First off let me say – by the time you are receiving this – that I hope everyone had a fantastic 4th of July with friends and family! Second, I wonder if anyone else will also now have the Talking Heads stuck in their brain for 3 days…
Today’s update is going to be another attempt at brief and to the point. Though, as is always the case only a few sentences in, one never knows just where my mind will go as we progress. The six months we have all just experienced has been chaos – from politics to war to financial markets and everything in between – and I think it best at this moment in time for me to put everyone’s mind at ease as it pertains to your money, so you can get on with the actually important and enjoyable things in life for the rest of the summer.
I’ve gotta say, the first half of 2025 has proven at different points to be the most comical, puzzling, infuriating and overall bizarre periods I can recall in some 30 years of doing this. While I will not make this a political piece – though I so badly want to – the fact of the matter is that it has been politics driving virtually all of the chaos. Of course, none of this is likely coming as a surprise to anyone given the election last year, combined with the endless and now inescapable government intervention we have discussed oh so many times before. Even so, few if any could have predicted this level of chaos, or certainly the manner in which it has transpired. So let’s see if I can summarize the headlines, in context of what it has meant for your money so far this year, and what it might mean for the second half…
ACT ONE – Q1 2025
Donald Trump – the Candidate
It seems like a lifetime already, but only six months ago, The Donald was talking and acting in exactly the manner one might expect based on his campaign. Speaking here only to the things that most directly pertain to your money, it included lowering taxes and regulation, reducing deficits, fraud and waste in government, and attempting to ensure that the US was no longer getting “ripped off” by the rest of the world. His method of tackling the latter was through tariff threats.
Even more interesting than his actions, were his words – which we noted in our first update this year. This was Trump circa 2015, where he acknowledged that some level of “pain” would be required to fix long-term (which are ever so increasingly short-term) problems, and that “he didn’t care much about stocks”. Sure, he was also launching his own “meme coins”, and selling watches, books and God knows how many other “Trump items” on TV – but hey, oligarchs gotta oligarch, am I right? I digress. I’m trying here, I truly am…
Unsurprisingly, stocks threw a hissy fit at the mere thought that the government gravy train might be coming to an end. The S&P 500 was down some 19% from its all-time highs achieved early on – unsurprising with nosebleed level valuations, combined with the myriad of macroeconomic risks present even before El Donald started yapping. Things were getting ugly – and the calls for inevitable recession began screaming once again.
Of course, not all was bad during this period. Be it because of the weakening dollar vs other currencies, central banks around the world trying to hedge against Donald Gone Wild, or the geopolitical tensions increasingly flaring – our friend Mr. Gold was ripping. As a result, given our significant underweight exposure to the stuff that was getting hit (stocks), having some gold exposure – and our alternative (long/short, market neutral, etc.) positions performing quite well – well, to put it in a compliance-approved manner, let’s just say we were very happy with our relative performance over this period. I swear, we are living in Bizzaro World – which will also be the title of my never to be released book, chronicling my professional life from about 2012-whenever this nonsense finally ends. “Nonsense” of course referring to the recent market/Fed/Oligarch environment – not my professional life, as I still don’t think I will ever retire. Though there are certainly days (and years!) it might feel otherwise, I truly love what I do – and can’t imagine waking up every morning without this ever-present (and changing) challenge to look forward to. Anyway, I’m babbling now – back to it…
ACT TWO – Q2 2025
Donald Trump – the Politician
The title of this piece was derived from this time period. I will let each of you draw your own conclusions on the reasoning behind what happened next – which could range anywhere from “he realized just how bad it would get if he continued” to fill in the blank with any of the many other conspiracy theories one might arrive at. But, whatever the reason, Mr. Trump decided to do a complete 180 on virtually all of his talking points during Q1. The importance of reducing debt and more importantly (and realistically) deficits was replaced with a “Big Beautiful Bill” – apparently designed to significantly increase the deficits going forward. And all the tariffs designed to “put America first”? Turns out he was just kidding – or more likely, his fellow corporate oligarchs reminded him that they had additional stock buybacks to fund. All snark aside, he literally and openly did a 180 on all of it.
If you didn’t already know the answer to what happened next, you certainly should have guessed it at this stage of our relationship. The gravy train is back – Party Time! As of this writing, stocks have reversed all of their earlier losses – and are back to making new all-time highs. Bitcoins, meme coins, and “shit coins” are doing the same. In God’s attempt to add some level of adult logic to the current environment – gold is doing the same, but at an even faster clip. More on this later. And while our relative performance on your behalf during the second quarter of this year was nowhere near as robust as the first, we are very pleased with where we stand halfway through the year. Leading us to the fun and final part of this update…
ACT THREE – The Rest of 2025
Donald Trump – the ???
