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Market Commentary

15 Oct

Posted at 15:05h in Market Commentary by

Third Quarter in Review:

  • US equities moved higher in the quarter and are now up substantially year to date.
    • Within large caps, the S&P 500 was up 8.1% in the quarter and now up 14.8% year to date.
    • Small cap stocks were even stronger in the quarter, up 12.4%, but continue not trail large cap stocks this year.
  • International equities continued to perform extremely well with a tailwind of the weakening US dollar. These names were up 7% in the quarter and now up 26.6% year to date.
  • Fixed income markets produced nice returns as well, with taxable bonds up 2% and municipal bonds up 3% in the quarter. Year to date, taxable bonds have outpaced municipal by 350bps (6.13% vs 2.64%) as municipals have ran into technical headwinds.
  • The rally we have experienced over the last five months (since the tariff-related market sell-off) has been strong and wide range. In the rest of this write-up, we hope to outline our views on current economic data and our expectations going forward.

 

Economic Growth — Stabilizing, but still below trend

  • The U.S. economy shows early signs of bottoming, though expansion is not yet broad-based.
  • Manufacturing PMI edged up to 49.1, its highest in eight months, signaling slower contraction.
    • Production moved back into expansion (51.0), but new orders (48.9) remain weak, pointing to uneven demand.
    • Backlogs and exports remain soft, suggesting a late-downturn / early-recovery phase.
  • Services PMI held near 50.0, signaling stagnation. Business activity cooled, and hiring slowed, while prices (69.4) remained elevated — evidence that inflation pressures persist even as growth moderates.
  • Bottom Line: growth momentum is stabilizing, but the U.S. remains below trend and dependent on liquidity support.

 

Inflation — Re-accelerating and not yet re-anchored

  • Headline CPI has firmed to 2.9% year-over-year, with core CPI around 3.1%, driven by sticky shelter costs and new tariff effects.
  • The short-term annualized pace (3.5–3.7%) signals an inflation upswing, complicating the Fed’s easing trajectory.
  • Price pressures are most evident in services and housing, while goods inflation remains subdued.
  • Bottom Line: inflation has plateaued above the Fed’s comfort zone – it’s falling, but not fast enough to rule out policy risk.

 

Federal Reserve Policy — Transitioning from restrictive to reactive

  • The Fed funds rate, near 4.0%, remains modestly restrictive in real terms but is moving toward a data-dependent easing stance.
  • The yield curve (10Y–3M) has finally turned positive (+0.14%) after two years of inversion — a potential late-cycle pivot that historically signals recession risks are fading.
  • Markets expect further cuts into 2026, but that depends on the trajectory of inflation.
  • Bottom Line: policy risk remains two-sided; if inflation stalls above 3.5%, cuts could pause; if growth weakens again, cuts may accelerate.

 

Market Behavior — Liquidity overtaking fundamentals

  • Despite soft macro data, U.S. equities continue to rally. The S&P 500 hit record highs (6,740), driven by AI-related mega-cap strength and expectations of policy easing.
  • As shown in Bloomberg’s AI network chart, OpenAI, Nvidia, Microsoft, Oracle, and AMD form a dense investment web — billions in cross-investments, GPU spending, and cloud deals are reinforcing a liquidity-driven growth narrative even as real economic indicators lag.

 

(Bloomberg AI Investment Network — October 2025)

 

    • Nvidia has pledged up to $100 billion in OpenAI.
    • OpenAI struck a $300 billion cloud deal with Oracle and is deploying 6 GW of AMD GPUs.
    • Microsoft, Oracle, and others are deeply embedded across both the hardware and software layers of the AI economy.
  • This ecosystem has become the core engine of equity market capitalization growth, with the AI “infrastructure trade” supporting valuations even as underlying profits flatten.

 

Earnings and Valuation — Narrow, expensive, and fragile

  • S&P 500 forward P/E stands at ~23x, near post-COVID highs, supported by rate-cut expectations rather than strong earnings growth.
  • Free cash flow yield is near record lows at ~2%, below investment-grade bond and Treasury yields — implying a compressed equity risk premium.
  • Earnings concentration remains extreme:
    • The “Mag7” account for ~33% of market cap but only ~25% of EPS (OP/MKT ≈ 0.77).
    • Financials, Energy, and Communication Services are over-earning relative to size, while Tech’s earnings share lags its valuation weight.
  • With PMIs below 50 and margins peaking, equities are vulnerable to multiple compression if growth or earnings disappoint.

 

Risk Environment — Improving tone, fragile balance

  • Our proprietary risk composite shows a mild uptick (+0.64), signaling rising but contained risk.
  • Volatility and liquidity metrics have improved since Q2, but policy and geopolitical uncertainty remain dominant.
  • Financial markets are loosening ahead of policy, with equities and credit spreads reflecting early-recovery optimism, even as credit growth and small business lending stay weak.

 

Why Markets Rally Despite Late-Cycle Signals

  1. Markets lead the economy — investors are pricing an early recovery 6–9 months ahead.
  2. Liquidity beats macro — easing and slower quantitative tightening lowers discount rates, inflating valuations.
  3. Performance chasing — defensive managers are re-risking amid FOMO-driven rallies.
  4. Narrative power — the “Soft Landing + AI Productivity + Fed Put” story coupled with a stock market motivated government, keeps sentiment high.
  5. Valuation-driven rally — EPS growth is flat, but higher P/Es lift index levels, echoing prior “liquidity repricing” cycles (1995, 2019).

 

Our Outlook — Policy-led stabilization with valuation risk

  • Base case: sub-trend growth (~1.5–2.0%), mild disinflation, and ongoing Fed easing into 2026.
  • Best case: inflation falls faster, enabling more cuts and sustained AI-led capex momentum.
  • Risk case: inflation re-accelerates; yield curve steepens for the wrong reasons (higher term premia).
  • Positioning view:
    • We remain constructive but cautious given valuations.
    • We prefer quality balance sheets and cash flow visibility over speculative beta.
    • We are watching for data reversion once shutdown-delayed releases resume.

