April 2025 Market Insight | Vann Equity Management

Highlights

Key Takeaways

Important Read
Bull vs. Bear: Which Argument Makes More Sense?
Market Preview: Will There Be Any Tariff Relief?
Economic Cheat Sheet: Focus Turns to Inflation (CPI on Thursday)
What the Tariff Announcement Means for Markets
The Bull Case vs. the Bear Case Post Tariffs

At the time of writing this, Monday morning Futures are sharply lower again (down close to 2%) as there was no meaningful tariff relief over the weekend while administration officials reiterated their support for the current tariff policy. The stock market got absolutely pummeled last week thanks to a material escalation in the global trade war initiated by President Trump’s tariff announcement that shocked us and the markets with much larger than expected tariffs. Stagflationary¹ economic data did not help either, and when the dust settled last Friday the S&P 500 plunged 9.08% for the week and is now down 13.73% YTD.

So far, tariff concerns do not appear to have significantly impacted U.S. economic activity. Most real‑time barometers of GDP growth have decreased, but only slightly. Earnings estimates generally have held up; but we have seen an enormous increase in business uncertainty. This means the potential impact could dwarf what was seen in 2017. Then, the effective tariff rate that the U.S. imposed on all imports only rose from 1.6% to 3.1%. However, this time around, even if deals are made with numerous trading partners, the effective tariff rate is likely to be substantially higher. The measures announced by President Trump on April 2nd would move the rate above 20%, even higher than the peak levels seen in the 1930s. Trade uncertainty is higher than at any time since at least the mid‑1980s; and one widely followed index of economic policy uncertainty has spiked to a level previously only eclipsed at the height of the COVID pandemic.

The bottom line is that higher tariffs pose a significant risk to the current economic outlook. While this risk may ultimately prove to be temporary, we think concerns are likely to get worse before they get better; but they ultimately will get better. Depending on where tariffs end up over the next 6-12 months will determine to what extent inflationary pressures will be transitory or more persistent. The market is currently begging and screaming for clarity around growth and inflation; but fiscal policy is now playing a game of chicken with the entire world trade economies and our Fed. We think many countries will cave in this game, but one thing for sure is that the US Fed is waiting to see more before making any decisions on rate moves; which may now become a foregone conclusion for any hope at a soft landing.

As a result, businesses and consumers appear to be putting some major spending decisions on hold. If this level of uncertainty persists, a U.S. recession—and, probably, a global one as well—are the most likely outlook.

The Important Read

From the individual investor to the experienced fund manager, we are all looking at red across the financial screens, every investor's mind is focused on this one question. Markets are crashing, fear is everywhere, so what does the savvy investor do now? Fear is invading portfolios, distorting judgments, and dragging some of the more experienced investors off track. Every member of our investment team and many of our long-term clients have seen this before, in 2000, 2008, and 2020. And for the long-term investors, we have always made it through, and the market has ended up higher than where we started. Now while on the surface each collision seemed distinct, but beneath each bear market ran the same emotional script: panic first and opportunity second. A time during which history discreetly reveals a pattern for those with selectivity and discernment, the headlines exude a sense of impending doom.

Here is what to know:

The Nature of Fear in Markets—It Distorts Reality

Fear makes smart investors emotional ones. It substitutes survival instinct with solid planning, and regardless of experience, anxiety whispers that this time may truly be different when the market declines rapidly and hard.

We have seen this script before. The dot-com bubble broke in 2000, therefore eradicating ideas of infinite expansion. The financial crisis tore confidence in institutions in 2008. In 2020, a virus crippled global markets in a matter of months. Every moment set off the same response: broad panic, indiscriminate selling, and a dash to safety; which usually comes too late; and each event was followed by a significant market recovery.

"Short run, the market is a voting machine," Warren Buffett said. Long-term, the market functions as a weighing machine. Most investors overlook the fact that anxiety, when it gets louder, becomes a major sign of forced selling. That is not a justification for running. It motivates one to start working.

