Dear Friends,
We’ve enjoyed a great year thus far as markets have rallied to all-time highs. As we write this, domestic stocks are up 15% year to date, foreign stocks are up 28%, and the bond market’s total return is up over 6%. In addition, alternative assets such as gold and bitcoin have also hit record highs. Although yellow lights are flashing that this rally may have gotten excessive, most investors appear to be tuning those out.
What’s behind the rally? In addition to high levels of optimism and positive sentiment, the key drivers behind the rally have been:
- Strong corporate earnings which have exceeded expectations
- The prospect for continued cuts to interest rates
- The “AI trade” as trillions of dollars are being invested into artificial intelligence infrastructure and implementation
- Tax cuts for both consumers and businesses
While optimism and animal spirits could continue to fuel the rally, risks do remain and should not be ignored.
- The labor market, while still relatively strong, has weakened. Further weakness could lead to economic softness and slowdown.
- Inflation has moderated but remains above the Fed’s target of 2%. Continued or accelerating inflation could jeopardize the market expectations for the number and extent of future rate cuts.
- Political uncertainties (tariffs, government shutdown, immigration policies, etc.) and geopolitical risks. Markets have rallied right through these issues so far…but surprises or missteps are always a risk.
What is our position related to the current environment?
With stock markets at all-time highs, we are rebalancing portfolios - taking chips off the table with regards to domestic stocks (especially the large cap tech sector), shifting to slightly more defensive positions such as foreign and value stocks, and continuing to take advantage of a very favorable bond market. As usual, we are not making dramatic moves; we remain fully invested but are diversifying our portfolios in order to cushion the blow in the event that we do see a correction in the stock market in the coming months. We do not attempt to predict the future but staying in the market, rebalancing to target allocations, and buying low and selling high are fundamental components of our disciplined long-term investment strategy.
Let us know any time if you have any questions or if we can do anything for you. We appreciate your support and encouragement.
Matt and Andrew