Investment Policy Committee Update - February 2025

We entered 2025 with a decidedly risk-on stance in our portfolios, reflecting an optimistic view of the strength of the overall US economy and a better-than-consensus outlook on the trajectory of corporate earnings. As we move further into March, we have a better perspective around corporate earnings as well as what we may be able to expect from the Trump administration’s policies. Overall, we remain optimistic about Corporate America and are maintaining our preference for stocks over bonds. That said, we are recalibrating the magnitude of our optimism by reducing our equity overweight during our February rebalance. This risk reduction reflects an acknowledgment that markets have moved a bit closer to pricing in our above-consensus earnings forecasts.

Within our stock allocations, we are increasing our exposure to US, relative to international Developed Market (DM) stocks. Specifically, we are emphasizing exposure to large, high-quality US companies with relative earnings strength while fading the recent DM rally as regional forward earnings guidance cools. Our DM earnings signals have softened, and in our view, the European economy remains meaningfully behind in AI infrastructure buildout and will likely continue to face challenging geopolitical issues in 2025. We are also continuing to reduce our already underweight exposure to Chinese equities. Our objective is to mitigate exposure to potential surprises from tariff negotiations as well as aggressive Chinese government stimulus.

To improve defensive portfolio characteristics and diversification, we are adding further to scarce assets with our February rebalance by adding to our gold allocation - funded from fixed income. Gold has delivered strong results since our last addition with our November 2024 rebalance, and we see further upside catalysts from potential global trade disruption and geopolitical conflict. Additionally, within the fixed income sector, we are shortening duration within US treasuries, expecting we will be able to capture similar term premiums and yields but with less volatility by moving away from ultra-long bonds.

Over the past few months, the markets have been on quite a rollercoaster ride, driven by a series of headline-grabbing events. Following the presidential victory of Trump in November, there was a surge in market returns as investors welcomed his pro-business agenda, which included corporate tax cuts and deregulation. However, the initial excitement of the "Trump trade" began to wane, and the Federal Reserve's hawkish stance on future rate cuts led to a market pullback in December. As we moved into January and February, volatility persisted, fueled by a series of market-moving events. We were hit with an AI-related sell-off, as DeepSeek, a Chinese AI lab, released a low-cost Large Language Model that raised concerns over the need for massive AI hardware spending and US AI dominance. More recently, we’ve experienced significant uncertainty over Trump's tariff policy and inflation. We believe these topics will continue to drive volatility moving forward.

As a team, we are very focused on the health of the economy, consumer, and corporate fundamentals as the long-term drivers of markets. The US economy appears strong on many measures. Unemployment has inched up but remains low at 4.1%, with the labor market averaging 186k new jobs per month in 2024. Consumers are showing resilience, and a tight housing market is contributing to historically high home equity values and a related wealth effect. This uptick in headline sensitivity certainly deserves attention, which is one of several items underpinning our decision to trim to our stock position, while still maintaining a strategic overweight to risk assets.

We will continue to provide these ongoing updates on our views and investment positioning through posts like this, and as we meet with you. If you have questions about our strategy, please let us know and we can review details at our next meeting. While we don’t recommend fixating on short-term market fluctuations, if you would like to check specific investment performance across all your accounts, our online Orion Portal is available 24/7.

Thank you for your continued trust and allowing us to coordinate your asset management as part of our Family CFO services!