There is never certainty in markets.
Sometimes much of the investing public convinces themselves that certainty exists. Before the Great Financial Crisis, it was common knowledge that housing prices always went up. You could be certain about that. Until home prices fell 30% from their mid-2006 highs.
Bear markets tend to be wake up calls to the uncertainty of the market. Investors should not have been certain that anything with a “.com” after its name was a good investment before the Tech Bubble burst. They should not have been certain that “portfolio insurance” would protect them from losses in the crash of Black Monday in 1987.
Investors aren’t always so confident. Sometimes they can feel very uncertain. That was a defining market characteristic in Q1 of 2025. (And perhaps even more so as we move further into the year.)
Today’s uncertainty is a sharp reversal from the “Trump Bump” experienced at the end of 2024. Only a handful of months ago, optimism about President Trump’s pro-growth policies ruled the day. Hopes for deregulation, lower taxes, and cuts to wasteful spending helped drive the market higher. There were arguably signs of market euphoria as Palantir Technologies (PLTR) stock doubled, Tesla (TSLA) stock ripped 69% in just over a month, and anything cryptocurrency-related seemed unstoppable (remember the Trump and Melania meme coins?).
The focus has shifted to tariffs and the United States’ seemingly deteriorating relationships with our allies. We are not dismissive of these concerns. We see potential for a trade war to hamper global demand. And we see potential for tariffs to cause elevated inflation, at least in the short term.
The prospect of slow growth and rising inflation may lead some to think of stagflation like we endured in the 1970s. That market environment led to a ‘lost decade’ for stocks and is certainly not one we want to repeat.
But it is worth noting that today looks little like the 1970s. Today the annual core personal consumption expenditure price index (the Federal Reserve’s preferred inflation measure) rate is a relatively docile 2.8%, roughly half the rate during the early 70s, before inflation really got going. Unemployment remains low at 4.1%, below the nearly 6% of the early 70s. And of course, the US has gone from being dependent on foreign oil to being the largest energy producer in the world.
What about growth? Well, that remains the central question, at least in the short term. Will efforts to fix U.S. trade policy succeed and lead to economic growth? Or will they create chaos, global animosity, and a drop in economic activity that takes years to recover from, all while the national debt rises ever higher?
In recent months, the pendulum of expectations for future growth has swung from cheery optimism to dour pessimism. Currently more than half of economists at major U.S. banks expect a recession in the next twelve months, up sharply from the less than 20% who forecast a downturn at the beginning of the year.
Investor sentiment has also cratered. Recent polls by the American Association of Individual Investors show a level of consistently bearish sentiment not seen since the polls began in 1987. Worse than during Covid-19, worse than the 2008 Financial Crisis, and worse than the bursting of the Tech Bubble.
During this massive move from bullish to bearish outlooks, we once again find ourselves somewhere in the middle. As we cautioned in our year-end letter, “heightened geopolitical concerns and potential black swan events call for more caution than normal”. We still feel that way. We don’t find much reason for pound-the-table bullishness. Nor do we think it is time to run for cover. To take either position requires a certainty that we don’t believe is warranted.
To be sure, it makes all the sense in the world to fix trade for the U.S. and ensure that American goods and services are on equal footing with international ones, both here and abroad. But the potential for major economic and geopolitical disruption is real. And success is not guaranteed.
That’s why we’re taking precautions. We’re holding a healthy amount of cash and gold in many of our strategies. We’re diversified outside of U.S. markets. We’re finding opportunities outside of common stocks. And we’re prioritizing owning stocks that we believe will be resilient in a more challenging environment.
With that said, we do not believe now is a time to panic and completely abandon your long-term strategy. We are confident that owning world-class businesses will prove to be a winning strategy towards meeting your long-term goals whatever the world throws at us.
Sincerely,
Austin Root
On behalf of the SAM Investment Committee
