12 times saw stocks bottom the day they moved into a correction (which in the current case would have been Thursday, March 13th). That is way more than I would have ever expected. Will we do it again? After the rare bullish clue we recently saw (more on this below) we think there’s a chance.

Some More Good News
Some more good news and why you shouldn’t sell right now is we saw a potential buying thrust, consistent with higher prices coming. How do weak markets end? I like to say when the selling stops. Kind of obvious, but with all the negativity we’ve seen anyone who wanted to sell likely has done so, leaving only buyers. Well, the buyers showed up Friday, March 14 and Monday, March 17 as both days saw more than 90% of the components of the S&P 500 higher, a very impressive back-to-back feat. This is extremely rare but could be a clue a major low is in place or trying to form.

The last time we saw this was in early October 2022, right as that bear market was ending. You can see on the table below we’ve seen strong returns after previous buying thrusts, with the S&P 500 higher six months later 10 out of 11 times and up nearly 11% on average. This coupled with the data from above suggests the potential for better-than-expected returns over the next six months, which might surprise many investors who are positioned for the worst.



Not All Corrections Become Bear Markets
We found 13 official bear markets (down 20% from recent highs) going back to World War II, with many asking whether this could be number 14. We don’t think so, but a nice way to show this is to highlight that most corrections don’t become bear markets.

We found only 13 of the previous 39 corrections eventually turned into bear markets. Or as we like to say, all bear markets started as a correction, but not all corrections turn into a bear market.



Panic Is in the Air
We’ve noted many times the past few weeks that fear is in the air and from a contrarian point of view this could be very bullish, as nearly anyone who wanted to sell has probably sold by now. One example of this is the American Association of Individual Investors (AAII) Sentiment Survey has had bears above 55% for four weeks in a row, besting the previous record of three weeks in a row that ended the week the Great Financial Crisis ended in March 2009. Yes, investors are potentially more worried now than after a generational crash and recession.

Purely anecdotal, but many investors are scared and want nothing to do with stocks. I know I’ve heard from many friends and family who share this same sentiment, as all they’ve heard in the media is how bad everything is out there.

Shoutout to Ben Carson for this find, but a recent Wall Street Journal article interviewed regular investors and the sentiment was quite negative. Below caught my attention:

For years, Yoram Ariely hadn’t touched most of his investments, preferring to ride the stock market’s ups and downs. Last Tuesday, he decided he had enough.

The 82-year-old unloaded almost half of his stock investments, fearful of the effects of President Trump’s economic agenda, and tariffs in particular. He may get rid of more still

“The decisions are changing daily,” said Ariely, a retired business owner in Longboat Key, Fla.

So we have surveys and anecdotal sentiment at extremes, but what about people who manage real money? The recent Bank of America Global Fund Manager Survey showed the largest drop ever in US equity allocations last month. That’s in the chart below, but the recent monthly survey also saw the second largest decrease in global growth expectations ever, the largest increase in allocations to cash since March 2009, and the lowest allocation to US equities since June 2023.



Why a Big Drop This Year Is Still Not Likely
The last thing that’s caught my attention lately is how rare it is to see stocks down 10% for an entire calendar year. Given many investors are expecting a big down year, could it really happen? Going back the past 100 years, stocks were lower by more than 10% for the full year only 12 times (on a total return basis) and as you can see, big drops usually happen for a reason. In other words, something bad has to happen. Could something bad happen this year? Of course, but for now, we still don’t see any compelling reason to expect a major recession or any reason for something very bad to happen.

 

10 Baggers and 100 Baggers
Tue, Mar 25, 2025

Yesterday was the 25th anniversary of the S&P 500's closing high during the Dot Com Bubble. After rallying 14% in the month leading up to its peak on 3/24/2000, the S&P would go on to fall 25% over the next year and 49% at its low point in October 2002.



Had you bought the S&P 500 at the peak on 3/24/2000, you would have felt like the worst market timer in the world a year later. But eventually the market recovered, and if you rode it out and held through today, you would still have generated annualized gains of more than 7.5% if you bought on the day of the Dot Com Bubble peak. As the saying goes: time heals.