 

In short:

  1. Markets are celebrating rate cuts and AI optimism, not broad economic strength.
  2. Growth is stabilizing but fragile; inflation is sticky; policy is reactive; valuations are stretched.
  3. When real data resumes, volatility could rise as sentiment meets fundamentals.

 

Sources:

Procyon Macro & TAA Review; Bloomberg; Reuters; Federal Reserve

15 Sep

Posted at 14:44h in Market Commentary by

 

Although the US economy has been resilient, the effect of higher rates and trade wars has not been evenly distributed. The concentrations of both capital investment and subsequent earnings continue to build in the tech sector despite a stricter borrowing environment and more difficult global trade.

We see the S&P, NASDAQ and DOW all hitting record highs, home prices hitting all-time highs, bitcoin and gold, all at all-time highs and CPI sitting at 2.9% over the last twelve months. What would cause the fed and US investors to ask for rate cuts? The fed appears to remain focused on their dual mandate of full employment and moderate inflation.

 

Employment softening: Bouncing from historic low unemployment, but with a clear trend.

  • Unemployment at 4-year high, 4.3%
  • Downward revision of 911k less jobs created over 12 months period ending 3/31/25.
  • Job creation for August was 22k, a sharp decline from previous months.
  • Firms most affected by higher rates and tariffs are smaller companies who are finding it difficult to hire.

 

Inflation: Sticky but under control.

  • CPI is up 2.9% over the last 12 months
  • Shelter & Food – Biggest drivers of inflation over the past year, with rising rents and higher prices for meats, poultry, and dining out.
  • Energy & Services – Mixed impact: gasoline fell, but electricity, natural gas, and healthcare costs added pressure

As the fed governors debate these points internally, they have decided to cut the target fed funds rate by .25% to a new target of 4.00-4.25%. The signal from Chair Jerome Powell is that the fed’s goal of full employment has shifted in importance versus inflation in the last few months, and that going forward more cuts are expected.

The fed’s reaction to the softening labor market should be encouraging to workers and investors as it shows confidence that inflationary pressures have largely passed and they can count on full-on support for labor in the near-term.

 

Sources:

Bureau of Labor Statistics: https://www.bls.gov/cpi/
Y Charts: https://ycharts.com/

 

08 Jul

Posted at 14:22h in Market Commentary by

On the surface, the second quarter of 2025 was a blockbuster quarter for equity markets. U.S. and international equities surged over 10%, driven by a powerful rally that took hold in April and rarely let up. Small caps lagged but still posted a solid 8.5% gain.

Taxable fixed income finished slightly positive, while municipals drifted modestly lower.

If you only looked at the numbers, you’d assume investors spent the quarter embracing risk with confidence. But markets rarely move in straight lines—and this quarter’s strength masked a rollercoaster of volatility, uncertainty, and geopolitical shock. While the final story is written above, the chapters that follow offer deeper perspective on what shaped Q2 and where we go from here.

Chapter 1: Tariffs Return with a Vengeance (and So Does Volatility)

The tone for Q2 was set even before it officially began. Markets spent much of Q1 trading lower in anticipation of a shift in U.S. trade policy, and on April 2nd, those fears were realized. In a dramatic speech, former President Trump declared “Liberation Day,” where he announced sweeping tariffs on nearly all imports from countries where the U.S. ran a trade deficit.

Markets responded sharply. U.S. equities plunged, with the S&P 500 dropping nearly 19% from its February peak to the early April trough. The VIX (volatility index) spiked above 50—levels not seen since the pandemic panic of 2020. International markets held up slightly better thanks to a weaker U.S. dollar, but still fell close to 14% from their highs.

The sudden shift in trade policy not only rattled markets—it created deep uncertainty for business leaders and research analysts. With little clarity on the scope or duration of tariffs, many companies began pausing investment plans. We expect these effects to echo through the second half of the year as firms reevaluate capital allocation and supply chain strategies.

Chapter 2: A Pause, Progress, and Promises

Just one week after Liberation Day, the narrative shifted again. On April 9th, President Trump surprised markets by announcing a 90-day pause on the newly announced tariffs. The move was framed as a goodwill gesture to allow space for ongoing trade negotiations, some of which had begun bearing fruit behind the scenes.

The market response was euphoric. The S&P 500 experienced its strongest single-day rally in years, and risk appetite returned with force. From the trough on April 8th to the end of the quarter, major equity indices climbed over 24%.

The 90-day pause was not a resolution, but it was a release valve. It gave markets breathing room and helped anchor the view that extreme trade policy outcomes may be used more for leverage than legislation. While risks remain, investors grew increasingly confident that future tariff headlines would be more bark than bite. That being said, baseline tariffs of 10% remain in place and will have impact on earnings and business investment going forward.

 

Chapter 3: Powell Holds in the Face of Political Pressure

Coming into the year, markets were pricing in rate cuts by mid-2025. But strong labor market data (unemployment at 4.1%) and inflation that remained above target (Core PCE at 2.7%) kept the Fed firmly on hold.

Chairman Powell and the FOMC opted to stay patient, resisting growing political pressure from President Trump, who has been vocally critical of the Fed’s hesitancy to cut. The Fed’s stance remained cautiously restrictive, aiming to keep inflation on its path toward 2% without jeopardizing the broader economy.

With policy uncertainty (especially on trade and fiscal fronts) still swirling, a wait-and-see attitude is appropriate. The Fed continues to hold a slightly restrictive policy stance, which we believe is appropriate given the economic conditions. Going forward, the Fed finds itself walking a tightrope—balancing economic resilience with political noise, and data dependency with global risk factors.

 

Chapter 4: Missiles Fly, Markets Hold

Perhaps the most surprising chapter of Q2 came in mid-June, when geopolitical tensions flared dramatically. Israel launched coordinated strikes on Iranian nuclear sites, followed days later by a U.S. air campaign coined Operation Midnight Hammer.

Oil prices surged more than 10% overnight, and headlines warned of a broader regional war. But markets barely blinked. Iran threatened retaliation but ultimately refrained, as President Trump brokered a ceasefire that de-escalated tensions.

