As the stock market entered 2025, investors and corporate executives were rather optimistic about the prospects for the year. Market pundits were speculating that the expected pro-business agenda of the incoming Trump administration would rejuvenate the economy that had begun to moderate. But the new administration has been focusing most of its attention on revisiting the tariff regimes in the United States with the notion that this could supercharge the industrial sector. But investors are not buying it – and for good reason.
Contrary to the narrative that tariffs will make us “rich” and will bring back more jobs to the United States, most economists believe they are ineffective at best, and dangerous to economic health at worst. Perhaps the best example was the passage of the infamous Smoot-Hawley tariff act of 1930. It resulted in plummeting imports and exports, and by most accounts dragged the economy into the Great Depression. While we believe that President Trump’s “bark is greater than his bite,” we also believe that investors are increasingly alarmed that he may dig in his heels for longer in the hopes of securing a favorable deal.
The potential ramifications of an all-out tariff war has added to worries for equity investors. We warned just three months ago about the elevated valuations in the U.S. equity market, particularly the leading “Magnificent 7” stocks (Apple, Nvidia, Microsoft, Amazon, Meta, Alphabet and Tesla). Our modest exposure to these stocks was a key contributor to our client portfolio performance during the quarter, which also have a good helping of stocks and sectors that we deem defensive and reasonably valued. Most notably, gold stocks were helpful in buffering the elevated volatility throughout the quarter, as the price of gold surged to record levels.
The challenges for the stock market are becoming more formidable, but we are by no means giving up on equities overall. With the recent selloff we are finding a growing number of opportunities, even among select technology stocks. But we remain disciplined and mindful of the potential risk that the economic slowdown could lead to lower corporate earnings and lower stock prices. This is a propitious time to focus on risk mitigation and perhaps turning over the keys to professional asset management.
Financial Planning Enters a New Paradigm
As the stock market is struggling so far this year, we believe it makes sense for retirees and others who use or depend upon financial planning services to think a bit differently going forward. To be sure, stock market returns since the Financial Crisis of 2008-2009 have been spectacular. But therein lies the problem. Financial planning models generally rely heavily on trailing stock market performance. Even if stock market returns going forward are in the mid-single-digits, many financial institutions use modeling assumptions based on more recent stronger positive returns. A potential lower rate of return could upend the projected growth of one’s assets and the ability to maintain a comfortable lifestyle.
We recommend performing what we refer to as “stress testing” the plan. We look at a variety of hypothetical assumptions that are significantly different from the base assumptions. The most common stress testing we perform for clients is focused on lower projected asset returns, higher than expected rate of inflation and potential increases in unanticipated major expenses. A solid financial plan is only as good as the accuracy of the assumptions. We believe that stress testing is an ideal way to ensure that unexpected market and economic twists do not wreak havoc on one’s plans for enjoyable and tranquil retirement years.
This article is provided for informational and educational purposes only. The information contained herein is not intended and should not be construed as individualized advice or recommendation of any kind. Where specific advice is necessary individuals should contact their investment professional regarding their circumstances and needs. Any opinions and forward-looking statements expressed herein are subject to change without notice. The information provided herein is believed to be reliable, but we do not guarantee accuracy, timeliness, or completeness. It is provided “as is” without any express or implied warranties. There is no assurance that any investment, plan, or strategy will be successful. Investing involves risk, including the possible loss of principal. Nothing herein should be interpreted as an indication of future performance. Past performance is no indication of future results. Investment Advisory Services are offered through Mariner Independent Advisor Network (MIAN), an SEC Registered Investment Adviser. Caplan Capital and MIAN are not affiliated entities.