Current Overview of the Market
The stock market is currently experiencing significant volatility, hit by a dual whammy of deteriorating economic conditions and the onset of a new tariff war with its accompanying inflation fears. Add to the mix global geopolitical tensions and you have a potential for significant problems ahead.
As we’ve experienced before, a forceful approach to policy can cause global markets to feel the wrath. As markets fluctuate, sometimes widely, it’s crucial to review our portfolio structure and the protective measures we have in place.
Portfolio Structure
As we enter periods of volatility, it’s important to understand your portfolio as a whole, not just its components. We tend to focus on the equity-only side of things when markets get volatile, but your portfolio is designed with a number of balance mechanisms, including how it’s constructed.
We’ve structured our portfolios to take advantage of the skew in leadership we’ve seen evolve in the S&P 500 over the past decade.
The “Magnificent Seven” stocks now make up 35.4% of the S&P 500, a significant increase from 12.3% in 2015.
From 2015 to 2024, these seven tech giants returned 697.6%, far outpacing the S&P’s 178.3% return. To take advantage of that skew, we’ve constructed our equities portfolio component to mirror the top 50 of the largest companies in the index.
This structure gives us the advantage when the markets are outperforming, but during times of stress, it can add to short-term volatility. To mitigate that, we construct our portfolios with a fixed income component designed to offset the impact of the more volatile equity markets.
SUGGESTED: “Magnificent Seven” weight in the S&P 500.
Our Protective Measures
Beta Management
Our portfolios are designed to manage beta volatility during peak-to-trough drawdown periods by reducing equity exposure during heightened volatility.
When our portfolio’s beta (a measure of volatility vs. the S&P 500) exceeds 1, we implement a proprietary strategy to reduce risk and align more closely with the index.
Crossover Trigger
We’ve designed a proprietary “Exit Trigger” to move out of equity markets when conditions become unfavorable, helping to avoid sustained bear markets that can ravage portfolios.
Our Trigger mechanism is designed to keep us out when we need to be, preventing premature exits during short-term corrections.
Current Outlook
So, with the S&P 500 up over 10% since April’s low, with retail loading up and hedge fund positioning still depressed, is this just a bear market rally — or something more?
It wouldn’t be the first time that markets and the economy appeared to be falling off a cliff, but the market did not budge. We can thank years of 0% interest rates for conditioning investors to be blindingly optimistic.
The new reality is that it takes a tidal wave of bad news to break the psychological backs of market participants. We are experiencing that today. Markets recently tanked because of a reality they couldn’t ignore—namely, astronomical tariffs applied without mercy.
Now, markets have rebounded under the perception that tariff and trade deals are being worked out. In the absence of solidified deals, stocks are trading as though the problems have been solved. They haven’t been.
If, however, the world turns bullish again overnight, our model will respond and trigger in kind. Until then, we remain on the sidelines.