Common Investor Fears During Crashes

Rational thinking gives place to emotional survival when markets collapse quickly. Fear takes over control; it does not simply occupy the room. We have observed the same repeating worries afflicting investors during every significant downturn, and every time these are the questions that we get asked:

“Am I going to lose everything?” Most extreme fear generates this question; but the answer is Rarely does it ever capture reality. A downturn is volatility, not finality; it is not a catastrophic loss unless you are overleveraged or focused on structurally flawed assets. These are none of our clients.
"It is different this time…." Every crash in the moment seems unheard of. Beneath the headlines, though, the causes are usually excess, leverage, and false expectations and they become painfully known. Many times, believing "this time is different" results in the rejection of tried-for solutions. We have a quantitative process that has generated decades of positive returns over a market cycle. Likely now after the decline many forecasters will jump on the fear wagon and advocate further downside. 10%-20% is a normal correction and we are well within that tolerance.
“Should I sell now and buy back lower?” This is an illusion with peril. Accurately timed market movements rely more on chance than skill. Most who try end up buying back at more expensive rates, selling low, and missing the recovery. We do not try to time the markets, we let earnings dictate the direction of our portfolios.
"Am I missing better prospects somewhere else?" One develops a dread of missing out and then worries about being left behind. Often hunting safer assets already overvalued, investors migrate out of quality into comfort.

They are behavioral traps, loss aversion, recency bias, and herd mentality that drive investors into emotional decisions, irreversibly damaging capital. The long-term winners are the ones that interpret fear as a signal, not as a justification.

The Practical Response

When markets fall, most investors react, but really, they should reassess and make sure they have a process or have a financial advisor that owns a process. Every position in the Vann Equity Management portfolios begin with quantitative metrics and a qualitative catalyst. During times of volatility our team stops and goes back over each and every thesis of every holding instead of panicking. We ask ourselves, “Has the plot changed?” “Has the brink vanished?” “Should we not hold or double down?” If so, we cut it quickly and redistribute it. Our process does not sell on dread. We sell when the sales, earnings, margin or thesis disappear. It is very rare that once cash is raised the individual investor will jump back into the market anywhere near where the bottom is…. Therefore, missing the recovery and locking in unnecessary losses.

Opportunity quantitative screening, not the comfort of cash will win the game of long-term. Volatility causes mispricing. That is when we search for spinoffs, insider-heavy turnarounds, restructurings, and dislocations—that is when we run the most aggressive of our screening process. History supports this: in the twelve months following significant market lows, the S&P 500 has averaged over thirty-five percent. The secret is to use the data and draw from experience.

Live by Smart Money - Insiders buying amid a crisis are not guessing; they are expressing certainty. We monitor management changes, insider buying trends, and dropped spinoffs often missed by other institutional investors. These are choices supported by data, not emotional ones.

The Power of Process Over Panic

In falling markets, the process serves as the shield while emotion is the enemy. There should be no guessing. Volatility sharpens our research-driven, quantitative-led approach; it does not disturb it. Others rush for comfort or cash, but Vann Equity Management follows discipline: spotting dislocations, verifying catalysts, and precisely allocating within the equity markets. This process is about adapting to what is working, not working, and what will work; not about forecasting the bottom. Every crisis we have negotiated has made us more careful, more focused, and surer of our capacity to identify value when the noise level is highest. Anxiety vanishes. Process lives.

Remember, it is time in the market; not timing of the market that accumulates true wealth.

What You Should Do Now

Some investors seek an exit when fear rules the market. The brighter one’s search for opportunities. If you only learn one lesson from this month’s issue, let it be this: sell a portion of your equity portfolio up to 25% if you are retired and need ALL of your money and plan to only live the next five years, but do not sell if it is simply because you are afraid. There is a difference.