Within the Russell 1,000 (a larger large-cap index than the S&P 500), just over half of the stocks in the index now were around 25 years ago. These stocks have posted an average total return of more than 2,600% since 3/24/00. Just under 300 stocks in the index have been "10-baggers" in the last 25 years, meaning they've gone up 10x. But there are also nineteen stocks in the index that have been "100-baggers" since 3/24/00, meaning they've gone up at least 10,000%.

Below is a list of these nineteen "100-baggers." For each stock, we provide its percentage change since 3/24/00, how much a $1,000 investment in the stock on 3/24/00 would be worth today, and a brief one-sentence description of what the company does.

While you may think that Tech stocks would dominate the list of biggest winners over the last 25 years, that's not the case. Of the nineteen "100-baggers," just four are in the Technology sector, while there are five Industrials and five Consumer Discretionary stocks.

The biggest winner by far, though, is a Consumer Staples stock: gas-station/convenience store energy-drink maker Monster Beverage (MNST). A $1,000 investment in MNST on 3/24/00 would be worth -- wait for it -- $1.275 million today! That's double the return of the second-best performer -- NVIDIA (NVDA).

Notably, Apple (AAPL) is the second-best performing Tech stock behind NVDA with a gain of 20,821%. It's the stocks that sit just above and below Apple that are more interesting. Just above AAPL sits a farming supply retailer -- Tractor Supply (TSCO) -- with a gain of 26,036%, while an auto parts retailer -- O'Reilly Auto (ORLY) -- sits just below AAPL with a gain of 16,381%.

Below are some of the things that other 100-baggers do:

-Provides less-than-truckload freight shipping services (ODFL)

-Makes commercial and residential kitchen equipment (MIDD)

-Develops credit scoring and analytics software (FICO)

-Offers hazardous waste disposal and environmental services (CLH)

-Distributes HVAC equipment and refrigeration products (WSO)

-Provides kidney dialysis and healthcare services (DVA)

Good businesses that can execute can be found in any industry!



Along with the 25th anniversary of the Dot Com Bubble, 3/23 was the fifth anniversary of the market's low point during the COVID Crash in 2020. Along with highlighting 100-baggers over the last 25 years, below is a list of stocks that have been 10-baggers (up at least 10x) in the last five years since the COVID low.

What's most remarkable about this list is how many Energy stocks there are. Four of the five biggest winners are domestic oil and natural gas stocks: Antero Resources (AR), Targa Resources (TRGP), Matador Resources (MTDR), and Permian Resources (PR). Antero is up the most with a gain of just under 5,000%. The only non-Energy stock in the top five is bitcoin-holder MicroStrategy (MSTR), which is up 2,867% since 3/23/20.

Rounding out the top ten are video-game seller GameStop (GME), server-seller Super Micro (SMCI), energy-drink maker Celsius (CELH), AI chip-king NVIDIA (NVDA), and another oil and gas play: Ovintiv (OVV).

Other notables on the list of 10-baggers over the last five years include Dick's Sporting Goods (DKS), Vertiv (VRT), Dillard's (DDS), Comfort Systems (FIX), Vistra (VST), Quanta Services (PWR), Builders FirstSource (BLDR), and Broadcom (AVGO).

 

April is the second-best month for S&P 500 and DJIA

April 1999 was the first month ever to gain 1000 DJIA points. However, from 2000 to 2005, “Tax” month was hit, declining in four of six years. From 2006 through 2021, April was up sixteen years in a row with an average gain of 2.9% to reclaim its position as the best DJIA month since 1950. DJIA’s streak of April gains ended in 2022’s bear market declining 4.9% that year and 5.0% again in 2024. April is now the second-best month for DJIA (+1.8%) and S&P 500 (+1.5%) since 1950 and fourth best for NASDAQ (+1.3%) since 1971.

In post-election years, April remains a top performing month ranking second best for DJIA and S&P 500, and third best for NASDAQ. Average gains since 1950 for DJIA and S&P 500 are comparable to all years, but notably improve for NASDAQ, Russell 1000 and Russell 2000. NASDAQ’s three post-election year April declines were in 1973, 1993 and 2005.

 

Taxes Schmaxes – April Strong Open to Close – Deadline Impact Fades

The first half of April used to outperform the second half, but since 1994 that has no longer been the case. The effect of April 15 Tax Deadline appears to be diminished with bullish days present throughout April. Traders and investors appear to be more focused on first quarter earnings and guidance throughout the entire month of April.

