While tariffs collect headlines as they rattle markets, I would offer two additional factors that have contributed greatly to the most recent market turmoil. The first is confidence. By changing the world order, confidence has been shaken. Markets are forward-looking discount mechanisms, meaning they make assumptions about the future state of earnings and then assign a probability via a price multiple to that outcome. The greater the confidence the higher multiple. At this point, we have very little to determine what this new tariff world will look like one week from now, never mind one year from now. To what extent will earnings be impacted, in which countries and in what sectors? It’s hard to tell at the moment. As a result, the reaction is to assess this as an increase in risk, and the price needs to be lower to create a higher future return to compensate investors for that increased risk.
The second, and perhaps more important factor, is that U.S. markets are essentially priced to perfection. The consensus entering the year was for 20%+ earnings growth assigned to a CAPE ratio of ~37x, twice the historical average. In environments priced for perfection, anything less than a perfect outcome can lead to price declines. With time we will have clarity. That will lead to restored confidence and the volatility will pass. Long-term earnings will not be zero. Recessions, if there is one forthcoming, are normal parts of a business cycle. This too shall pass. Until then it looks like a bumpy Monday.
Important Disclosures
Integrated Capital Management, Inc. is an SEC Registered Investment Advisor. Registration does not imply any certain level of skill or training. This blog is intended solely to report on various investment views held by Integrated Capital Management. Opinions, estimates, forecasts, and statements of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice. We believe the information provided here is reliable but should not be assumed to be accurate or complete. References to specific securities, asset classes and financial markets are for illustrative purposes only and do not constitute a solicitation, offer or recommendation to purchase or sell a security.
Past performance is no guarantee of future results. Please note that investments in foreign markets are subject to special currency, political, and economic risks. Index performance returns do not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest directly in an index.
Any capital markets views are intended solely to report on various investment views held by Integrated Capital Management. Opinions, estimates, forecasts, and statements of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice. We believe the information provided here is reliable but should not be assumed to be accurate or complete. References to specific securities, asset classes and financial markets are for illustrative purposes only and do not constitute a solicitation, offer or recommendation to purchase or sell a security. Outlook may change at any time given shifting market conditions. Past performance is no guarantee of future results. Please note that investments in foreign markets are subject to special currency, political, and economic risks. Index performance returns do not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest directly in an index
Closed end funds are exchange traded, may trade at a discount to their net asset values and may deploy leverage. When the strategy purchases shares of a closed-end fund at a discount to its net asset value, there can be no assurance that the discount will decrease and may possibly increase. If a closed-end fund uses leverage, increases and decreases in the value of its share price may be magnified. Distributions by a closed-end fund may include a return of capital, which would reduce the fund’s net asset value and its earnings capacity. Closed end funds are offered by prospectus. The prospectus and/or other applicable offering documents contain this and other important information about the investment strategy. You should read the prospectus and/or other applicable offering documents carefully before investing. Investors should consider the investment objectives, risks, charges and expenses of the investment strategy before investing. iCM uses third-party data that is believed to be accurate and complete. All data is subject to change.
TICE Blended Benchmark comprised of 32% S&P 500/8% MSCI EAFE/38% Bloomberg Aggregate Bond/20% Bloomberg Municipal Bond/2% Cash
FTSE NAREIT All Equity REITs TR = U.S. REITs
S&P 500 Index = U.S. Large Cap
Russell 1000 Growth TR = U.S. Large Growth
Russell 1000 Value TR = U.S. Large Value
Russell 2000 Index = U.S. Small Cap
MSCI EAFE ND USD = Developed International Equities
Bloomberg High Yield Corp Bond = High Yield Bonds
Bloomberg Municipal TR = Municipal Bonds; BBgBarc
Bloomberg US Credit TR = U.S. IG Corp Bonds
Bloomberg Aggregate Bond = U.S. Taxable Bonds
Bloomberg Treasury TR = U.S. Treasury Bonds
MSCI Emerging Markets ND USD = Emerging Markets Equities;
JPM GBI EM Glbl Divers TR = EM Bonds;
Bloomberg Commodity TR USD = Broad Basket Commodities
First Trust Composite Closed-End Fund TR Index = Closed End Funds
Use or publication of this material is prohibited without the express written consent of Integrated Capital Management, Inc.