I will say that I am much more inclined to think this “new” version of Trump is the real one – and I say that largely because my personal answer to the previously asked question is that he flipped when he realized (or was told/convinced) of just how bad it could get if he didn’t. With that being our base case – let’s delve into our analysis of what might lie ahead for the remainder of the year…
Stocks
One of those rare times you will ever hear us comfortably saying this with a Shiller PE sitting at thirty-eight: I would *guess* the party continues this year. We’ve seen this story so many times before over the past 15 years, it becomes foolish to think otherwise. Yes, as mentioned repeatedly in other updates, there are a myriad of economic risks out there that could bring said party to an abrupt stop. Geopolitical, debt (consumer and government), and inflation to name only a few of countless others. And of course, who knows if the oligarchs in charge will pivot yet again and start tariff war 2.0? But in spite of the economic and political unknowns – and coupled with the fact we now know the government gravy train remains alive and well – there is once again a tailwind behind asset prices that seems foolish to ignore.
All of that said, you will not be surprised to hear me say that we are in no rush to be adding (equity) risk to portfolios. At the risk of too much redundancy, we have no interest in gambling with your life savings on when and how this party finally ends. Try as they might – and I listen every single day to folks trying – no one can make a good case that buying stocks at these levels, across virtually every single valuation metric one could analyze, makes “long-term investing” sense. “Trading” sense? Sure. “Investing” sense? Nah. Doesn’t mean stocks can’t and won’t go higher from here. In fact, I just stated above that my gut tells me they will. Hell, it doesn’t mean they won’t go higher in perpetuity – and that valuations will never matter again! In other words, this time actually is different. But that doesn’t mean one needs to (or should) gamble their entire (or even majority of) life savings on as much, especially when history has repeatedly proven the dangers of doing so amidst similar landscapes….
At the same time, and for the reasons described above, we have little interest in reducing equity risk either. We’ve experienced two significant market drawdowns recently– the majority of 2022 and again in the first quarter of this year – and our portfolios were more than resilient in the face of each. As such, we are content with sticking with what has worked, look for opportunity along the way, and adapt as warranted based on what transpires.
Gold
No way I am going into 3 pages on this one. To any of you reading who regularly follow along with this stuff, you will likely agree that gold “makes complete sense” in a world with deficits exploding and the printing presses running overtime to accommodate. But you might also agree that – especially in the last 15-20 years or so – investing based on what “makes sense” has not often worked out in one’s favor. Still, when you have the momentum of both the central banks and the algorithms now at your back – coupled with governments unable or willing to do much about their spending – gold definitely has a place in our view.
But before we move on, let me state this for the record: gold is a very volatile creature, with a long history of zigging when the narrative might say to zag (see 2011+). And it is up a lot. Even with small exposure, it is the one asset class that makes me queasy thinking that I own too much, and also that I don’t own enough – both at the same time. As such, we will likely be continuing to add or trim around a small core position going forward.
Bonds
Consistent with what we have been communicating over the past two years – and speaking specifically to US Government bonds - one can make an equally compelling case for and against owning them in size. In our view, the best cases made for owning them would be the rather shaky economic backdrop, and then – much more importantly – the fact that the politicians desperately want (and quite possibly need) interest rates significantly lower to fuel their ongoing spending. Remember: interest rates down, bond prices up (and vice versa). The best case against owning bonds is ironically the best case for owning them. We now know with certainty what we previously only surmised: the government must issue a lot of bonds to fund these deficits. And why would investors accept 4% interest payments for long-term bonds when we know that the government will just keep eroding the purchasing power of our money while we wait to be paid back?
It's a toss-up, and as we have stated, a much more interesting conversation than the stock market in our view. But here is the kicker: with interest rates now firmly in positive territory, the risk/reward on owning duration (longer maturities) is in our favor. One very quick delve into technical jargon to make this case...
Let’s say, hypothetically, one owns a basket of US Treasury bonds with an effective “duration” of 10 years, and an effective yield (interest rate) of 4%. The “duration” tells you how sensitive your bond portfolio is to interest rate movements. Oversimplifying, and generally speaking, one can expect a 1% move in price for every year of duration held – for every 1% of interest rate movement. In other words, our hypothetical basket of bonds with an effective duration of 10 would be expected to move up (if interest rates fall) or down (if interest rates rise) 10% in price for every 1% move in interest rates. But remember: you are getting paid your 4% interest regardless. This is why risk/reward is in your favor mathematically. If interest rates go up 1%, we lose 10% in price – but receive 4% interest – so our loss is effectively only 6%. However, if interest rates go down, we gain 10% in price plus we get our 4% interest – so our gain is 14%.
Now that we understand this relationship, we can also surmise that the higher the starting interest rate – the more the risk/return is in our favor. And when you understand that, you can also better understand the statement I always make to you that “if interest rates go higher, you won’t be happy looking at your statement – but I will be very happy as your advisor!”. Our long-term return expectations go up every time interest rates rise – especially if we have protected up-front and can take advantage of the now higher rates (see 2022). And as you might recall, I care a lot more about your total return over the next 10 years – along with the risk you assumed to get there – than I do about the last six months as described above, or the six months to follow.
