As we kick off February, markets are weathering multiple assaults on their bull run. We should be rejoicing a pickup in profit growth across multiple sectors with the S&P 500 on pace for a 10% growth in profits vs. 7% anticipated. But earnings are taking a backseat to politics as the Tariff War 2.0 began in full 2/1/25. The opening salvos of Tariff War 2.0 began against Canada and Mexico with a 25% tariff on all imports from Mexico and Canada, exempting energy resources from Canada at 10%. China will also see a 10% tariff on all imports. Importantly, the US government is also suspending the âde-minimisâ exemption for packages and shipments under $800 addressed to individuals. The de-minimis exemption has been a huge driver of global e-commerce â think Temu, Shein, or baubles from Esty international sellers. The point of the de-minimis exemption was to allow insignificant and small items to be disregarded for regulations, duties, or taxes in the context of international trade. Suspending this exemption makes international e-commerce exponentially more difficult and expensive.
Markets are reacting sharply to a new potential threat: what if the USA is not the leader in AI technology and others have figured out how to do it better and more efficiently? That potential game-changing question was brought up by DeepSeek, a Chinese AI app that was recently launched in the US. DeepSeek is majority owned by Lian Wenfengâs quant AI focused Hedge Fund, High-Flyer. They announced the development of DeepSeek in March 2023 and by all measures have exceeded expectations. This app was developed as a response to OpenAIâs ChatGPT, which launched in late 2022 and caused a large scramble to keep up by Chinese tech firms. DeepSeek is like ChatGPT but with a few noticeable differentiators. DeepSeek develops open-sourced free AI models, which means multiple developers can inspect and improve on the software. Their first opensource AI model R1 competes with ChatGPT in areas such as reasoning and code generation and has become the #1 download in the iPhone app store as an AI assistant App. In a very short time (days!) they have overtaken ChatGPT as the top-rated free app. China is flexing its AI muscles this week, and US tech companies seem to be on the back foot.
I have been very good this year, with minimal volatility and producing 20% returns for the second year in a row! I included more friends in my rally this year, not just the Magnificent 7, and I brought along utilities, financials, and industrials. I even invited some of the old-school blue-chip names like WMT and AXP to join the rally party. I only dropped -8% one time all year, not even the normal -10% correction that would be expected. And with the VIX below 15, you can tell I have been consistent and upward trending. I was very nice this year, not naughty!
October has garnered the reputation as a spooky month, and not just due to Halloween. The dreaded âOctober surpriseâ is typically a nasty political shock and the market has experienced extreme historical volThe election overhang is finally behind us, Q3 earnings season is about 90% done, and the bull market has survived its historically weakest period with nary a blemish. But even with all that noise comfortably behind us, there is a feeling now of, now what? And for many, the worry cycle has begun once again. The What-ifs are endless with a new administration looking to pivot policy and potential for unprecedented overhauls to government (DOGE- the Department of Government Efficiency) or the removal of the Fedâs independence loom in the distance. We often warn about waiting for disaster and betting on doom-and-gloom. And we caution investors about reading too deeply into geopolitical events as they are poor predictors of market directionality. atility in Octoberâs past. But we view October through a more positive lens; we are about to enter the strongest 6-month seasonal period for equity markets. Even in election years, November and December are often very strong, typically powered by the Santa Clause rally to close out the year. Â
October has garnered the reputation as a spooky month, and not just due to Halloween. The dreaded âOctober surpriseâ is typically a nasty political shock and the market has experienced extreme historical volatility in Octoberâs past. But we view October through a more positive lens; we are about to enter the strongest 6-month seasonal period for equity markets. Even in election years, November and December are often very strong, typically powered by the Santa Clause rally to close out the year. Â
Portfolio construction is a delicate balance of diversification vs. conviction. Often the proper allocation is driven by Modern Portfolio Theory (MPT) and an efficient frontier, which was developed in 1952 by Harry Markowitz in his dissertation on Portfolio Selection.
A few bad months does not mean the end of a bull market. Itâs often best to bear the short-term loss and hang in there for the high probability of long-term gains and a year-end rally.
Itâs a full-time job staying sane in this world gone mad. Politics are polarized and evolving rapidly, the economy keeps giving mixed signals vacillating between growth and being on life support, and the markets just violently rotated out of the popular mega-cap tech trade and into the unloved small and value sectors.
All that is certain in life are death and taxes, but taxes are about to get a whole lot less certain. We are potentially exiting a period of decades of more tax friendly policies and may see the pendulum shift towards higher tax rates for individuals and corporations.
May gets a bad rap about being a capitulation month in the markets. Sell in May and go away, the adage goes. But itâs not May that is the problem, itâs fall. Typically, when looking at 6-month seasonal patterns, the May-October 6-month period is one of the weakest, but if you look at it on a month-by-month basis, May, June, and July are not horrible months. Â The problem comes in September. September is by far the weakest seasonal month of the year, followed by February, but that is not Mayâs fault.