By quarter’s end, energy prices had fully retraced their gains, and equities continued their march higher. The market’s muted reaction was a testament to investor focus on fundamentals and a belief that the conflict would remain contained. It was also a reminder of one of our core beliefs: time in the market beats timing the market.

 

Epilogue: The Story Continues

We’ve already seen significant developments in the early days of Q3. Most notably, the Big Beautiful Bill—a sweeping piece of fiscal legislation—was signed into law on July 4th. The bill includes tax cuts, infrastructure spending, and energy policy changes, and while its full impact will take time to unfold, it’s expected to add meaningfully to the national debt.

The bill comes after Moody’s downgraded the U.S. credit rating in Q2—a sign that debt levels are beginning to catch up with fiscal optimism. As a result, we anticipate higher rates on the long end of the yield curve. The curve remains slightly inverted, but we expect a combination of modest Fed cuts and rising long-term yields to push it toward normalization in the months ahead.

From a macro perspective, we remain constructive. Inflation is moderating, employment remains tight, earnings are resilient, and financial conditions are stable. A more accommodative central bank paired with pro-growth policy may continue to support risk assets. But with rising divergence across market caps, sectors, and styles, selectivity matters more than ever.

 

Our Positioning

We continue to emphasize broad diversification as essential tools in this market:

  • International equities have shown long-awaited leadership after a decade of underperformance.
  • Value stocks led early in the year, but growth roared back after April’s lows.
  • Small caps still trail, but falling rates and tax relief could act as a catalyst.
  • Fixed income has played its role as portfolio ballast during equity drawdowns, particularly in March and early April.

Passive index exposure and concentrated sector/company bets may have worked in recent years—but going forward, we see growing risk in narrow exposures. Discipline, diversification, and a long-term view remain your greatest allies in this fast moving market environment.

08 Jun

Posted at 13:31h in Market Commentary by

Strategic Macro Themes: Navigating a Shifting Global Landscape

As global capital flows continue to realign across economies and corporate balance sheets, our team is closely tracking several critical macroeconomic and geopolitical developments. Below is a summary of the key themes shaping our strategic outlook:

Trade Realignments and the “Chexit” Era

Shift Away from China

The U.S. has significantly reduced direct trade with China, redirecting flows to countries such as Mexico, Vietnam, and India. These nations increasingly serve as intermediaries in supply chains that still rely on Chinese components.
In response, China is deepening trade ties with emerging markets across Africa, Latin America, and Southeast Asia to diversify away from Western markets.

Rise of Economic Nationalism

In 2025, the U.S. imposed sweeping new tariffs1:

  • 30% on most Chinese imports, with exceptions like smartphones at 20%.
  • 25% on steel, aluminum, and non-USMCA-compliant goods from Mexico and Canada.
  • 10% baseline tariffs on most other imports, including from the EU.

These tariffs are framed as reciprocal and based on trade deficit ratios, not purely retaliatory.
Legal challenges were initially successful, but an emergency appeal reinstated the tariffs.

Friendshoring and Nearshoring

Supply chains are increasingly relocating to politically aligned nations. The EU is expanding trade with the U.S., ASEAN, and Africa while reducing reliance on Russia and China.

Fragmentation of Global Trade

The global trade system is becoming more fragmented and opaque. Regional trade blocs and indirect trade routes are replacing traditional global supply chains, resulting in higher costs, investment delays, and reduced transparency.

Strategic Sectors Under Pressure
  • Critical sectors such as semiconductors, industrial production, and critical minerals are at the center of these realignments.
  • The U.S. and EU are investing heavily in domestic capabilities, while China is securing long-term supply contracts with resource-rich nations.

 

→ Strategic Outlook: We are adopting a globally diversified and defensively postured approach to navigate the volatility and complexity of evolving supply chains.

Global Technological Competition

U.S. / China Rivalry

The U.S. and China remain locked in a high-stakes race for technological supremacy in AI, semiconductors, and quantum computing. Both nations are investing aggressively in domestic innovation while restricting cross-border tech flows.

Green Tech and Strategic Autonomy

The EU is leading in green technology, while the U.S. and China compete over battery supply chains and clean energy infrastructure. Reshoring is accelerating as nations seek to reduce dependence on geopolitical rivals.

Emerging Tech Hubs and Space Innovation

Countries such as India, South Korea, and Brazil are emerging as influential tech players. Meanwhile, space technology is becoming a new frontier, with both public and private entities expanding satellite and lunar initiatives.

 

→ Strategic Outlook:  The U.S. regulatory landscape is evolving rapidly to support competitiveness in the global tech ecosystem. Our focus is on understanding how firms are positioning themselves in this dynamic race.

 

“Big Beautiful Bill” – U.S. Fiscal and Tax Policy Update

Passed by the House on May 22, 2025, and currently under Senate review, the bill includes several impactful provisions:

Extension of TCJA Provisions
  • Permanently extends lower individual tax rates and the doubled standard deduction from the 2017 Tax Cuts and Jobs Act.
  • Maintains high estate tax exemptions and limits on mortgage interest and itemized deductions.

 

New Deductions and Credits
  • Introduces temporary deductions for tips, overtime, auto loan interest, and a larger standard deduction for seniors.
  • Expands credits for child care, paid family leave, adoption, and education.

 

Business and Investment Incentives
  • Restores 100% bonus depreciation and expands pass-through business deductions.
  • Enhances tax benefits for small businesses, manufacturers, and Opportunity Zones.

 

Health and Savings Reforms
  • Expands Health Savings Accounts (HSAs) and codifies CHOICE health reimbursement arrangements.
  • Adds employer incentives and adjusts eligibility for premium tax credits.

 

Revenue Offsets and Fiscal Impact
  • Introduces new limits on SALT deductions, nonprofit tax rules, and international tax enforcement.
  • Projected to increase the federal deficit by $2.4–$3.8 trillion over 10 years 2, with tariff revenue cited as a key offset.

 

→ Strategic Outlook:  We anticipate further amendments before a Senate vote. The broader implication is a continued reliance on deficit financing to support government initiatives, which may influence long-term fiscal sustainability and market sentiment.

