Observations

Financial Markets Review

In March, U.S. equities continued their downward slide from all-time highs set in February, as all major indices sold off. The S&P 500 suffered its biggest monthly decline since December 2022, falling 5.75%. The tech-heavy Nasdaq and small cap Russell 2000 took the brunt of the selling, down 8.21% and 6.99%, respectively. Much of the weakness was found in the factors that led the market higher over the past couple of years, specifically growth stocks. With the Magnificent 7 weighing on the market-cap weighted S&P 500, the equal-weighted S&P 500 fared a bit better, declining a more modest 3.86%.

Uncertainty surrounding trade policy was the overarching headwind to equities in March. The constant back and forth between the U.S. and our neighbors to the north and south did very little to inspire any confidence amongst investors. As we progressed through the month, the deterioration in the “soft” data, which encompasses sentiment surveys, began to pick up steam. The March Consumer Confidence report came in below consensus and significantly below the prior month’s print, while falling to its lowest level since January 2021. The major driver behind the plunge was the Expectations Index declining to its lowest level in 12 years on the back of slowing growth and higher inflation. These stagflation fears were confirmed at the March FOMC meeting, when the Fed updated its GDP forecast down 0.4% and their PCE inflation forecast up 0.3%. As seen in the chart below, the barrage of negativity eventually found its way into the BofA Global Fund Manager Survey with the quickest contraction in U.S. equity exposure on record.



Source: BofA Global Fund Manager Survey

Despite the negativity and bearish positioning, investors were still not prepared for President Trump’s “Liberation Day”. Much of the commentary leading up to this point was for the April 2nd announcement to be a clearing event, as the tariff announcements would bring about more clarity. However, investors were caught completely off guard by President Trump announcing the highest tariffs in more than a century on almost every country. According to JP Morgan, the new tariffs put in place were effectively the largest U.S. tax increase since 1968. The equity markets reacted swiftly as the S&P 500 proceeded to plummet more than 10% over the ensuing two days, making it one of the largest two-day selloffs in recent memory.



*Plus Citi. Source: Bloomberg

As the news was being digested, nearly every strategist was trying to gauge how the combination of the market selloff and growth risks from tariffs would impact the economy in the coming months. One by one, firms revised their S&P 500 year-end price targets lower and ratcheted down their earnings estimates. Some of the notable revisions include the following:

• BofA – S&P 500 price target cut to 5,600 from 6,666, though they see a wide range of outcomes from 4,000 to 7,000.  Expected hit to earnings in the 10-15% range.


• JP Morgan – S&P 500 base case of 5,200, which is down from 6,500.  The bear case is for 4,000 with two years of no real EPS growth and the probability of a global recession increasing to 60% from 40%.

The truth is no one quite knows how the anticipated tariffs will affect the market, earnings and the economy. And that is because there is still so much uncertainty. From enacting tariffs on a large scale to a 90-day pause to some countries and products being singled out, there is no clarity as to how all of this might unfold. The only certainty in markets is that volatility will be heightened for the foreseeable future, both to the upside and downside. Given that we came from a period of historically high valuations just a few months ago, it should not come as too much of a surprise to see the market correct. The extreme volatility we’ve witnessed over the past couple of weeks may not be healthy, but a market correction is needed from time to time. What is not normal is for a market to continually go higher on the back of a handful of companies. This reset, albeit nerve-wracking, should be viewed as an opportunity for investors to rebalance their portfolios to better align with their willingness and tolerance for risk.

Tandem Strategy Update*

During times like these, it’s important to stress to clients of Tandem that your portfolio is not the market. It’s very easy to get caught up in daily and even minute-to-minute gyrations of the stock market, but that doesn’t necessarily mean your portfolio is acting in kind. As a refresher, we seek to own companies that consistently grow revenues, earnings, and cash flows through any economic cycle. We do not seek to “time” the market, trend follow or invest in the hottest fad, but rather we buy high quality companies with a history of consistency. Sometimes the market underappreciates these types of companies, as seen over the past couple of years. And other times, the market recognizes the value of consistency and stability in a company’s fundamentals, as we’ve started to see this year. However, at no time do we deviate from our discipline, regardless of what is happening in the broader market.

Part of that discipline revolves around the cash allocation in the portfolio. Rather than us haphazardly deciding on how much cash to keep in the portfolio, cash is simply a byproduct of our process. If there are more companies to sell than to buy, cash goes up and if there are more companies to buy than to sell, cash goes down. Through much of the last year, there were more opportunities to liquidate companies that no longer met our criteria or reduce positions based on an unsustainable valuation. This led cash levels to rise, which put us in a position to take advantage of the current market turmoil.

Over the past month, we have been very active in taking advantage of volatility to add to existing core holdings and establish a few new positions. Within our Equity strategy, we initiated a new position in Adobe (ADBE) and within our Mid Cap Core strategy, we initiated new positions in Badger Meter (BMI) and Kinsale Capital Group (KNSL). Medpace Holdings was also a new addition to both our Equity and Mid Cap Core strategies. The accumulation of our existing core holdings across all our strategies – Large Cap Core, Equity and Mid Cap Core – can be found in the table below.



*The transition level activity taken by Tandem is applicable to new manager-traded accounts and new money in manager-traded accounts, not the composite or firm-wide level. New manager-traded accounts and new money in manager-traded accounts are not automatically invested on the first day. Rather, they are transitioned into our strategy over a longer time period that is dependent upon market conditions, this process differs from Tandem’s model-provided strategies, where money is invested on the day the account opens. Strategy level activity is applicable to the composite and action is taken at the firm-wide level.

Source: Source of all data is FactSet, unless otherwise noted.