The benchmark US Treasury yield has been unusually volatile, pushing to 4.8% during the first quarter, near its 5% high, then dropping steadily through March, ending the period at 4.2%. Following the quarter, the 10-year yield briefly dropped below 4% during the first days of the tariff-driven market turmoil then abruptly inflected back up to near 4.4% as investors grappled with the inflationary possibility of the policies. Treasury Secretary Scott Bessent has made managing the 10-year yield a key administration focus because higher benchmark rates could serve as a check on many other presidential goals, and that focus, including the structure of monthly treasury auctions, had borne fruit prior to the tariff policy announcements. In terms of potential Federal Reserve action, market expectations for further cuts have quickly moved from an estimate of less than 2 quarter-point cuts to an expectation for more than 4 quarter-point cuts in 2025, as tariff policy has increased the probability of economic weakness.

Source: Bloomberg, Texas Regional Bank

At the same time, both CPI and the Fed’s preferred gauge of inflation, Core Personal Consumer Expenditures (PCE), have remained stubbornly high. While oil prices and rates have both fallen, there is the potential for recently enacted tariffs to add to existing inflationary pressure and make rate cuts difficult for Fed Chairman Jerome Powell to justify. The interplay between these two factors, the volatility in benchmark yields, as well as the political element—assuming the Federal Reserve Board might prefer to allow the market to expose any of the bureaucracy’s perceived faults within the administration’s policies—will make forecasting Federal Reserve policy difficult over the course of 2025.

Source: Bloomberg, Texas Regional Bank

Summary

Great long-term investors look forward to periods of market dislocation such as we’ve seen over the past quarter, and particularly over the days following the administration’s announcement of new tariff policy. If it is possible to buy a strong, fast-growing company at a significant discount and an attractive cash flow yield because of a market panic that temporarily drops the stock price by half, then sign us up for shopping in the sale aisle. With a ten to twenty-year hold-period, the problems that markets are focused on today are likely to fade to irrelevance while earnings power and future cash flow distribution compounds relative to our entry price. At the right valuation, the same is true for other investments, including many of the funds and ETFs that dominate most investors’ portfolios.

Unfortunately, investing is, in part, an emotional exercise. The reason the aforementioned stock dropped was profit taking and fear, which leads to second-order effects like margin calls and forced selling, which shows up in lower prices and even more fear, more selling and even lower prices. The reality is that most human beings are simply not wired to be great investors because, by definition, lows are created at moments where the perception is of much more bad news to come, and the fear induced by this process creates a desire for action, the desire to escape, and the easiest action of all is simply to sell, to step aside until the facts are more clear and the markets more stable. Unfortunately, when that stability returns and the fear subsides, the price of the stock or fund will also have recovered, and to re-enter the trade, the investor gives up long-term returns for that soothing feeling of comfort. Warren Buffett’s advice is to “be fearful when others are greedy and greedy when others are fearful,” something that is easy to say, but hard to do when the stocks on the screen are all red, and a ridiculous talking-head on CNBC is pulling at his hair, blowing air horns, and screaming about the1987 crash while mumbling vaguely-understood economic theory. At those moments, the whole long-term investing idea seems different than it did when planning it out in your advisors’ tranquil office and stopping the pain becomes emotionally easier than considering the less immediate concepts implicit in valuation, long-term outlooks and compounding. It has been a while since we got a taste of that kind of panic, but we’ve seen it in markets again over the last few days.

“Be fearful when others are greedy and greedy when others are fearful.”
– Warren Buffett

Investors do best when they use periods of strength and high expectations to trim holdings and adjust portfolio exposures, and when they use weakness like we have seen over recent days to allocate cash into measurable value. Valuation and entry points matter, and markets entered this phase of volatility at very high valuations, leaving room for a healthy correction in prices. Current values are most attractive in value-oriented stocks, certain international markets, and in smaller capitalization stocks. US large cap stocks, while much more attractive than they were 100 days ago, are ‘cheaper’ but not yet ‘cheap’. This is a good time for a thoughtful conversation with your Wealth Advisor to discuss the ways your portfolio can take advantage of the turmoil and, in some cases, the discounts.

It is reasonable to expect continued volatility ahead relative to investors’ experience of the previous two years. A Presidential Administration that is trying to reset long-term economic relationships, a Federal Reserve whose hands may be tied by inflation to a degree that the Federal Reserve prior to 2020 was not, interest rate levels that have compelling reasons to adjust higher due to growing US borrowing needs, and elevated valuation ranges for large cap stocks will all be contributing factors to a regime of higher uncertainty and wider trading ranges. The good news is that volatility creates opportunity, and well-advised investors can position themselves to take advantage. We have a strong and growing team of Wealth Advisors through the state of Texas. Each of them is prepared to have a detailed conversation about your portfolio and the current balance of risks and opportunities.

 

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