 

Sources:

08 May

Posted at 15:05h in Market Commentary by

FRAGILE FOUNDATIONS: TARIFF POLICY AND THE DIVERGENCE IN MARKET EXPECTATIONS

We’re pleased to share the May 2025 edition of Equity Insight. In this update we explore recent developments in tariff policy, market volatility, corporate earnings, and the evolving outlook for investor sentiment.

From shifting trade dynamics to signs of market stabilization, this piece offers timely insights into what’s driving today’s investment landscape. Please click below to access the full report.

Enjoy the read.

11 Apr

Posted at 15:10h in Market Commentary by

INCREASING RECESSION RISK WARRANTS A DEFENSIVE BIAS

We’re pleased to introduce Equity Insight, a new monthly commentary from our Head of U.S. Equities. Each edition will offer timely perspectives on market trends and economic developments.

In this inaugural issue, we explore the growing risks to the U.S. equity outlook amid rising policy uncertainty and shifting investor sentiment. As the economic landscape becomes more fragile, understanding where the vulnerabilities lie and how markets are responding is imperative.

We hope you find this update useful and look forward to discussing it with you. Should you have any questions or wish to explore these topics further, please don’t hesitate to reach out.

11 Apr

Posted at 14:07h in Market Commentary by

Last week we highlighted President Trump’s proposed retaliatory tariffs. This week has quickly turned that message into old news.

 

 

To recap what has happened:

On April 2nd, the US announced reciprocal tariffs with a very simple calculation: a 10% floor and a tariff equal to essentially half of the trade deficit the US has with the associated country.

While the market was slightly positive prior to this announcement, the reaction to larger than expected and more widespread tariffs was met with heavy selling across all markets.

This was a market shock. The selling was more initially tied to growth companies with elevated valuations. Diversified portfolios held up better due to more resilience from value and international stocks. Not to mention, fixed income acted as the safe haven that investors hope for in a diversified allocation.

The Trump administration stoked the flames of the market over the last week by saying things like the market drop was a mag-7 problem, not a MAGA problem. Or saying that markets needed to “take their medicine”. It appeared

as though the administration was hostile towards wall street.

On Sunday, overnight markets were forecasting north of 5% drop with some international markets selling off more than 10% overnight. Cooler heads seemed to prevail on Monday morning, with the S&P opening down 4% (well off of the pre-market lows).

The S&P rallied on Monday morning on an unconfirmed news report that Trump was implementing a 90-day delay to tariffs. Shortly after this report, the White House denied any delay in tariffs and called the report “fake news”. Markets had a 7% swing in the matter of minutes before giving up this positive performance as the reality sank in.

On Tuesday we saw the largest intraday move in the stock market since the great recession. After starting the day positive, we finished the day sharply negative. Reciprocal tariffs went into effect Tuesday night.

In the few days before leading up to Wednesday’s announcement all markets generally traded in lockstep, with nowhere to hide. Even bonds experienced this selling pressure.

Finally, on Wednesday:

        • Overnight, bond yields rallied materially. A move that is not consistent with a market selloff. There were a number of speculations – Foreign bond sellers? Bank failures? Hedge fund leverage?
        • In the morning, Jamie Dimon (CEO of JP Morgan) made strong comments noting a recession is a likely outcome of the Trump tariff policy.
        • That same afternoon, Trump decided to delay reciprocal tariffs for 90-days for all countries willing to negotiate. This left China as the only country facing material tariffs.

 

While reciprocal tariffs were paused, the 10% base tariff rate remains in place. Additionally, product and sector level tariffs remain in effect. However, Trump noted that they would consider company level exemptions from tariff policy.

Markets reacted strongly to the news of this 90-Day pause. We saw the largest intra-day market swing in history. The S&P 500 finished the day up 9.52%, the best single day performance since 2008. However, the euphoria of Wednesday wore off quickly on Thursday, with major indexes falling more than 4%.

 

What now?

        • The 90-Day pause shows that the administration at least has a heartbeat on this tariff policy issue. It removes the biggest fear for markets which was a growing concern over the competitive positioning of the US in global trade. It shows that the administration is at least willing to work with allies, while still holding a hard stance on trade.
        • It leaves investors with a high water mark on tariffs and now a near term base. While the range is wide, this is more information than we had a week ago and leads to less uncertainty. This uncertainty has been the driver of negative market performance over the last week.
        • It is now clear that the main focus for the administration is China. As part of the announcement, the administration also increased the tariff on China, now sitting at 145%. China has noted that they are willing to work on a deal that is good for both sides, but will fight “to the end” if the US is not willing to work towards a compromise. Most recently, China upped tariffs on US imports to 125%.

 

Procyon’s Perspective

        • We view the developments on Wednesday as a major positive in the trade/tariff discourse that has played out over the last week. However, material uncertainties remain in the market as it relates to the escalating trade war with China, the impact on inflation, next steps for the Federal Reserve, and earnings/guidance going forward. There is a lot that needs to be decided between now and the “end” to this trade policy. This uncertainty will continue to lead to market swings to both the upside and downside.
        • Wednesday was an example of just how quickly things can change. Market reactions can be violent in times of extreme uncertainty. As long-term investors, we look for attractive entry points for positions that we want to invest in for the long term. Intraday or intraweek volatility may provide those opportunities, but making quick changes to portfolios in light of headlines and market reaction can do more harm than good.
        • We continue to watch markets closely. As stated in our prior commentary, we are confident in the long-term economic future of the US. We view the developments this week as steps in the right direction, but continue to acknowledge the uncertainties that remain which can lead to future volatility.
        • Finally, we continue to emphasize the importance of diversification and active management in this time period. Diversification has helped weather the storm this year and we continue to expect that going forward. While all equity markets are negative year to date, fixed income is positive, alternatives have held up relatively well, and exposure to value and international markets has provided some protection on the downside.

We will venture to keep you updated as conditions develop. Please reach out to your advisor with any concerns.

