Take Advantage of Volatility – 2025 Q3 Commentary

01 Jul Take Advantage of Volatility – 2025 Q3 Commentary

We write to you today from our new headquarters at 230 Court Square, Suite 102, Charlottesville, VA 22902. Currently, we are not fully ready for company, as some office furniture remains on back order. We hope to be fully moved in by mid-July. In the meantime, for local clients who want to meet, our conference table and chairs are in, so we can host you. The above update is important to us, but you are no doubt more interested in the market and portfolio movement since our last newsletter.

When we wrote last the market found itself in turmoil as a result of the Administration’s tariff announcements. At the beginning of April, the S&P 500 was down 15% year-to-date and the Value Line 1700 had fallen 18% year-to-date. In fact, two of the most volatile days in modern market history occurred on April 7th and April 9th (see Table 1 below). In our second quarter newsletter we reminded clients that corporate management teams were and would continue to navigate changes to tariffs and that quality management teams would guide companies through this period of confusion. On May 20th and 21st we hosted a webinar to share our views on what had been going on and how Morris & Wells had reacted to the volatility.

That volatility provided an opportunity to make three changes to the portfolio. Over the course of April 7th and 8th we purchased shares of three companies we had admired for some time, but whose valuations had previously been much higher. In an example of the degree of uncertainty and volatility in the stock market during the last quarter, one of those investments has increased 90% since the time of purchase. A few things had to happen to provide that kind of return. First, the Administration delayed enacting tariffs until July 9th. Second, it also appears like a prolonged war between Iran and Israel was avoided. Third, inflation remained in check and the US economy remained resilient. As we write this third quarter newsletter, the US Administration appears close to completing a trade deal with China. Hopefully, that news signals the potential to work out other trade pacts. We assume the potential of those negotiations would continue to dampen volatility in the stock market.

Additionally, we made one more portfolio change during the second quarter to try and combat potential volatility. Given the low valuation and ongoing need for natural gas, we bought back into an exploration and production company with which we had familiarity. We believe that oil and gas related companies offer further potential stock price appreciation during times of geopolitical and military flare ups around the globe. That is true because in situations like Israel and Iran’s conflict, the price of oil typically rises. That happened during the most recent strikes between the two countries, but oil rapidly came down in price as the two countries along with the US established a framework for a ceasefire. Furthermore, as shown in Graph 1 below, commodities in general appear undervalued relative to the rest of the S&P 500.

When we include a change we made earlier in the year that amounts to five buy/sell combinations in 2025. Our typical number of portfolio changes in a year amounts to four or 20% of the portfolio. So, at 25% “turnover” year-to-date we have made more changes than a typical year, but we would expect that given the volatility in the market. One often undiscussed benefit of increased turnover in the portfolio includes booking losses for IRS purposes. Despite the portfolio rising year-to-date, we have been able to provide taxable client accounts losses to either offset gains or carryforward, which demonstrates the tax efficiency of an active investment strategy like ours. Understanding that the tariff situation has not been fully resolved and that other issues exist that could lead to more volatility during the second half of the year, we remain invested in precious metals miners, oil and gas explorers and producers, and cyber-security providers. However, as we have seen with the market comeback during May and June, we own plenty of companies that are not just defensive in nature but lend some capital appreciation potential to the portfolio.

Our clients’ financial situations differ, so if you need to discuss a change in cash flow needs or if the recent volatility has caused more stress than you would like, please reach out to us. We can discuss increasing your allocation to less volatile assets (for us today that means bonds and money market funds). We intend to avoid having any individual, family, or organization needing to distribute cash from stocks in a declining market. We also want all of our clients to understand that the stock market and our portfolio will continue to be volatile, and the only way to lessen volatility is by putting more of your assets in investments other than stocks.

The most recent bout of volatility did scare people, as you can see in Graph 2 below, illustrating consumers’ view of business conditions. We hope that you feel like we helped reduce some of that anxiety and provided clear explanations of how we observed the tariff issues and what we were doing to take advantage of the resulting volatility. You can always call, email, or stop by the office during times of market or economic turmoil. It is never a nuisance, and we understand there will be many more occurrences in your lifetime of volatility like we experienced in April. Every time we talk to one of you, we gain insight and/or understanding into how one person is observing a given environment. We thank you for your communication over the last couple of months and appreciate every interaction.

If you have any questions about the above or anything else, please contact us. We hope to have you over for coffee and pastries in late July. Thank you for your trust and ongoing support!