As you can see in the above chart of the recent 21-year market performance in April and post-election years since 1950, April has historically been nearly perfect with gains steadily building from the first trading day to the last with only the occasional and minor blip along the way. In post-election years, April does tend to open on the soft side, but the early dip has historically been shallow and brief.

 

Last Day of Q1 Tends to Shine on Small Caps & Tech

Over the past 35 years since 1990 the last trading day of Q1 has experienced mixed trading most likely due to end-of-quarter portfolio restructuring. DJIA is down 21 of 35 with an average loss of –0.23%. S&P is down 19 of 35 with an average loss of –0.04%. However, Russell 2000 is up 26 of 35 with an average gain of 0.33% and NASDAQ is up 20 of 35 with an average gain of 0.20%.

Before today’s declines, (as of March 27 close), DJIA was down 0.6% year-to-date and S&P 500 was off 3.2% while NASDAQ was down 7.8% and Russell 2000 was off 7.4%. If bargain hunters are responsible for Small Cap and Tech strength on the last day of Q1, year-to-date performance suggests a potential repeat on Monday.

 

DJIA and S&P 500 Best on First Trading Day of Q2 Last 35 Years

When compared to the last day of Q1, the first trading day of Q2/April has favored DJIA and S&P 500. Since 1990, DJIA is up 23 of 35 with an average gain of 0.18% and S&P is up 22 of 35 with an average gain of 0.12% while NASDAQ is up 19 of 35 with an average loss of –0.20% and Russell 2000 is down 18 of 35 with an average loss of –0.26%.

From 1995 to 2012, the first day of Q1 was even stronger with DJIA and both S&P 500 up 15 times in 18 years however, since 2013 the day has become mixed. It would appear that stormy March markets have been spilling over into Q2 and April. Tariff uncertainty is at a fever pace and could easily derail any historical trends in early April.

 

Waving Goodbye to A Tariff-ible Quarter


“It is uncertainty, far more than disaster, that unnerves and weakens markets.” -John Steele Gordon, American writer

After serious consideration, we’ve decided to move all of our portfolios into Godiva Chocolate Cheesecake at The Cheesecake Factory, because if you’ve ever had one then you know. Now that I have your attention, April Fool’s Day!

Now to your regularly scheduled blog.

After what began as a nice start to the year with a green January, the S&P 500 fell in both February and March. In fact, it lost 5.8% in March for the worst March since 2020 and second worst March the past 24 years. Dominating the weakness was continued worries over tariffs and potential uncertainty surrounding trade policy. Remember, markets can go up on good or bad news—it is uncertainty they don’t like and we saw that in a big way last month. The quote above from John Steele Gordon is one of my favorites on this topic.

Was This Really a Surprise?
No, we didn’t expect stocks to be this weak to start the year, but below is a chart we’ve shared many times and it shows that the first quarter of a post-election year tends to be quite weak historically. In fact, it is one of the worst quarters during the entire four-year Presidential cycle. Add in the facts (as we’ve discussed before) that early after a 20% year has been weak historically and so has the first quarter in general the past 20 years, and maybe this weakness isn’t as surprising as it might seem. The good news is the second quarter tends to do better in a post-election year.



The Decline Isn’t as Broad Based as You Might Think
Yes, the S&P 500 is down close to 5% after the first quarter, but this is greatly skewed by weakness in the technology and consumer discretionary sectors. In fact, seven sectors are up on the year, two are virtually flat, and only two are down. In total, nine of them are outperforming the S&P 500 so far this year. Toss in the fact that bonds are up a little bit, gold is soaring, and many stock markets around the globe are firmly in the green this year and it has been a nice year for a diversified portfolio. Of course, if you were heavily in the Mag 7 then this year hasn’t been very fun.



Some Good News for April
March wasn’t a good month and we clearly didn’t expect the second worst month of March over the past 24 years this time a month ago. But some good news is that after the worst ten Marches ever, April bounced back with gains in eight of them with some very solid returns.



Speaking of April, it was lower last year, but it hasn’t been lower in back-to-back years in 20 years. Since 1950 it is the second best month, the past 20 years the third best month, the past decade the fourth best month, and the second best month in post-election years. No, you should never blindly invest in seasonality, but this could bode well for the bulls.