 

 

 

 

14 Mar

Posted at 13:54h in Market Commentary by

Over the past several weeks, tariff discussions have dominated financial news, creating a climate of uncertainty that has rippled through markets. The Trump administration’s recent move to propose a 25% tariff on Canadian aluminum and steel -only to retract the decision later that same day- illustrates just how unpredictable trade policy can be.

The dynamic environment has left market participants trying to guess where these tariff talks will settle. Concerns over the potential inflationary impact of tariffs and rising recession probabilities have led to heightened volatility over the last several weeks.

Couple this rising uncertainty with historically elevated US equity valuations and you create a backdrop for a market pullback like we have seen. We have even seen some asset classes enter into correction territory (10% drawdown) with others holding up relatively well (international markets and value stocks).

At the core of this volatility is the fundamental reality that tariffs alter competitive dynamics across industries, creating both winners and losers.

Key Impacts of Tariffs on Investments

  • Beneficiaries: Domestic industries shielded from foreign competition (e.g., U.S. steel producers during tariffs on foreign steel).
  • Losers: Companies dependent on global supply chains (e.g., auto manufacturers using imported parts).
  • Corporate Profits & Costs: Higher tariffs increase costs for companies that rely on imported materials, potentially lowering profit margins (e.g., Apple’s costs rise if tariffs on Chinese components increase).
  • Consumer Spending: Higher import costs can lead to inflation, reducing consumer purchasing power, which affects retail and consumer goods stocks.
  • Stock Market Volatility: Tariff announcements often lead to market swings as investors adjust expectations based on trade policies.
  • Currency Movements: Tariffs can impact exchange rates, affecting multinational companies and emerging markets.

 

Investment Strategies Around Tariffs

While uncertainty is never comfortable, investors can take a disciplined approach to navigating tariff-driven volatility.

  • Macroeconomics: For better or worse we believe tariffs are inflationary. There will be upward pressure on prices of goods related to tariffs as historically this has been the case, and we have no reason to think this time is different. Additionally, the US economy has potential to experience some bumps and bruises as a result of this transitory time period.
  • Commodities & Alternatives: Some investors hedge against trade tensions with commodities, domestic-focused real estate and hedge fund exposures.
  • Company Specifics: Companies with strong domestic supply chains may be less affected and more resilient. International supply chains became strained ahead of covid as a trade war had already begun and may become more strained as tariffs persist.
  • International Markets: Countries facing tariffs may see slower growth, impacting investments in their markets. Furthermore, countries that are on less stable economic footing are most at risk.
  • Asset Allocation: Procyon believes strongly in diversification as it remains essential as the various tariffs are renegotiated on an ongoing basis. We have already seen the benefits of diversification as asset classes have reacted vastly different in the market drawback. Growth stocks and Small Caps are down over 10% since February 18th. Value stocks are down -5.6% and international stocks are down just -1.35%. Fixed Income markets are up over that same time period.*

 

Tariffs in Historical Context

While today’s trade tensions may feel unprecedented, tariffs have been a fixture of global commerce for centuries In Ancient times, tariffs existed as a way to regulate trade and raise revenue. In the 16th-18th century, Europe used high tariffs to protect industries and control trade with a focus on wealth accumulation. In the 19th century, the industrial revolution sparked debate between free trade and protectionism. In more recent history, the WTO reduced tariffs globally in 1995, but trade tensions in 2018 reintroduced protectionist measures. In the U.S., tariffs are currently being deployed with two primary objectives:

  • Protectionism: The US is using tariffs to communicate to neighbor nations that they need to secure their borders to the United States (International Emergency Economic Powers Act or IEEPA) due to flows of illegal drugs, undocumented immigrants and contraband.
  • Trade Deficit: The US is using tariffs globally (Fair and Reciprocal Plan) to help offset trade imbalances with other nations. In January the US trade deficit was $131.4b.

President Trump’s 2025 tactics rhyme with his actions throughout 2018. We saw a similar drawdown in early 2018 as concerns over a trade war spooked markets. Over the next several months, markets remained choppy as the tug of war between US and China continued. Finally, as the threats subsided and the tariffs settled, markets rallied nicely before a December sell-off that was not trade-related.

Lessons learned from that time period still ring true today in our portfolios. Namely, the benefits of diversification, ensuring you are properly allocated according to your plan and risk tolerance, and the ability to be patient in the face of volatility.

*Source: Ycharts.com

 

 

 

 

 

30 Jan

Posted at 20:37h in Market Commentary by

MARKET UPDATE: RECAP OF KEY TRENDS IN 2024 AND OUTLOOK ON WHAT IS AHEAD FOR 2025

While the 4th quarter was a volatile ride, US equity markets finished the month higher, capping off another year of 20%+ returns. Not all markets were created equal, however, as international markets saw large declines in the quarter, ending the year with single digit positive returns. Finally, fixed income markets were the focus towards the end of the year as yields moved rapidly amidst election results and Federal Reserve rhetoric. Fixed Income markets saw contractions in the 4th quarter, finishing the year just slightly above 1%.

GOOD NEWS IS BAD NEWS?
Macroeconomic data points continued to be strong at the end of the year. Year over year inflation (CPI) reached as low as 2.4% in September, and despite the small pick up at the end of the year (2.9% December reading), remains trending towards the Fed’s long-term target. Third quarter GDP continued to show strength, growing at a 1.2% rate from the prior reading. Finally, the employment market has been remarkably resilient with the unemployment rate sitting at 4.1%, and the economy adding 256,000 jobs in December.

On paper, this has given a nice backdrop for the Fed to continue on their rate cutting cycle throughout 2025. However, markets have not been so sure of this. Throughout the 4th quarter, we saw the 10-year treasury rate move from 3.81% to 4.58% at the end of the year. This has extended into early 2025, with the 10-year treasury now sitting just shy of 4.8% as we write this.