At Vann Equity Management, our investment team pays more attention to what is misinterpreted than to what is falling. This is the time to monitor insider buying since, although the public withdraws, insiders are often acting with conviction rather than emotion. This is also the moment to hone our attention to spinoffs, restructurings, and businesses experiencing true internal transformation rather than merely following what seems low-cost. We are using this crash to construct a future-oriented portfolio rather than to fix a faulty one. The market will bounce back, as it always does, but only those who used the drawdown sensibly will stand ahead. Get ready to observe the process. Relax. See the panic as an advantage. Understand we have a repeatable, not reactive, approach that will help you be more suited for what lies ahead than merely surviving what is now.

Final Words

Panic is noise. You are supposed to pick up the signal. Do not herd like others. When others pause, look for mispriced opportunities, separate actual triggers, and act with confidence. While bad judgments do, crashes do not kill investors. Process, patience, and preparation set long-term winners apart from the rest, not luck or timing. If you do need cash and cannot withstand the volatility, please reach out, and let us open another account and decide what amount of cash is right for you to move to the sidelines; based on your individual and family needs, not fear.

Stocks

Stocks collapsed last week as the Trump administration’s reciprocal tariff announcement was much worse than feared and the S&P 500 plunged on Thursday and Friday to fresh YTD lows.

✓ What is Outperforming: Defensive sectors, minimum volatility, and sectors linked to higher rates have been relatively outperformed recently as markets have become more volatile.

✓ What is Underperforming: Tech/growth and high valuation stocks have lagged as yields have risen.

Bulls vs. Bear: Which Argument Makes More Sense?

The bullish argument is: 1) It is not a total washout (the S&P 500 is down sharply but defensive sectors and minimum volatility factors are only down modestly), 2) The Trump Put still exists and 3) The “worst-case” tariff news is now known, and a large wall of worry has been constructed.

The bearish argument is: 1) It is the 1970s again (rampant stagflation driven by a huge policy error), 2) The market is still overvalued and 3) The Trump Put exists but may be in the low 4,000s in the S&P 500.

In the short term, the bearish argument takes it with ease, because the bullish argument is extremely weak in the near term. Essentially, the bullish argument is based on the logic that 1) It cannot get any worse on tariffs, 2) It is all still a negotiation and 3) Eventually Trump will see the error of his ways. The problem with that is it can always get worse (retaliation) and that means a possible constant drip of more tariff threats in the coming weeks.

At this point, even optimists have to doubt the “negotiation” tactic as nothing has been negotiated lower in four months of tariff threats. Then, waiting for Trump to admit an error and change could be an expensive position. Bottom line, the near-term outlook for markets is not good and even if there is tariff reduction this week, we should expect continued volatility after a short-term bounce.

So, why are we not declaring this a bearish game changer?

Because the bullish argument is more compelling in the medium/long term (three-to-six months and beyond). The simple truth is the U.S. economy is stronger than the shock. This policy will either work (which would be very unexpected and defy the known laws of economics) or the pressure from the economy will force the change, either with the president making that change, or the Congress, or election results forcing him to do it. Additionally, unless this policy is a total success, we would be shocked if, within the next two years, the presidential ability to levy tariffs is not removed and requires Congressional approval (something akin to the War Powers Act, only for tariffs).

Bottom line: in the near term we do think it makes sense to continue to hide in defensive and low-volatility equities in our portfolios. However, if these tariffs stay in place for an extended period and the S&P 500 does fall another 10%-20%, our team believes that will present a substantial long-term opportunity. So, while we do not hope that happens, we do think this disruption will present another long-term buying opportunity.

Economic Data (What You Need to Know in Plain English)

Tariffs obviously dominated the market narrative last week but while there are valid economic concerns moving forward, the reality is that March economic data was mostly “fine” and that while the U.S. economy may be losing some forward momentum, the major reports did not show a sudden drop-in activity. Put plainly, U.S. economic data is not that bad and if it were not for tariffs, this week’s data would have been perfectly Goldilocks.