Now the Bad News
A weak first quarter could be a warning sign for more weakness over the rest of the year. Looking at the 15 worst first quarters ever we found that the rest of the year was up only a median of 3.0% and up about a coin flip, much worse than all years since 1950. It isn’t all bad though, as April does better after a weak first quarter at least. Still, we’d put this in the potential worries camp.



Yes, the worries are growing and uncertainty is high, but we remain optimistic the economy will avoid a recession and stocks can come back nicely before this year is over. But enough about that. I’m writing this from beautiful Bryce Canyon in Utah while on Spring Break with my family. All I can say is you need to come here once in your life. It is unlike anywhere else in the world. Here’s me in front of the iconic Thor’s Hammer. Thanks for reading!

 

The Tariffs Are a Big Deal and Risks Are Very High


Tariffs are here and in a big, big way, much bigger than anyone expected. And it isn’t really reciprocal tariffs. The calculation of tariffs is based on the trade deficit the US has with each country, and nothing to do with actual tariffs other countries charge on US goods.

For example, say a country exports $10 of goods to the US and imports $6 of goods from the US. That’s a trade deficit of $4 the US has with the country, i.e. 40% of their exports. Boom! They get charged a 40% “reciprocal” tariff to make things “fair”. BUT, the administration wants to be seen as lenient, and so they’ve halved that rate from 40% to 20%. Still, the minimum rate is 10%.

This calculation is why the island of Norfolk (population 2,188 and 1000 miles off the coast of Australia) got slapped with a 29% tariff – they export about $655,000 of goods to the US (mostly leather footwear). Meanwhile, Australia gets slapped with a 10% tariff.

The highest tariff rate imposed on any country is 50%, on goods from the tiny African nation of Lesotho (also one of the poorest). Lesotho imposes a tariff rate on US-made goods that is similar to other countries in the Southern African Customs Union (SACU). But Lesotho is charged 50%, whereas other members get hit with a lot less, including 30% for South Africa, 21% for Namibia, and 37% for Bostwana. That’s because Lesotho exported about $237 million of goods to the US in 2024 (mostly diamonds and Levi’s jeans), while they imported only about $7 million worth of products from the US (they can’t really afford to buy a lot of American products). As calculated, that’s (237-7)/237 = 97%, and halving that gets close to 50%.

South Korea, which has a free trade agreement with the US, and near 0% tariffs on US goods, gets hit with a 25% tariff. Meanwhile, serial tariff user, Brazil, just gets 10%.

China gets hit by a 34% tariff under this calculation, but that’s above the already announced 20% tariffs on Chinese goods – which means tariffs on China are now at 54%.

Then we also have tariffs on autos, steel and aluminum, along with upcoming tariffs on things like lumber and pharmaceuticals.

There’s Not Much Room for Negotiation Given US Goals
The bilateral deficit-based tariff calculation is going to make it hard to negotiate with the US. How do you reduce your tariff to zero if it’s practically zero already, as in South Korea’s case? You’d have to “promise” that the bilateral trade surplus with the US will fall to zero – but how do you do that without completely retooling your economy towards consumption instead of manufacturing. Even if it happens (which is very, very, very unlikely,) it’s going to take ages to actually happen.

This is the problem with focusing on bilateral trade. A country may have a surplus with the US but an overall trade deficit – how does it go about reducing its trade surplus with the US to zero without simultaneously adjusting trade with everyone else. Meanwhile everyone else is trying to do the same thing.

These tariffs are slated to go into effect on April 9th, which leaves barely a week for negotiations. And if other countries retaliate, as several have suggested they will, we could see the administration dial up these tariffs even more. Interestingly, China has been relatively quiet with respect to the tariff issue, with no meetings scheduled at least until June.

On top of that, the administration has also torn up USMCA, which President Trump himself touted as a great deal back in 2019 (USMCA replaced NAFTA). So, there is no certainty here that the US will stick to its end of any negotiated deal.

It also gets to the point that these tariffs have several incompatible goals. On one hand, the goal is to bring back manufacturing to the US – let’s be clear, this will happen by import substitution, i.e. making foreign goods much more expensive and forcing Americans to buy slightly less expensive US goods (but still more expensive than current prices). Keep in mind that this has major implications for household consumption, especially durable goods (like cars, furniture, appliances, TVs, etc) – the last 30 years, post NAFTA and China’s entry into the WTO in 1999, saw a steady pullback in durable goods prices, i.e. deflation (the chart shows the personal consumption expenditures index for durable goods). Covid broke that streak, as supply chains cracked – but over the last 2 years, it was looking like the downtrend in prices resumed. But now, the goal is to willfully break those same supply chains, which means we could be at end of an era of durable goods deflation.