 

08 Jan

Posted at 14:44h in Market Commentary by

MARKET UPDATE: PRE-ELECTION INSIGHTS

Both equity and fixed income markets broadly moved higher throughout the 3rd quarter, building on a strong firsthalf.
•Large cap value stocks, small cap stocks, and international markets emerged as the standout performers,contrasting with trends seen in the first half of the year, where US large cap growth stocks dominated.
•The market rotation in the 3rd quarter is a welcome sight and is a positive for the overall health and continued strength ofthe stock market. We have highlighted the need for broader market participation and have positioned portfolios for thisreality.
Election Time
•As we enter the 4th quarter, our focus turns to the election and its impact on the longer-term market trajectory.While rhetoric has grabbed headlines to this point, the conclusion to the election will allow us to fully evaluate whatthe next 2 years of fiscal policy will look like.

29 Jul

Posted at 17:19h in Market Commentary by

Markets broadly continued to trend higher throughout the second quarter and into the start of the third quarter, despite some pockets of weakness. Throughout the second quarter of 2024, US large-cap stocks advanced while their small and midcap counterparts trailed. Emerging market equities were the best performing of the major asset classes, jumping 5.4% after lagging other major equity markets to start the year. Fixed income remains slightly positive on the year as higher yields have lessened the impact of rates moving higher.

Valuations

The start to the third quarter was strong as well, with both equity and fixed income markets advancing. We have seen a slight rotation out of large-cap growth and into large-cap value and small-cap equities to start the quarter. This is part of a normal market cycle and frankly a welcome sign for the health of the overall equity market. We entered the third quarter with S&P 500® valuations well ahead of historical averages. This was especially true of US large-cap growth stocks who sported a price to earnings ratio of 28.4x. This was 150% of the historical 20-year average of 19x earnings. While there is no single most important metric for evaluating the overall valuation of the equity market, price to earnings gives a good representation of the premium you are paying for earnings today versus what a “normal” market environment looks like. These P/E Ratios are historically a good predictor of future returns and with valuations where they were at the start of Q3, future return expectations were becoming limited.

While valuations grew richer for US large-cap growth stocks, we saw market concentration climb as well, reaching levels last seen in the 1960’s. The top 10 names in the S&P 500® made up 37% of the index at the end of the second quarter. It is no secret that names like Nvidia, Microsoft, and Meta have been leading markets to new all-time highs throughout the last year. The growth of the “Mag-7” (Microsoft, Apple, Nvidia, Amazon, Alphabet, Meta, and Tesla) has been immense, with valuations and index weightings climbing as these stocks continued to hold the lion’s share of earnings. Investor attraction to these names left the remaining 493 stocks in the S&P 500® producing muted returns, with the average stock up just 5% year to date. As of the end of the second quarter, the percentage of S&P 500 stocks outperforming the index was at a record low.

The last time valuation dispersions were similarly extreme, and leadership was this narrow, was during the 90’s Technology Bubble. Those who ignored valuation and bought into the bubble missed investment themes that lasted more than a decade. The chart below compares the total returns of the S&P 500® Value Index and the S&P 500® Growth Index from the Tech Bubble’s peak in March 2000. From that date, value cumulatively outperformed growth for the next 20 years and 2 months. It wasn’t until the recent post-pandemic period that growth cumulatively regained the performance lead from that start point.

A Market Rotation

The start of Q3 has been an evolving story as there has been a sharp market rotation over the last few weeks. The market rotation really started on July 10th, when mega cap names fell, and the broader market moved higher. Since that time, growth stocks are down -5.5% while value is up +2.41%. Additionally, small-cap stocks have outperformed large-cap stocks by nearly 9 percentage points (+6.62% vs. -2.2%) in just eight trading days. Mag 7 stocks have borne the brunt of this rotation, with Nvidia down -12.6%, Meta down -10.8%, and Amazon down -8.3%. Apple has held up the best of the bunch (-3.72%) but still trails the benchmark over that period.

The cause of this rotation is not fully known or understood by experts at this time. While everyone wants to point to one specific thing, there are several different reasons why this could happen and could continue. Was it softening inflation numbers and a change to the Fed’s anticipated monetary policy stance? Was it the coming election cycle and associated candidate rhetoric about potential policy for the next 4 years? Was it simply rebalancing from large market participants (i.e. hedge funds) as growth stocks notched a stellar 1st half? Or did the technology trade get crowded, and investors went searching for other opportunities? In any event it was certainly a momentum crash as that is the dominant factor within the large-cap growth space.

While eight trading days is not long enough to identify a trend, or a new market regime, the speed of the market reaction is a good reminder to investors as to why we maintain diversified portfolios. One single market is not always going to be king. Some rotations are fast, some are slow; some are long-lived, while others are just a flash in the pan. Our goal is to maintain exposure to all these markets to achieve long term portfolio growth no matter who or what is leading the market on any given day.

Is Value Dead

Given that backdrop, it is worthwhile to raise a question that has been posed by many: is value dead? It is a fair question to ask in light of growth stocks outperforming value over a 10-year rolling time period.

The basic assumption to traditional value investing is that capitalism is an ongoing economic structure, and one should be optimistic about the future. Value investing believes that investors should search for undervalued growth because many companies within the economy will grow. It also is a belief that markets are not always efficient, and opportunities are available to those who remain patient.

Many investors believe that growth investing is only about an exciting future, growth investing is now largely based on the notion that only a select universe of companies can actually grow. Be it a single sector or industry. That rather pessimistic view of the lack of the overall diversity of potential earnings growth has become unrealistic (there are currently about 160 companies within the S&P 500® with earnings growth of 25% or more), and that extreme view has led growth investors to generally ignore valuation.

So, a key difference between the two strategies is that value investing believes that many companies will grow, and one should look for the cheapest investment to partake in that growth, whereas growth investing believes only a small universe of companies have growth potential and one should downplay value because earnings growth is a relatively scarce commodity.

The father of growth investing, T. Rowe Price Jr., didn’t believe that growth should be bought at any price. Rather, he was a proponent of buying superior growing companies whose earnings and dividends could be bought at reasonable valuations given their superior growth.

Election

Are you not entertained? In an election cycle that was undoubtedly going to be filled with twists and turns, June and July have contained a series of historical events that will be talked about and shape history for years to come. In June, a less than stellar performance from President Biden in a debate with President Trump left much to be desired from the democratic candidate. Immediately following the debate and the weeks following, Trump’s odds of winning the presidency jumped to over 60%. Calls for President Biden to suspend his campaign intensified in the weeks following with odds of other democratic nominees rising and even surpassing Biden’s chances in early July.