Inflation will come back into focus this week, and we will also get some important updates on growth. Given last week’s tariff announcements, any data that points to stagflation will only add to the already considerable, near-term market headwinds.

Bottom line: This market needs some good news and the sooner the better. Benign CPI readings and better-than-expected jobless claims will not erase stagflation concerns (especially since the impact of tariffs will not show up fully in the data until April and May) but it will push back against them; and at this point, even that could help stocks stabilize.

Special Reports and Editorial

What the Tariff Announcement Means for Markets

Last week’s tariff announcement fell under our “worse-than-feared” scenario as President Trump announced a 10% baseline tariff for all imports and dramatically higher tariffs for major trading partners including China and the EU, which saw the imposition of 34% and 20% tariffs, respectively.

Regarding the belief that reciprocal tariffs are tools to usher in global tariff reduction, that door was left open by the administration as the reciprocal tariffs are based on a proprietary formula that includes tariffs, other monetary barriers such as Value Added Taxes (VAT), and a subjective measure for “cheating,” such as currency manipulation. The point being, it appears that as tariffs on U.S. goods are lowered, so too would U.S. reciprocal tariffs from the U.S. While it wasn’t expressly said that these reciprocal tariffs can lead to tariff reduction, it was strongly implied (and that is a mild silver lining).

From a market standpoint, the big issues now are 1) How long are these tariffs in place and 2) Are there any meaningful exemptions to these substantial tariff increases? If the answers to those questions are “a long time” and “no,” then fears of a dramatic economic slowdown will surge and that will continue to pressure stocks.

From a positioning standpoint, the tariff announcements are worse than feared but they are not, as of yet, a definitive bearish game changer. Our team says that simply because we again do not know how long they will last or whether there will be enough exemptions to remove some of the sting. That said, clearly this is an incremental negative for markets and we do not expect the recent lows to hold in the S&P 500.

Bottom line: While the tariff announcement was not a worst-case scenario (that would have happened if there was no hope of global tariff reduction), it was an incremental negative and we should expect more market volatility in the near term (although we would not take this as a signal to materially de-risk from stocks, at least not yet).

The Bull Case vs. the Bear Case Post Tariffs

Reasonably, there is a lot of confusion and worry from investors about this market, so now that we know the tariff plans, we want to step back and lay out the bullish case for stocks (yes one still exists) and the bearish argument for stocks, so that 1) We are all well versed on these two outcomes and 2) Can confidently and clearly discuss them with clients or prospects.

The Bullish Case

It is not a total washout. The market is not as bad as the index performance implies and it has not been a total market wipeout. For much of yesterday, defensive sectors (XLV/XLU/XLP) were higher on the day and YTD, as each of those sectors is up about 5% YTD. Here is the point: Tech and consumer stocks are getting crushed, but this market remains far from a total wipeout that we see in typical bear markets. The index declines aside, this is still a market that is rotating from tech and consumer names to the rest of the market, and that is encouraging.

The Trump Put Still Exists. This current market calamity is very different from two recent ones (the pandemic and financial crisis), in that, it is manufactured by government policy. President Trump initiated these tariffs with the stroke of a pen and he can reverse them with that same pen or via a post on Truth Social. This is not some existential crisis we cannot solve and if it is a policy error, it can be corrected. To that point, the “Trump Put” still exists, although it may be lurking with the S&P 500 down 20% or 25% YTD (not a great outcome but still, it exists). More to that point, yesterday, two Senators (a Republican and a Democrat) introduced legislation for new tariffs to require Congressional approval. And while that bill will not pass, clearly Congress has taken notice of what is happening. So, while Trump may not be up for re-election, virtually everyone in Congress is, and even Republicans will only tolerate this policy for so long if it fulfills fears and causes a recession.