On the other hand, another stated goal is to raise 100s of billions of $ of revenue (to perhaps pay for tax cuts), but in that case you don’t want import substitution and reshoring of manufacturing. Then you have the tech-adjacent folks close to the administration saying these tariffs are meant to be negotiated down so that globalization can happen on a “level playing field”, i.e. zero tariffs everywhere.

Uncertainty Is Going to Hurt, Whether or Not These Tariffs Are Kept in Place
Ultimately, we have no idea whether these tariffs will be permanent. And that’s going to be problem for businesses.

If you’re looking to build a plant to manufacture, say leather footwear in the US (perhaps taking away share from Norfolk Islands), what if the tariffs are removed a few months from now, or 3 years from now, and the previously calculated return on investment no longer makes sense. That’s going to reduce capital investment here in the US.

Real private nonresidential investment, i.e. business investment was already slowing in Q4 2024 before this shock. Companies sitting back without making investments is going to be a bigger drag on GDP going forward. Now, we did have a trade war in 2018-2019 and didn’t see a big collapse in business investment but we had two things going for it, 1) a huge corporate tax cut, and 2) a Federal Reserve (Fed) that started to reverse tight policy. That’s not the case today.



There’s also the problem of stranded assets for US companies. What do you do with a foreign plant now. Take the example of Nike, which has 500,000 people working in Vietnam, across 155 factories, even as high-value design is done here in the US. Does Nike reshore all their manufacturing facilities, and what do they do with the ones abroad? Moreover, who builds these factories here in the US (we likely don’t have enough construction workers), and where do we find half a million workers to manufacture sneakers, assuming that low value-add activity is something desirable to be reshored. Companies will be asking a lot of questions, to which there aren’t any clear answers.


A Shock That Could Leave the Fed on the Sidelines
The Budget Lab at Yale calculates that the US average tariff rate will rise to 22.5%, the highest since 1909. Even higher than the Smoot-Hawley tariffs signed into law by President Hoover in 1930.



To be clear, this is a massive shock to the economy – akin to a big tax increase on consumers and/or businesses (if they don’t pass the increased tariff cost to consumers) – we just don’t know how large and for how long.

My colleague, Associate Portfolio Manager, Blake Anderson, who manages equity portfolios and focuses especially on the Technology sector, says that Apple runs about 37% gross margins on its products, and 85-90% of production costs are Asia based. A 50% tariff on those products and the gross margins collapses to 5%. Which likely explains why Apple shares fell more than 8% on the day after Liberation Day. Of course, Apple could charge consumers more for iPhones, iPads, etc, but that runs the risk that they stop buying altogether.

In fact, a lot of companies in the traditional industrial heartland of America and even the Great Plains may be disproportionately impacted by the tariffs, and retaliatory tariffs – these areas still have a lot of manufacturing that rely on capital goods and intermediate inputs (including being a key part of the auto supply chain). And they also rely a lot on exports, including agricultural products, commodities, and even aerospace.

Over the last two years, we’ve repeatedly talked about the fact that manufacturing construction in the US has soared since the end of 2020 (by over 130% in inflation-adjusted terms). Ordinarily, we would now be expecting companies to purchase (and import) industrial equipment to for these factories, but they’re going to get big tariff slapped on it. In other words, it just got more expensive to build in the United States.

The massive tariffs may also paralyze the Fed as I discussed in my prior blog. Investors expect three to four interest rate cuts this year, but I’m not so sure. You would expect rate cuts in the face of a rising unemployment rate, which will occur if the tariff shock pushes hiring even lower and layoffs really surge as companies retrench. This could happen but the Fed may be paralyzed between a rise in inflation (albeit “transitory”) and reacting to a rising unemployment rate. Right now, investors are estimating a near zero chance of no rate cuts this year, but I think it’s a lot higher than that. Perhaps not as high as to be the base case, but not insignificant either. Even if the Fed cuts rates, they would be reacting to a rise in unemployment rate as opposed to taking preemptive action. In other words, they’re going to fall even further behind the curve on easing policy (and elevated rates are already hurting housing and manufacturing).

