Insight & Commentaries

Diversification is often regarded as the bedrock of sound investing. It is widely believed to reduce risk, smooth out returns, and provide stability in uncertain markets. However, this assumption deserves scrutiny, especially when considering the realities of bear markets. Markets Have Two Environments: Bull And Bear Investors must remember that markets operate in two distinct environments: bull markets and bear markets. While bull markets can be enjoyable—lifting nearly all stocks and creating an illusion of stability—bear markets expose vulnerabilities. This reality is particularly important for: A portfolio that thrives in a bull market but collapses in a bear market is…

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There has been much discussion recently about growth. Artificial intelligence and other emerging technologies are fueling expectations for high returns, pushing stock values to record highs. While analysts forecast uninterrupted growth, we question whether some of these expectations are realistic. Markets appear to be pricing in very high growth assumptions, which may prove difficult to meet over time. The Three Pillars of Valuation Three key factors drive valuations: opportunity cost, risk, and growth. Opportunity cost reflects the need for returns that exceed what can be earned in risk-free assets, such as U.S. Treasury bonds. Riskier assets demand a premium to…

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Viewpoint 2025

The U.S. economy in 2024 showed remarkable resilience against inflation, rising interest rates, and global uncertainties. GDP expanded, consumer confidence stayed strong, and household wealth hit $155 trillion. This reflects America’s economic strength, driven by innovation and industrial capacity, though vulnerabilities remain. Fiscal shifts in 2025 offer potential gains but will test the economy’s ability to sustain momentum. The S&P 500’s rise highlights earnings growth and multiple expansion but reveals risks tied to the dominance of the “Magnificent 7.” Concentration risks persist, even as diversification provides balance. With returns likely to moderate, strategic positioning will be critical to navigating the…

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U.S. stock market valuations have reached a historic $60 trillion, with GDP and household net worth doubling since 2009. Employment has grown by 30 million jobs, and S&P 500 profit margins have expanded significantly. However, declining earnings yields suggest stretched valuations, indicating potential risks ahead. Despite differing methods, as the election approaches, both major candidates share goals for developing the labor force, improving housing, and regaining energy leadership. Given these conditions, diversification is prudent; bonds, gold, and emerging markets offer viable alternatives as the Federal Reserve’s (Fed) policies weaken the dollar. Tactical adjustments are needed to balance growth opportunities and…

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We agree with the Federal Reserve’s (Fed) decision to cut rates by 50 basis points. As we will explain, our own analysis of data throughout the past few months confirms the necessity of the Fed’s September rate cut but also highlights a potential underestimation of the economy’s weakening momentum since spring. In reviewing the Federal Reserve’s monetary policy actions throughout 2024, it’s essential to juxtapose their observations with our own insights derived from the WCA Barometer. The Barometer, a diffusion index measuring various economic inputs, provides a nuanced perspective on the evolving economic conditions. We use the WCA Barometer to…

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The U.S. economy grew to a record $28 trillion annualized in Q1, the equity market added $9 trillion over the past year, reaching a record $57 trillion, and our WCA Barometer shows positive (albeit fading) strength. Despite this, popular indices’ gains are driven by a few mega-cap companies, leading to less diversification. Historically, smaller companies thrive in expansions and high-risk environments, yet today’s market favors mega-caps. In this update, we address investor concern about growing market divergences between large and small, how we believe portfolios should be positioned to benefit from what comes next, provide an update of current conditions,…

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The Federal Reserve appears poised to ease off the monetary brake by cutting the policy rate later this year. This potential shift is supported by several indicators, primarily signs of cooling inflation. For over a year, short-term interest rates have been maintained well above the inflation rate, reflecting a stringent monetary policy stance (Chart A, below). Given the inherent lag in the effects of monetary policy, there is a compelling argument for the Fed to start reducing rates to prevent economic deceleration and to support continued growth. Chart A Already Priced In However, there are significant concerns about the current…

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SimilaritiesIn both 1999 and today, the stock market exhibits strong momentum and a herd mentality, particularly among the largest, most valuable companies. This is evidenced by the significant valuation differential between the market capitalization-weighted S&P 500 index and its equally-weighted counterpart. Currently, this differential is as pronounced as it was in 1999, just before a significant technology stock correction. As we delve deeper, it’s crucial to remember that while trees do not grow to the sky, the same holds true for stock valuations. Valuations Adjusted for CyclicalityValuing stocks using long-run averages of earnings, such as those used in the graph…

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From last October’s lows, the total value of stocks in the United States is up another $10 trillion. Sitting near $55 trillion, the U.S. stock market is now within a stone’s throw of record high valuations. At the same time, profits and profit margins for the largest public companies in the S&P 500 index are also at levels not seen before. There are few signs of stress in financial markets, despite much handwringing over the Federal Reserve’s (Fed) next move. If there were real concerns that high interest rates were about to sink the economy, it is highly unlikely that…

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While the market may appear calm, it’s important to recognize the potential risks that could disrupt this tranquility. The combination of inflated valuations and a surge in liquidity is a potential catalyst for inflation and reckless investing. It’s crucial to maintain a state of vigilance as the situation could rapidly deteriorate, a lesson history has taught us. Fire, Meet Fuel By the end of 2022, America’s fortunes had ballooned. At $136 trillion, household net worth was twice what it was a decade earlier. The unemployment rate was at 3.6%, a 53-year low. And economists at the Bureau of Economic Analysis…

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