At Least Now We Know. After three months of speculation, we now know the worst-case tariff scenario. Yes, the president can raise tariffs further if other countries retaliate, but at this point, that is not going to make a difference—We mean, the economic fallout from 56% tariffs on China or 76% tariffs on China will not be that different! The unknown tariff overhang has now been removed and while it has been replaced by worse-than-feared tariffs, the incremental direction for tariffs is now lower, not higher. To that point, as long as it is reasonable to assume these tariffs will be reduced or eliminated in three-to-six months, then this is not a bearish game changer.

Obviously, tariffs are a headwind for stocks and slowdown fears are surging and markets will be under pressure for the near term. But at the same time, the tariff policy is now known, removing a major unknown, and the incremental direction could be towards fewer tariffs, not more. Finally, an economic slowdown is not a guaranteed outcome and, after all, this policy can be reversed with the stroke of a pen. Markets will stay volatile, but the bulls should view this as a long-term opportunity.

The Bearish Case

Welcome to the 1970s. Trump’s tariff declaration will bring back memories of President Nixon’s price controls and go down in history and a colossal policy mistake, but not before it revives stagflation as prices surge and growth slows, putting the nation in an economic vice. First, CPI and other inflation measures will jump on a combination of 1) Consumers front-running tariffs and price increases and 2) Actual price increases. And even if those are one-time disruptions and do not fuel continued inflation (which is dubious at best), the jump in prices will keep the Fed from cutting rates, leaving the economy “on its own.” In sum, it is a repeat of the 1970s, where the Fed could not help support growth and self-inflicted policy mistake after mistake pummels the U.S. economy.

This market is way overvalued. At the start of the year, the consensus earnings estimate for the S&P 500 was about $270/share. That is borderline laughable now. Even if the administration’s goals of a return to U.S. manufacturing are realized, it will take quarters and years for that to occur. In the meantime, corporate earnings will suffer from either 1) Margin compression as they eat tariffs, 2) Revenue reduction as consumers simply do not buy or 3) A combination of the two. Meanwhile, even if we use that $270/year EPS figure, at 5,400 the S&P 500 is still trading at 20X earnings, which is easily 10% too high for a looming stagflationary environment, and we could make a credible case that if these tariffs stay on at current levels, a 15X multiple is more appropriate. That means “fair value” in the S&P 500 could be more than 20% lower from here!

Good news is meaningless in the near term. The administration has basically guaranteed that any good economic data or earnings results (which include the Q1 earnings season that starts next week) will be viewed as meaningless because it all happened before these tariffs. If data is good, it will be ignored for this entire month and, likely, next month as well. Meanwhile, any strong earnings are also now useless as we will have to see how companies perform in the new reality. Bad news, however, is even more meaningful. Investors are scared, so any news that contains even a hint of stagflation will only serve to exacerbate recession concerns and further pressure stocks.

The Trump Put may be in the 4,000s for the S&P 500. Even bears will concede this policy error can be corrected, but it appears that President Trump has a very high pain tolerance with markets and it may take a 20%-25% decline to make the policy error evident. Using history as a guide, the last time the Trump Put was elected was December 2018, when the S&P 500 still fell another 10% past that and it’s not unreasonable to think we could see a 30% decline in stocks if these policies stay in place.

Bottom line: This is a colossal policy mistake and the only question now is, how bad does it get? Unless these policies are reversed soon, the likely answer is… a lot worse.

Our professional thought is that we have found technical support here at around 4850 +/- on the SP500 and are looking for anywhere from a 6-10% of completely oversold conditions. We are beginning to see a washout of supply and believe demand will pick up very quickly and violently.

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February 2024 Market Insight | Vann Equity Management

Highlights

Key Takeaways

What Could Interrupt This Rally?
Weekly Market Preview: Can Inflation and Growth Data Push Stocks Even Higher?
Weekly Economic Cheat Sheet: CPI Tomorrow, Key Growth Readings Thursday.
Special Reports for Advisors and Advanced Renders:
Market Multiple Table Update
Is NYCB A Canary in the Commercial Real Estate Coal Mine?

Stocks

The S&P 500 traded above 5,000 last week thanks to strong Treasury auctions reducing concerns about demand for U.S. debt and on generally solid economic data.