Now, long-term treasury interest rates have been falling for a couple of months now. Normally that would be a tailwind for areas like housing, via lower mortgage rates. But housing is also going to be buffeted by higher tariffs on inputs into the construction process, including lumber. And rates are falling for the wrong reasons, i.e. because investors expect slower economic growth in the future.

Economists in the administration have also said that the inflationary impact of the tariffs can be muted by a rising dollar. But that assumes that the US economy will continue to outperform the rest of the world and interest rates in the US will stay much higher than elsewhere (attracting flows into USD based assets). But markets are betting the opposite will happen – that growth will collapse, pushing the Fed to cut rates – and so the USD has actually fallen, including after the latest tariffs announcement. That’s going to make imports even more expensive.





What About Markets, and Portfolios?
With respect to markets in general, everything we’ve seen policy-wise over the last two decades has been to lower volatility- whether it’s the Fed stepping in with QE or rate cuts, or Congress and the White House sending out stimulus checks (that doesn’t mean they were successful every time, but the goal was to smooth over cracks that were forming – whether in markets or the economy). But policy right now is actively volatility-inducing. Administration officials have openly talked about “short-term pain” for “long-term gain”, with President Trump himself admitting that a transition period for the economy is likely, and that “you can’t really watch the stock market”. Treasury Secretary, Scott Bessent, said that the sell-off in stocks was due to a pullback in technology stocks, rather than protectionist policies “a Mag7 problem, not a MAGA problem”.

Of course, given the seemingly incompatible goals of these policies, as I described earlier, it’s hard to see a clear long-term gain right now. The risk of a recession over the next 12 months has increased quite significantly, but things are still very fluid.

All this has implications for portfolio construction and how different parts of the portfolio complement each other. For example, if inflation surprises to the upside over the next few months, the Fed may not cut, and we could see bonds failing to act as a diversifier to stocks. But you don’t want to throw out long-term bonds from a portfolio in case a recession materializes, and interest rates plunge. Low volatility stocks are another way to diversify portfolios – these are stocks that tend to outperform when markets are volatile.

Another thing to keep in mind is that the current account deficit for the US (which is mostly the trade deficit) is the other side of the capital account surplus, i.e. net inflows of capital into the US. It exactly balances out. Over the last 2 decades, those inflows of capital have mostly gone into portfolio investment rather than fixed direct investment (FDI), i.e. US debt (especially treasuries) and stocks. Mostly thanks to the outperformance of these assets over everything else. If the trade deficit disappears, the capital surplus has to also disappear as these things need to balance.

We just had one of the biggest economic policy announcements made by the US government in history, and the ramifications go beyond mere trade. It also has implications for flows of capital into various global assets, which could impact differential returns between all these assets.

Diversification has had a tough decade and a half, thanks to the U.S. stock market, led by technology stocks, outperforming by as much as they have. But now may be the time when a really diversified portfolio is crucial. That includes both equities and diversifiers, the stuff you expect to zig when stocks zag. You likely don’t want to be concentrated in any single side of the equity market, including just US equities, but instead diversifying globally to take advantage of lower correlations between US and International stocks. If the dollar continues to pull back, as other countries reduce trade with the US, that will be a potential tailwind for international stocks. On the diversifiers side, as we’ve consistently been saying, you want to diversify your diversifiers, across cash, bonds, commodities, managed futures, and even low volatility stocks (as I mentioned above) – given all the uncertainty, it’s hard to say which one zigs when stocks zag. The good news is that there are myriad ways to create a well-diversified portfolio right now, in a cheap way, much more so than 20 years ago, or even 10 years ago.

 

A Solid Payroll Report Means the Fed Stays on the Sidelines


The economy created 228,000 jobs in May, well above the 140,000 that was expected by forecasters. Monthly numbers can be noisy (especially since some of the jobs created could be a rebound from lower-than-expected numbers after terrible weather January and February) and so let’s look at the three-month average. That’s running at 152,000, which should be more than enough to keep up with population growth, especially in the face of a big drop in immigration. Of course, that’s lower than the monthly average of 209,000 in the fourth quarter of 2024—so the labor market has certainly cooled.