Then, an assassination attempt on President Trump at his rally in Pennsylvania added more fuel to the fire of the republican base. The events led to a week of unity for the republican party as many came to show support for Trump, culminating with Trump’s acceptance of the GOP nomination at the Republican National Convention.

Ever increasing calls by high-ranking democratic officials for Biden to step aside intensified over the same week, with Biden suspending his campaign for President on July 21st. Vice President Kamala Harris is now almost certain to be the democratic nominee following these events, securing endorsements, delegates, and funding rapidly.

What do the next 3-4 months look like? It’s simply anyone’s guess. We continue to believe that politics and elections do not drive market performance. We are closely monitoring and watching the events for selective opportunities, but we do not believe material allocation changes should be based on who is president. This viewpoint is based on historical fact. Markets tend to be forward-looking and driven by economic conditions. While rhetoric can shake markets leading up to the election, we continue to focus on longer term trends and economic conditions to drive our asset allocation strategies. Ultimately, CEOs and small business owners alike want to know what rules to expect for the next 4 years, and they will be able to plan for profit accordingly.

Fed

With our focus more on long-term trends and economic conditions, it is important to turn attention towards the Federal Reserve and the outlook for monetary policy.

The inflation picture so far this year has been mixed but trending in the right direction. The first quarter of 2024 reported CPI numbers higher than expectations which cooled the probability of 6+ rate cuts that were expected at the start the year. Second quarter CPI has come closer to trend and fed futures markets have now priced in almost 100% probability of a rate cut in September which is parallel to fed indications.

The expectation is that inflation will continue to fall closer to the Fed target of 2-2.5% for the remainder of the year. If true, the fed will likely continue with their predetermined path to moderately reduce rates later in the year and into 2025.

Employment

Employment continues to soften from the post pandemic hiring spree. The unemployment rate, while still very low, has come in at 4.1%, up from a low of 3.4% a year earlier. Much of this recent increase in unemployment is due to the increase in the labor participation rate from the lows of Covid, a metric that has not yet returned to pre-covid participation levels. Given that backdrop we expect the participation rate to continue to tick higher and employment figures to normalize between 4-5%.

Consumer

Personal consumption expenditures continue to look strong in the rear-view mirror, although we know that consumer product companies have been warning of a slowdown. Visa reported earnings with a rare top-line miss, they noted that higher borrowing costs are affecting consumer spending. Also, a few retailers have lowered their earnings guidance for this year as the consumer product industry softens.

A large part of the recent multi-year spending surge was due to the excess savings and pent-up demand created during Covid. If we look at the national savings rate, which spiked to all-time highs of 30% (of disposable income) during the pandemic, we can see that it has come down to 3.9% in the most recent reading, well below our historical average.

While this story rings true to many across the nation, we still see unprecedented demand for high-end retail. The luxury retailer LVMH (Louis Vuitton Moet Hennessey) reported increased sales in the US for the first half of the year. Ferrari reported double digit growth in sales in the US in 1Q24. Housing has taken a small step back as existing home sales fell 5.4% while the national average price reached a new all-time high of $426,900. The lack of inventory and expectation of lower rates in the near term continue to push prices higher in housing. It is difficult to get a clear view of how housing prices will become more affordable for the average American without a significant surge in available inventory.

In summary, the Procyon Investment Committee has strong conviction around the broadening of market leadership outside of large growth companies because valuation matters, rate cuts coming later this year, and the lack of major market impacts related to which party wins the election. Our cumulative experience and academic study have provided our committee with the opportunity for strong debates around these key issues and we look forward to providing you updates as the second half of 2024 unfolds.

IMPORTANT DISCLAIMERS AND DISCLOSURES:

The information contained in this presentation has been gathered from sources we believe to be reliable, but we do not guarantee the accuracy or completeness of such information, and we assume no liability for damages resulting from or arising out of the use of such information. Past performance is not indicative of future results.

The views expressed in the referenced materials are subject to change based on market and other conditions. This document may contain certain statements that may be deemed forward‐looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur. The information provided herein does not constitute investment advice and is not a solicitation to buy or sell securities.

Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, investment model, or products, including the investments, investment strategies or investment themes referenced herein, will be profitable, equal any corresponding indicated historical performance level(s), be suitable for a particular portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions.

Please note that nothing in this content should be construed as an offer to sell or the solicitation of an offer to purchase an interest in any security or separate account. Nothing is intended to be, and you should not consider anything to be direct investment, accounting, tax, or legal advice to any one investor. Consult with an accountant or attorney regarding individual accounting, tax, or legal advice. No advice may be rendered unless a client service agreement is in place.

Procyon Advisors, LLC is a registered investment advisor with the U.S. Securities and Exchange Commission (“SEC”). This report is provided for informational purposes only and for the intended recipient[s] only. This report is derived from numerous sources, which are believed to be reliable, but not audited by Procyon for accuracy. This report may also include opinions and forward-looking statements which may not come to pass. Information is at a point in time and subject to change.

06 May

Posted at 18:09h in Market Commentary by

Equity markets continued their advance throughout the 1st quarter of 2024 as the rally that started in October of last year extended. The S&P 500 was up 10.56% in the 1st quarter, and up 28.5% since October, 27th of 2023. If you recall, this market rally was kicked off by the US Federal Reserve indicating that they were at the end of their rate hiking cycle and signaling up to three rate cuts by the end of 2024. While equity markets rallied across the board on this move, the start to this year has not been created equal for all markets. US small cap stocks were up 5.18% in Q1, international developed stocks were up 5.93% and Emerging Markets were up just 2.44%.

Fixed income markets saw volatility throughout the quarter. While they experienced a similar rally to equity markets in Q4 of last year as the Fed pivoted their policy stance, the start of this year has been negative for fixed income markets. The Bloomberg Aggregate Bond index was down -0.78% in the quarter, global bonds were down -2.08%, and municipal bonds were down -0.39%. The only positive performance within fixed income was from high yield bonds, whose higher correlation with equity markets led to some price appreciation during the quarter.

