Equity Markets

Global equity markets declined 1.3% to start the year as the US market fell 4.3% while international markets advanced 5.2%. US investors are contending with several new political initiatives, government cost- cutting, immigration, and tax policies, but tariffs have concentrated everyone’s attention. After years of underperforming the US markets, international markets attracted investors with lower valuations. Several European governments are considering deficit spending to bolster their defense and potentially grow their economies. The current market decline will provide opportunities to invest in long-term investment themes such as healthcare, artificial intelligence (AI), and data center expansion.

Markets declined significantly in the first week of April as US tariff announcements went beyond expectations, which, if implemented, will negatively impact the number of goods consumers can purchase and could reduce companies’ profit margins and earnings. Investors are trying to determine if the US tariffs are a negotiating tool to get other countries to lower their tariffs or if the intention is to unwind decades of globalization to bring production back to the United States. Some trading partners have already offered zero-tariff policies, but President Trump’s response to those offers will help clarify the intention.

If foreign countries remove their tariffs, it would be positive for US multinational corporations. Their current products and services would be more competitively priced and have better access to those markets. There may be some short-term disruption as consumers and corporations focus on local brands, but both want the best products and services at the lowest prices in the long term.

Imports to the US are $4.1 trillion or 14% of US GDP, while exports are $3.1 trillion. Unwinding globalization and reshoring goods production back home is a long process, and it would take the US years to build sufficient manufacturing capacity. With more than seven million job openings, labor availability would also be an issue. Building in foreign markets with a larger pool of potential workers remains less expensive, and changing those factors to favor the US will take time.

MCM’s investment strategy is to invest in companies that generate revenue, cash flow, and earnings with an acceptable valuation. We are employing a barbell approach, increasing allocations in more stable sectors (healthcare, insurance, utilities, and telephones) and finding opportunities in higher-growth areas (AI technology and certain healthcare companies) that have recently declined, sometimes significantly.

We increased healthcare investments by adding hospitals, robotic surgery, insurance, and information system companies. Healthcare remains a solid long-term theme as worldwide populations age, advancements in medical devices and pharmaceuticals continue, and medicine becomes more personalized.

We increased financial investments by adding insurance companies and brokers. Insurance products are needed in all economic environments, and premiums have increased as replacement costs have escalated over the last few years, benefitting both the insurer and the broker.

The utility sector is profiting from increased power demand tied to data center and household growth. We added independent power producers and utilities in the best position to meet this need. Telephone services are necessary to remain in touch with current events, family, and friends, and demand for their services remains solid in uncertain times.

Technology investment has been one of the best sectors for the last three years, but has come under pressure since mid-February. The subsequent decline provided an opportunity to improve the portfolio with several newer technology names while selling or reducing semiconductor exposure.

We remain focused on monitoring current investment themes, looking for new trends, and adjusting individual companies as valuations extend or business foundations change.

Fixed Income Markets

The start of 2025 has brought a great deal of change for investors to digest. The new administration has initiated a flurry of activity, predominately through the public negotiation of trade agreements. The threat of tariffs is a blunt tool in and of itself. In addition, the public manner in which tariffs are negotiated has heightened the market’s apprehension.

How could the tariff issue play out? Typically, trade negotiations are dry bureaucratic agreements hammered out over long periods behind closed doors. Terms are then publicly announced, allowing importers and exporters to move forward with plans under the new rules. It’s different this time, mostly taking place in the press and on social media. The upshot is that market reaction to every proposal and counterproposal in real-time reflects the uncertainty of not knowing what will be tariffed, how much, and by whom it will be paid.

If public trade negotiations continue and are met with retaliatory tariffs from other countries, the demand for US exports will be hurt. Higher import tariffs will mean higher prices, even for domestically produced goods, leading to concerns about slower spending and higher costs, or stagflation. If, however, these negotiations conclude with an agreement that doesn’t dramatically increase tariffs on foreign goods and result in retaliatory tariffs on US exports, much of the anxiety around this issue evaporates. The growing concern about tariffs has led to delays in hiring and capital spending plans, which ultimately weigh on growth.

The uncertainty also led the Federal Reserve to raise its inflation forecasts and lower its GDP forecast for 2025 in March, pausing the lowering of  interest rates until there is more clarity. The 10-year US Treasury started the year yielding 4.58% and declined to 3.88% on April 4. Despite the uncertainty, the outlook is positive from many other standpoints while the tariff negotiations proceed. Employment remains in good shape. Unemployment is low at 4.2%, initial unemployment claims are running at a very normal 220,000 – 230,000 per week, and private-sector job growth continues to meet population growth.

Housing inflation continues trending downward from its peak in early 2023, and productivity gains related to technological advances, AI, deregulation, and tax cuts are also positive.

The Fed used to feel that the monetary policy under its responsibility was the only lever pushing on
economic activity, practically begging fiscal authorities to do their part, too. Fiscal policy arrived during and after the pandemic, but it was too much, too soon. The inflation that followed eventually led the Fed to start a fight it declared premature victory over last fall, but now must pause.

Given the wide range of outcomes from the current trade negotiations, we expect the Federal Reserve to remain on the sidelines, neither contemplating raising nor lowering rates, until there is far more clarity regarding the impact on prices from tariffs.