The unemployment rate did tick up from 4.1% to 4.2%, but that’s a result of rounding. It actually moved from 4.14% to 4.15%. Let’s call that steady. The prime-age (25-54) employment population ratio, which I prefer to the unemployment rate since it gets around demographics (an aging population) and definitional issues around who is counted as “unemployed,” is now at 80.4%. That’s dropped from a peak of 80.9% last September. That’s concerning by itself, and more evidence that the labor market is cooling. At the same time, 80.4% matches the highest levels we saw between 2001 and February 2020, implying the labor market is still in an “ok” place overall (as long as the numbers don’t move lower). Note that this also means we don’t’ have a lot of workers “sitting on the sidelines” that can be employed to build all the new manufacturing facilities that will need to be reshored to America, let alone workers to make goods in them.



What ultimately matters for the economy is aggregate income growth, because that will determine how much capacity there is for spending. It’s a gauge of the speed limit of nominal GDP growth. Aggregate income growth is the product of:

• Employment growth, which is fairly solid at 1.3% year over year, but lower than the 1.5% pace we saw in 2019
• Wage growth, which is running at a 4.2% year-over-year pace, ahead of the 2019 run-rate of 3.4%
• Hours worked, which is where we were pre-pandemic

Aggregate income growth is up 4.4% year over year as of March 2025, and the three-month annualized pace is actually 4.9%. That’s in-line with the pre-pandemic pace of 4.5%.



This is all positive news, but it’s yesterday’s data. It tells you that the economy was in a reasonably good place going into a massive shock event, i.e. tariffs. It’s really hard to say what happens next.

As I wrote yesterday, the easiest way to think about tariffs is that it’s a tax increase for consumers and businesses—a big tax increase given the size of the tax cuts. The tariffs are going to create enormous distortion in consumption, and even investment data, over the next few months and we’re not going to be able to get a proper read on the economy. Meanwhile, we’re likely to see inflation data start to pick up after April and May, especially for durable goods like vehicles, as consumers rush to get ahead of tariffs. Businesses may also look to build up inventory at current low prices, which may result in a temporary boost in production. All this to say, the economic data over the next few months may be screwy and even likely to hide underlying weakness.

We’re also going into earnings season soon, but Q1 earnings are not going to mean much anymore, and I’m hard-pressed to think if a lot of companies are willing to give much guidance. At best, they’ll say they can weather the coming storm, but of course they’ll do that to avoid investors panicking and selling their shares.

The Economy Needs Support That Is Not Forthcoming
The president and his team are actively engaging in policy that is seeking to break how the global economy works, and re-tool it for long-term gain. But as I wrote in my prior blog, I’m unconvinced on the long-term gain part because of incompatible goals: generating more revenue for the US government versus re-shoring manufacturing versus liberalizing trade even further (as other countries drop all trade barriers). The way the tariff policy was constructed also leaves less room for negotiation. A country like South Korea already has near zero tariffs on US goods, and so what would the have to offer in a negotiation?

Congress is on the sidelines. Technically, tariff policy needs to be signed off by Congress, but that power has been eroded since the 1970s and ceded to the executive. They could buffer the blow to the economy with a fiscal package but right now the focus is simply on extending the tax cuts that are expiring at the end of this year. That’s positive, but all it does is remove another potential headwind, rather than adding a tailwind. If anything, Congress seems actively looking at options, including raising top tax rates, to avoid raising the deficit any further, a worthwhile long-term goal but not positive in terms of providing short-term support for the economy.

That leaves the Federal Reserve (Fed). As I mentioned above, inflation is likely to pick up on the back of higher prices for durable goods—both because consumers’ rush to get ahead of tariffs, and subsequently as a result of a tariffs themselves, assuming businesses chose to pass along higher input costs instead of reducing their margins. In theory, the tariff impact will be “transitory,” a one-time shift in the price level. But because of how households may adjust spending, how companies choose to raise prices and revise contracts, and how inflation data is constructed, we may actually see persistently higher inflation for a period of time, beyond just 3 – 4 months. For example, we could initially see new vehicle prices go up as consumers rush to buy, followed by a spike in used car prices as people avoid tariffed new vehicles, followed by increased auto-service costs including maintenance and repair, and insurance.

It’s going to be a big problem for the Fed, and Fed Chair Jerome Powell acknowledged as much on Friday morning. He said that that while uncertainty is elevated, it’s now clear that the tariff increases will be significantly larger than expected. He seemed less convinced that the impact will be transitory, saying:

“While tariffs are highly likely to generate at least a temporary rise in inflation, it is also possible that the effects could be more persistent.”