In the end – while entirely different creatures on just about every level – it really is no different than the way one would (should?) look at stocks. Buy low, sell high. As prices – and valuations – of stocks only go higher and higher, our long-term return expectations in the space are simultaneously going lower and lower as they become ever more expensive relative to their earnings. To be sure, this relationship has been “broken” in many ways since about 2013 – which not-so-ironically happens to closely coincide with the implementation of QE in this country – but that is another conversation for another update…
The Economy
I have never been afraid to say the two things anyone in my line of work is seemingly prohibited from saying. Those being, “I was wrong” and “I do not know”. I’m either too old, too honest, or too stupid to comply – and while I like to believe it’s the honesty, it’s more likely some combination of the three. Anyway, I bring that up only because I can say both right here and now.
Imagine you had told me at the end of 2021 that interest rates would go from a decade of near zero to 5%, in a span of only 12 months – with stocks being at or near the highest valuations in recorded history – and we would also suffer through 10% inflation (which I assure you was not “transitory” – check your grocery bill this month). Then you told me that we would not only avoid recession, but that stocks would also be at all-time highs almost immediately after the fact. I would have told you something along the lines of “I’ve seen a lot of crazy in the past 15 years, but even so, you are out of your mind.” Well, there we were and here we are. I was dead wrong.
The problem is, I haven’t quite figured out “why” I was wrong – which is normally not that difficult after the fact. Yes, I know that the government keeps flushing money into the system. I know the Fed is still the Fed. And I know that there are $trillions of “fake paper money” sitting in brokerage accounts and home equity due to whatever you want to call our markets over the past 15 years. Still, there is one question that I cannot even come up with a possible answer for:
Who keeps paying these prices, and buying all this “stuff” – and where is this money coming from?
And because I still can’t answer this question – coupled with the fact that I was so wrong (so far?) on what would happen given the circumstances – I have no other honest way of opining on the economy going forward other than to say simply “I don’t know”. Especially this year, the cracks are appearing/widening. Credit card balances (and defaults), real estate beginning to slow, “buy now pay later” exploding in popularity, housing activity, announced layoffs, etc. – we see the numbers beneath the surface, yet they never seem to matter. At least not yet.
And while on the topic – and solely for self-therapeutic purposes – I will share that I do find myself wondering about the state of our society as a result of all of this. If it is true that there is so much paper wealth floating around for the economy to sustain itself, even given the rather extreme circumstances – and that approximately 100% of this paper wealth is owned by only 50% of the population – what does that mean for the other 50%? What does it mean for the bulk of our kids coming out of college? Again, I don’t know. The optimist in me hopes that there is simply a lot more money and opportunity out there than I assume, and that everything is fine. Though the realist in me largely struggles to believe that – especially with the inflation of late…
With that, I thank you for granting me the opportunity to momentarily cleanse my soul – and I now end the “political diatribe, if only the politicians on either side ever actually meant what they said on the topic” – and will now get to the point. We remain cautious – but open-minded – about what might come for the economy ahead. Trump’s reversal of late most certainly helps in the short-term, as will the “Powell pivot” on rates if it does in fact come later this year. And while I have likely made my skepticism clear, we remain open-minded – even hopeful – that Trump’s bipolar messaging to start to the year is all just part of some masterful plan that no one yet fully understands. Further still, we haven’t even mentioned AI and the countless opportunities (and challenges) it will be presenting to both the economy and society moving forward. While we view it unlikely to be the main driving force for the rest of this year, it’s coming and it is coming fast.
But in the end, we consistently find ourselves pondering just how much road is left for the can to be kicked – both in terms of how much money we spend (print), as well as the corresponding rise in virtually all asset prices. And while no one truly knows the answer to that question, our best guess – in terms of what it means for your money over the coming six months – is that they are not out of runway yet…
In closing, and as stated many times before, please don’t sit around stressing about all of the headlines and what they mean for your monies. You hire us to do that on your behalf – and quite honestly, as I hope I have properly expressed here, I’m not stressed about a single one of them. We got this. Instead, I hope your summers are filled with laughter and joy, surrounded by those who you love. And I look forward to hearing all about it in our conversations ahead!
With that, and as always, we can never thank you enough for the trust and confidence you have placed in us.
Sincerely,
The preceding is for educational and informational purposes only and represents the views of the authors, which may not reflect those of HighPoint Advisor Group and LPL Financial.
The opinions expressed in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
Statements of forecast are for informational purposes and are not guaranteed to occur. Trends discussed are not guaranteed to continue in the future.
All performance referenced is historical and is no guarantee of future results. Investments mentioned may not be suitable for all investors.
Equity investing involves risk, including loss of principal. No strategy – including tactical allocation strategies - assures success or protects against loss.
Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.
The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major indices.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
Government bonds and Treasury bills are guaranteed by the US government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value.
The fast price swings in commodities will result in significant volatility in investor’s holdings. Commodities include increased risks, such as political, economic, and currency instability, and may not be suitable for all investors.
Any discussion regarding gold or commodities in general is referring solely to the asset class(s) themselves – we do not directly hold physical commodities or gold.
Investment advice offered through HighPoint Advisor Group, LLC, a registered investment advisor.