Sometimes The Economists Are Wrong…Hence We Diversify 

Five Things You Should Know

1. Equity Markets – were up this week with U.S. stocks (S&P 500) up 1.73% and international stocks (EAFE) up 3.19%.  
2. Fixed Income Markets – were steady this week with investment grade bonds (AGG) remaining flat and high yield bonds (JNK) up 0.37%.  
3. Bank of Japan – Japan’s central bank agreed this week to raise their interest rates to a 17-year high and expressed a more bullish outlook on the strength of inflation. The news was largely expected and reconfirmed for prognosticators the likelihood of more hikes, a strengthening Yen, and higher inflation. 
4. Tariffs Off for Now? – Comments from President Trump earlier this week stating that a 10% tariff on China’s goods was still on the table was walked back on Thursday in an interview where Trump said he’d “rather not” impose tariffs. He also noted his recent conversations with President Xi have been “friendly” and expressed confidence that a trade deal could be reached between the two global powers. 
5. Key Insight – [VIDEO & ARTICLE] This week we’ll look at a few different charts that support the benefits of diversification and why it may seem that we’re slow to react to perceived “unrest”. 

Insights for Investors

By Ben Klundt

Sometimes the economists are wrong….hence we diversify 

Over the last two commentaries we got to hear Tim speak regarding common market reactions and biases of investors in Part 1, and then compelling market outlooks for 2025 in Part 2. I’d encourage you to go and give them a read or watch (January 10, January 17). 

The reality is that for every prognostication or opinion that is based upon one’s own belief system and biases, there is an entirely different opinion based upon a differing set of beliefs, with no true way to know which will prove to be correct. In terms of being “correct,” I am specifically referring to the markets being UP or DOWN over a certain period of time.  

Since we know that of the two economists’ differing viewpoints that Tim shared in the prior commentaries one will be more wrong and one more right in 2025. I want to dig into a few charts that I hope help illustrate the challenges of timing markets, and why we run well diversified portfolios while also avoiding being “reactive” during times of perceived “unrest.” Such patience betters our ability to evaluate opportunities and decipher true danger from temporary drama based on current data and facts. 

While this first chart may look like the quilt that used to hang over the back of your grandmothers rocking chair, if you look closely, there is a bit more to it. What you’re looking at is most of the major asset classes that one would invest in to create a portfolio. When you invest your capital with us, we select from many of these to create a portfolio that will be acceptable for you based on your current income needs, time horizon and desire to see stability in your accounts among other personal factors determined in the financial planning process. 

It’s typical to see greater volatility in equities (ownership/stock in a company) versus fixed income (muni bonds, corp bonds, etc.) and with the increased volatility comes higher average returns.  But note that this does NOT mean that the higher performing asset class is the highest every year, many times it ends up being in the bottom quartile and at times experiencing double digit decline. It’s about averages. 

It’s also about valuations, i.e. the price you pay for something. While not a market timing tool, as we try to remind investors, current valuations have a strong correlation to future returns (see chart below, as well as Tim’s commentary from October 18^th of last year). Referring to the chart above, we see that often one year’s “loser” at the bottom of the chart, can be a “winner” near the top of the chart in future years. The key is being disciplined enough to sell some of one’s winners to invest in more out-of-favor assets and then to employ the patience to see that discipline gets rewarded. 

You’ve likely heard it from us before but here it is again, RISK is a permanent loss of capital, while VOLATILITY is a temporary decline in value (even if in the moment it feels permanent). There is always a price to be paid, and for investors the price you pay for long term growth is dealing with bouts of volatility from time to time.  

Now while Tim shared two perspectives as to what could happen in the US equity markets in 2025, it’s important to note that ‘they’ (the economists/analysts making the calls) have been wrong in the past. The key to investing success as relates to becoming financially independent isn’t about making the right call, but just making the decision to start saving, continually adding to your assets and avoiding panic. 

Our goal for the accounts funding retirement is to help create a ride that is tenable and provides the income that you will need during retirement to sustain the lifestyle you desire allowing you to sleep at night. With that in mind, there are sector rotation strategies and asset class “overweighting” that we will employ for those in the accumulation phase or for those who have additional capital to deploy after establishing sufficient income to meet their retirement needs. Such tactics can be taken to enhance one’s probability of creating alpha and achieving higher returns. A run on point made short; we certainly can take risks with assets that aren’t meant for retirement and for those that have a longer investment time horizon and/or risk tolerance.  

The other piece that I have found helpful for reminding myself to stay the course is the “This Time ISN’T Different” chart from First Trust.  
 

In our conversations with clients, we will hear things like “this time is different” or “we’ve never experienced anything like this before!” And you know what, they’re right to some extent. While each situation has its differences, the more important similarity is that each one is yet another challenge for markets to overcome. The market’s resiliency has mattered far more to the eventual outcomes, than any differences in names, dates or stories relating to the various data/news points above. Each different catalyst above related to a market pullback can be “something we’ve never experienced” but time and time again the market rebounds and quite often, pretty quickly when you look closely at this chart.  

Many of these events are what we may call a “black swan” event. An unexpected occurrence that has a negative impact on markets. These are almost impossible to plan for and why one runs a diversified portfolio so that when they do happen, the asset classes that are the most volatile, are allowed to recoup from their drops and you take withdrawals from the asset classes that have held up and are meant to be the buffer for periods such as these.  

Our desire, for all our clients, is to be the steady captain of your financial ship during times of turbulent waters and get you to your ultimate destination navigating through the events that will inevitably happen. It means the world to us that you trust us enough to help you and your family navigate these journeys and storms with you. If you, a family member, or a friend have questions or concerns, never hesitate to reach out as we’re here to help.  

Have a blessed weekend and Go Zags!  

Ben and the team at TEN Capital 

Data, Just the Data

• U.S. Jobless Claims – initial claims rose by 6,000 last week for a total of 223,000, the sharpest weekly rise in six weeks. Ongoing claims also saw an uptick of 46,000 for a total of 1.899 million claims, the highest amount since November of 2021. 

• U.S. Existing Home Sales – rose by 2.2% in December to a seasonally adjusted annualized rate of 4.38 million units. Year-over-year sales have now increased for three consecutive months. Housing inventory came in at 1.15 million, a 13.5% decline from November and the equivalent of a 3.3 month supply. 

• U.S. Consumer Sentiment – The University of Michigan consumer sentiment survey was revised lower to 71.1 in January. Both forward-looking and current condition components saw a decline.  

• Euro Area Manufacturing PMI – rose to 46.1 in January and above expectations, but still remains firmly in contractionary territory. Prices rose but manufacturing optimism rose to a 7-month high.