Upside Downside amid Uncertainty – 2025 Q2 Commentary

01 Apr Upside Downside amid Uncertainty – 2025 Q2 Commentary

We write this newsletter at a time of uncertainty in the financial markets and the economy. We view it as an interesting time because the data coming from companies and the government does not suggest a particularly difficult period. However, the new Presidential Administration in the United States has injected uncertainty into the market and the economy by not maintaining a constant message. In other words, not giving us and global corporations a clear understanding of the regulations those entities will operate under going forward. Most recently, on April 2, 2025, the Administration announced a blanket 10% tariff on goods from other countries with additional scaled reciprocal tariffs for different countries. As a result, at the time of writing the S&P 500 is more than 20% off its high for 2025 and down 15% year-to-date. Meanwhile, the Value Line 1700, the 1700 largest US stocks equally weighted, is down almost 18% year-to date.

Even with the recent announcement the market seems to be working through what will stick and what will not. Where does this uncertainty leave us? We continue to keep focused, but we are not moving quickly because if we were to react to tariff announcements in the morning, they could be walked back by the afternoon – a situation that has arisen at least twice since inauguration day. Whether we agree with blanket tariffs or not, does not matter. The market wants to know whether we will have blanket tariffs or not. Once they know the direction, good or bad depending on your view, market participants can adjust and run their operations accordingly. However, the announcements of the regulations and the regulations themselves have to be consistent and the market participants have to believe those regulations will be maintained in place for a reasonable period of time.

We would characterize the price action in the markets during the first quarter of 2025 as concerning. However, the pullback follows a period of significant strength. The drawdowns mentioned above are within the bands of normalcy, although, underneath the surface there has been a lot of volatility. If the messaging around tariffs and other regulatory changes from the Administration stays fluid, we would expect that volatility to continue. This could ultimately provide us with fresh opportunities as some stocks get repriced as a result of the uncertainty in the market. We constantly monitor for these opportunities.

We would welcome some lower prices in stocks of companies that we find attractive. That does not mean that we like the volatility that leads to those opportunities. One thing we have discussed with clients in meetings recently is that your ownership of the various stocks in our portfolio does not just represent letters on a screen or a monthly statement. Your shareholdings represent a minority ownership interest in the underlying businesses. During periods of volatility like we have been discussing in this newsletter, we promise you that the management teams of the underlying businesses, of which you own a portion, are not closing the door to their conference rooms and saying, “Let’s stop operations until we gain clarity on regulations going forward.” Instead, you would find these management teams strategizing around how to deal with the uncertainty and trying to forecast the best course of action to maximize the business’s profits.

Several of our portfolio holdings have shifted some manufacturing out of China. Some are determining how trade with Canada and Mexico is going to affect their operations. Some are figuring out whether they need to pullback on marketing spending in case we are going into a period of slower growth. Some are determining whether potential new tariff regimes and other regulations will provide them opportunities for growth. Some are considering raising prices or taking a hit to margins by absorbing price increases. At this point in time, corporate management teams cannot go full bore in one direction or another because of the uncertainty around the messaging and application of proposed regulations to date by the Administration. However, these management teams prepare for several potential outcomes while focusing on their financial bottom lines and protecting shareholders’ – our – interests.

As we mentioned above, we do not have to agree with the Administration’s potential policies, but we and most market participants would like clarity on those policies. This allows market participants to move forward. Below we would like to provide a potential upside surprise and a downside surprise to the market from where we sit today. These are not meant like the end of year predictions – out of consensus thoughts for the following year. These scenarios are meant as things to share with you that we think could happen and therefore we have attempted to position the portfolio to benefit from them.

Upside Surprise
We have referenced several times above that the market desires certainty. We leave room in our thinking that this Administration could gain more focus around its messaging and begins articulating its goals in a clearer and consistent way. The market does not have to agree with the intended outcomes of the proposals or even believe they will be beneficial. As long as the messaging is clear and consistent, the market and corporations will adjust and move forward, as outlined earlier.

Despite not agreeing with the use of broad tariffs, we acknowledge based on Graph 1 below, that room exists to review the tariffs that the US pays and assesses. In 2023 the US had lower trade weighted average tariffs than many nations. Similarly, individuals have managed their own balance sheets through the current economy – decreasing leverage since the great financial crisis. See Graph 2, below. If consumers remained in good financial health, and the administration backed away from blanket tariffs to focus on making things less unbalanced, all while keeping the messaging consistent, we could see near-term market upside from here. We see a number of companies whose stocks are trading at reasonable valuations, and could benefit from certainty.

Downside Surprise
On the other hand, given the messaging and back and forth around tariff decisions over the last two months, we also see the possibility of a confusing communication around something that will affect all Americans at some point – Social Security. The announcement on April 2nd stated that the Administration would not change Social Security, Medicare, or Medicaid benefits. However, based on listening to different mouthpieces of the administration, we believe the administration may want to act on Social Security. If the initial message relates to cuts and it does not clarify who gets grandfathered into benefits and whose benefits will change, there would be an immediate additional draw down in the stock market.

We can try to prepare the stock portfolio for that kind of drawdown, but ultimately it is difficult to balance. Part of our excitement for the investments we have discussed as undervalued comes from our view that at least a portion of the concern with the Administration making changes to Social Security has already been priced into the market. We believe this because the aforementioned mouthpieces have been making statements publicly for a while and the market is a forward looking mechanism and has likely taken at least some of possible changes to Social Security into account.

We approach these potential scenarios as we always do – being prepared for opportunities that arise while also making sure that our clients that have liquidity needs have no issues accessing that money from assets that are not declining in price like stocks could be. Therefore, if you need us to raise cash for distribution, please reach out to us.

In conclusion, we believe the messaging from the Administration could tighten and corporate management teams are prepared to adjust. There could be a further settling in of the market before moving upward off a new base, but these companies are resilient and will figure out how to operate under new rules – if that is the case. We remain optimistic but aware of the recent volatility and what the market wants to steady itself. If the market receives clear and consistent message regarding tariffs and other regulations, we like the upside surprise scenario above.

Morris & Wells Firm Update
Morris & Wells and before that Darrell & King has enjoyed an almost 15 year physical residence at 410 White Gables Lane. Jack had a dream of using a gorgeous patio as a conference room and he actuated that dream, which we all enjoyed. We have also shared important client milestones and covered a lot of life’s meaningful moments around the coffee tables at White Gables. As of June 1, 2025 that will change. Morris & Wells is moving offices to 230 Court Square, Suite 102. We share our excitement about the move with you and cannot wait to host our first quarterly gathering there later in the summer. We feel the building carries over the historic feel and openness of White Gables.

The new building also means that we will be physically closer to a lot of your accountants and estate attorneys. We welcome that connection and the ease of potential in person meetings with your whole financial and estate team. It seems like an opportunity to work in a vibrant business district in the midst of Charlottesville commerce. We hope that you grow to like it as much as we do.

If you have any questions about the above or anything else, please contact us. We love to chat with you. Thank you for your trust and ongoing support. Enjoy the spring!