Although January was off to a decent start, the remainder of the first quarter felt like a bad April Fool’s joke. With many contributors to a challenging quarter, here are a few thoughts on what happened and lessons learned.
Private Assets: For quite some time, we have warned about the dangers of private equity and private credit. The major players have now fallen anywhere from 25% to 55% leading JP Morgan CEO Jamie Dimon to warn that, “When you see one cockroach, there’s probably more.”
Private investing is not necessarily a good or bad thing. However, without proper due diligence, the risks increase exponentially. At one point, these investments produced mouth-watering returns, often due to the use of liberal leverage.
Now private credit funds are blocking fund investors from getting their money back. This should reinforce the understanding that there is a massive difference between assets that offer daily liquidity and those that may not offer liquidity for the foreseeable future.
Private assets offer much less transparency into how they actually function and what they own.
The Art of The Deal: In January, President Trump said he planned on taking over Greenland. Greenland has been our military ally for the past 85 years. This repeated statement served as a media misdirection while aircraft carriers headed for the Middle East.
In the last week of March, Trump also said he is having high level conversations with Iranian leaders. At the same time the 82nd Airborne Division, the 11th and 31st Marine Expeditionary Units, several Carrier Strike Groups, Advanced Fighter Squadrons and THAAD missile defense units are all headed for the Middle East.
In both cases, President Trump used misdirection or deception. Recognize it for what it is. Do not take Trumps statements at face value. Instead, read his book The Art of The Deal. Whether you agree with him or not, it will help you understand his tactics.
Interest Rates: President Trump said he wants interest rates to come down. And yet, rates on the 10-year Treasury have actually increased. The Fed, and/or the President may be able to influence short-term rates, but the markets determine where long-term rates should be.
Artificial Intelligence: The impact of AI upon businesses went from being all good to all bad with the flip of a switch. Rarely are there black and white outcomes. In reality, we decipher shades of gray. Less critical businesses may be replaced or dislodged by AI. However, mission critical businesses are much harder to replace. These businesses will most likely use AI to replace computer coders. In the process, they will become more efficient… not less. AI will not swallow the world.
The Dollar: Inflation remains a constant battle knocking down the purchasing power of people’s assets. At the same time, the US Dollar is “weaker.” This means the purchasing power of the Dollar outside the US is less. Imported goods are more expensive to buy. However, it means other countries are incentivized to invest into the US, or buy US manufactured products, build businesses or employ people.
The Dollar is no less relevant today than it was a year ago. However, currencies do fluctuate relative to each other. The US is approximately 26% of world GDP, while 50% of world GDP is denominated in Dollars. The Dollar remains the worlds favorite currency.
Stock Market Volatility: All of this has brought a fair amount of volatility to the markets. In the process, some people have wanted to know, “Why are my stocks down?”
With 5,000 stocks trading in the US daily, the reasons are varied. As such, it is imperative that investors differentiate between a stock quote and the true value of a business. The stock quote serves only to tell you what a business can be bought or sold for at that particular moment. It says nothing about the long-term value of a business. Long-term value continues to be determined by the earnings of a business.
Lastly, insulate your portfolio from April Fool’s pranksters by positioning for success. Keep cash and equivalents to take care of needs in the next 12 months. The volatility of the markets is a feature, not a bug. Take advantage of it. Your stock portfolio is designed to absorb volatility to take care of you five or more years down the road. Give yourself enough time to smooth out the volatility and benefit from long-term compounding.
Dave Sather is a Certified Financial Planner and the CEO of the Sather Financial Group, a fee-only and fiduciary investment management and strategic planning firm.