He added that they will be focused on making sure that a one-time increase in the price level does not become an ongoing problem.

Over the last year, the Fed had decidedly moved policy to favor an asymmetric response to employment vs inflation (their two mandates). With the inflation outlook looking stable, they could focus on protecting the labor market, which is why they dropped rates by 1%-point last year to preempt weakness in the labor market (the unemployment rate rose from 3.7% in January 2024 to 4.2% by August). But that asymmetry may be ending, more so because the labor market doesn’t look like it’s breaking down (yet), even as inflation is likely headed in the wrong direction.

In fact, Powell’s remarks sound like a central banker who is once again considering the option of raising rates to fight inflation. I don’t think the Fed will raise rates this year, but even if they don’t cut, that still leaves rates in meaningfully restrictive territory (using their own terminology to describe where policy is). That’s going to hurt the labor market, along with cyclical areas of the market like housing and manufacturing.

Interestingly, investors expect the Fed to cut policy rates all the way down to 3.3% by the end of 2025, 1.1%-points below where rates are currently (implying 4-5 cuts). Plus, they expect these cuts to come after the June Fed meeting. This means investors expect the Fed to slash rates in the back half of the year. Let’s be clear, it’s the market’s equivalent of thinking there will be a recession, with a big jump in the unemployment rate that the Fed will have no option but to respond to.

I don’t think it’s as clear cut as that. Core inflation could be headed back to 3.5% (it’s at 2.8% now, uncomfortably above the Fed’s 2% target) and it’s not a certainty that the labor market will collapse. We’re not seeing any signs of that, yet. In their March “dot plot,” Fed members expected the 2025 policy rate to end up at 3.9% (implying two cuts), with core inflation at 2.8% and the unemployment rate at 4.4%. It’ll be interesting to see where they put the dots at the next update in June. My guess is the projected rate for 2025 goes up, and projected core inflation and projected unemployment rate also goes up. That will not be positive for markets.



To summarize where we are as the economy faces a massive shock:

• The administration’s policies are actively looking to break how the global economy works, to retool for long-term gain (a very hard project to accomplish).
• The Fed is on the sidelines as they wait for data, and will likely only act after the labor market is breaking, and worse, they may even consider rate hikes if inflation stays persistent.
• Congress is on the sidelines, with no prospect of providing fiscal support. At best they extend the tax cuts, and that simply removes a headwind rather than providing a tailwind.
• Markets have significant concentration risk (towards the technology sector) and elevated valuations, which simply means there’s room for a bigger re-rating of expectations.
• The good news is that consumers and businesses are not leveraged to the hilt, but that lowers the odds of a big financial crisis, not the odds of a downturn spurred by retrenching.

Expect turbulence ahead. This is the time to have portfolios diversified as much as possible, without leaning too much one way or the other. Of course, markets pulling back is an opportunity to add more at lower prices, especially if you’re invested for the long term. But the long term is a series of short-term windows and you need to be sure that your risk allocation matches your tolerance for volatility, as we could see a lot of it in the months ahead.

 

Biggest Jumps in Dividend Yields
Tue, Apr 8, 2025

While the tariff situation has created a great deal of uncertainty and stock prices have crashed in tow, one silver lining is that dividend yields have at least ticked up. Currently, the S&P 500's dividend yield of 1.64% is the highest it has been since November 2023. For the average member that pays a dividend, it has seen a 33 bps increase in its yield, up to 2.58%. Additionally, there are 59 S&P 500 members that now have a higher yield than the 10-year Treasury. Of course, the impact of tariffs could materially impact earnings and hence their ability to pay a dividend at all, but holding that conversation aside, below we show the S&P 500 members that have seen the largest increases in their dividend yields since the sell-off began on February 19. Of all members of the index, there are 34 to have seen a full percentage point increase in their yields as a result of the declines since the S&P's high. The largest increase has come from Dow (DOW) which now yields over 10% after falling over 30% since 2/19. That is also the single highest yield of all S&P 500 members. Of the rest of the list below, there are another five stocks that now rank in the top ten highest yields: LyondellBassell (LYB), Pfizer (PFE), Franklin Resources (BEN), APA Corp (APA), and United Parcel Services (UPS).