Markets have generally been driven by interest rate expectations over the last five months. The Fed’s signal towards cutting interest rates in 2024 was generally well received by the market. However, markets continued to price in cuts to a level above and beyond what the Fed had signaled. Early in the 1st quarter, the federal funds futures market had priced in up to six rate cuts this year.

We believed the public markets got too far ahead of the Fed at that point. We continued to keep our portfolios in a position that would be less sensitive to changes in interest rates as we believed the market needed to come closer to the Fed’s indication. If the markets were correct, and we received six rate cuts this year, we would expect a significant economic event to take place that would force the Fed to aggressively support the economy in short order. However, the underlying employment picture remains strong, and inflation remains at elevated levels (relative to the Fed’s inflation target). This equation simply would not add up to six, and possibly not even three, rate cuts in 2024.

Our focus continues to be on the inflation numbers. Remember when inflation was described as “transitory” back in 2021? We are a long way from that and transitory has extended into a multiyear battle with the Fed pulling out all the stops to try to bring inflation back down to its 2% long term target. While progress has been made, inflation continues to sit between 3-4%, with the most recent CPI reading coming in at 3.5%. The numbers have been closely scrutinized, with many indicating the sticky shelter component of the inflation report as the culprit for higher readings for longer. The fact of the matter is, the economy is strong, and inflation will continue to be higher if demand continues to be present. We saw strong retail sales numbers in March, home prices continue to be sticky, and energy prices are once again on the rise. We don’t expect the inflation readings to be at the Fed’s 2% target any time soon under these conditions. Below is the expected path for core inflation over the next year given various monthly changes in the price index (which has been growing at about 0.3% per month on average over the last 6 months):

Where does this leave us for the remainder of 2024? A strong economic backdrop, robust corporate earnings, and a pivoting fed should mean all systems go. That being said, we have learned over the last several years that the market does an incredible job at pricing in events extremely quickly, and with the strong, rate-driven market rally over the last 5 months, it seems like most of the good news has been largely priced in. The start of the second quarter has not been as friendly to equity markets as participants start to readdress expectations in light of evolving fundamentals.

  • As we enter the second quarter, equity market valuations are elevated relative to historical averages across the board with the highest valuations coming from the large cap growth space. Since the start of the new quarter (through 4/19), US Large Cap stocks are down -5.4% (with growth stocks down -6.15%). US small caps are down -8.29%, international markets are down -4.1%.
  • Fixed income markets were pricing in as many as six rate cuts this year early in 2024. As of 4/19, markets are now pricing in just one cut this year. This is a significant change, and while the probabilities for the end of this year are wide, the highest probability is just one cut (even lower than what the Fed has indicated for 2024).

We expected this year to be volatile across the public markets. The lack of volatility over the past 5 months is not normal. It has been a steady climb since October 27th of last year. Market pullbacks are healthy for long term market efficiency as it gives investors and companies a chance to catch their breath – you can’t sprint your way through a marathon. We have been cautious in our investment approach this year as the market performance drivers have been narrow since last October.

More specifically as it relates to the public equity markets, we have steered away from the obvious higher- valuation names within the market and remain underweight to some of the tech names that have led this market higher.

We have focused more on some markets that we view as undervalued – small cap stocks continue to present a nice entry point for long term investors, international stocks present nice value opportunities, and even within US large caps there are some underappreciated companies that we focus in on.

On the fixed-income side, we have been keeping a close eye on the average maturity, credit quality and duration of our portfolio relative to our benchmark. As market participants aggressively priced in the growing potential for rate cuts, we shortened our duration (limiting our sensitivity to interest rate increases) as we expected rates to find an equilibrium at a level more in line with what the Fed had indicated. We have also since added duration as rate cut expectations have decreased and fallen closer to the Fed target.

What’s next for 2024? We continue to expect market volatility throughout the second, and perhaps third quarters of this year. The ever-escalating events that have transpired between Iran and Israel over the last couple of weeks and months have increased this belief. The looming US Presidential election will also undoubtably drive some market volatility as we get closer as well. Historically a divided government between the White House and Congress has the most statistically significant impact on markets in the 3 months following the elections as shown here:

However, all our collective experience and rigorous study has strengthened a core belief that investing based solely on potential political outcomes or the fear of geopolitical events is not a reliable investment strategy over the long run. We continue to focus on fundamental measures of sustainability and value, including free-cash-flow, revenue and earnings growth, balance sheet quality, and executive leadership. Fundamentally we remain confident in the underlying macro-economic picture. As the volatility unfolds, we will add to equity allocations opportunistically, and prudently across market sectors we see as driving performance in the coming year.

IMPORTANT DISCLAIMERS AND DISCLOSURES:

The information contained in this presentation has been gathered from sources we believe to be reliable, but we do not guarantee the accuracy or completeness of such information, and we assume no liability for damages resulting from or arising out of the use of such information. Past performance is not indicative of future results.

The views expressed in the referenced materials are subject to change based on market and other conditions. This document may contain certain statements that may be deemed forward‐looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur. The information provided herein does not constitute investment advice and is not a solicitation to buy or sell securities.

Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, investment model, or products, including the investments, investment strategies or investment themes referenced herein, will be profitable, equal any corresponding indicated historical performance level(s), be suitable for a particular portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions.

Please note that nothing in this content should be construed as an offer to sell or the solicitation of an offer to purchase an interest in any security or separate account. Nothing is intended to be, and you should not consider anything to be direct investment, accounting, tax, or legal advice to any one investor. Consult with an accountant or attorney regarding individual accounting, tax, or legal advice. No advice may be rendered unless a client service agreement is in place.

Procyon Advisors, LLC is a registered investment advisor with the U.S. Securities and Exchange Commission (“SEC”). This report is provided for informational purposes only and for the intended recipient[s] only. This report is derived from numerous sources, which are believed to be reliable, but not audited by Procyon for accuracy. This report may also include opinions and forward-looking statements which may not come to pass. Information is at a point in time and subject to change.