✓ What’s Outperforming: Growth factors, tech, consumer discretionary and communication services have outperformed thanks to strong earnings and continued “AI” enthusiasm.

✓ What’s Underperforming: Defensive sectors and value have underperformed recently mostly as Treasury yields have risen, although they are poised to rebound substantially if there is a surprise of growth.

What Could Interrupt This Rally?

Stocks extended the rally and the S&P 500 hit a new all-time high and finally topped the 5,000 level; the question that investors should be asking is not “Why did stocks keep rallying?” but rather “Why would stocks not keep rallying?”

Our investment team says that because the news and data reinforced the three drivers of this bull market:

Fed rate cuts by May
Solid economic growth (and no signs of a hard landing)
Continued disinflation and strong earnings

Our broader point is this: The burden of proof lies squarely with the bears and so far, the economic data and Fed speak have not done enough to disprove any of those four bullish factors.

Now, while it is true that the burden of proof lies with the bears, and so far, they have not had any news to derail this rally, the reality is there are a number of risks emerging. Here is the point: We get the S&P 500 5k euphoria, but the inevitability of the rally is not accurate. Yes, data has pointed to a sweet spot for growth, inflation, and the Fed; but that will not last forever and there will be bad news for this market, there always is.

So, our investment team wanted to point out the risks that have quietly grown in the background during this rally:

Rate cut disappointment: The chances of a May rate cut have declined from 100% three weeks ago to just over 70% as of last Friday. If those expectations drop below 50%, Treasury yields will rise and that will be a negative for stocks.
Layoffs: The jobless numbers (monthly numbers and claims) are at odds with the long and growing list of companies announcing layoffs. More to that point, the key aspect of the Q4 earnings season was cost-cutting by companies (meaning layoffs mostly). For now, that is supporting earnings; however, it is our thinking that it is inevitable that these start to work their way into employment statistics in the next quarter or two. The bottom line, for now, cost cutting is positive but the number of layoffs.
Commercial real estate (CRE): We profiled this risk last month, and what is notable is it is not just New York Community Bancorp (NYCB) that has been hurt by bad commercial real estate loans. KREF (KKR Real Estate Finance Trust) cut its dividend on bad CRE loans, and this week Treasury Secretary Yellen acknowledged risks in the CRE market, especially to non-bank lenders. The point being, this does not have to be a financial crisis to hit stocks and the likelihood of this being a non-event seems low to us.
Valuations, enthusiasm: Our team has always maintained that valuations themselves are not something that causes a reversal in stocks; and that is the case again this time. Something bad will have to happen to disrupt this momentum higher. However, valuations and enthusiasm do make any reversal more painful and intense; and at this point, the S&P 500 is priced for perfection and could easily give back 10% if we see one of the four positive drivers of this market materially contradicted.

Bottom line: it is important to acknowledge that this rally has been driven by actual good news and bullish expectations being reinforced by actual data. At the same time, the risks that kept investors worried in October (and even throughout 2023) have not been vanquished—they simply have not shown up, yet!

From a positioning and tactical standpoint, we continue to prefer the minimum and lower volatility and value overgrowth. These metrics outperformed through January but have lagged the past two weeks into February, as tech has rallied after earnings; but the risk-reward here continues to imply we should be focused on limiting downside exposure in the event of disappointment, not reaching for upside in a market that is already trading at an unsustainable valuation (above 20X earnings) and has priced in essentially a financial version of Nirvana (low inflation, dovish Fed, solid growth, resilient earnings and no negative surprises). We suppose that can happen, but in our 30+ years in this business, we have not seen it yet (and this is not to be confused with irrational exuberance).

Economic Data (What You Need to Know in Plain English)

There were only two notable economic reports so far in February, but both supported the “No Landing” economic thesis and as such, helped the S&P 500 to touch 5,000 on Thursday. However, one of the reports also echoed a potential rebound in inflation and as such, this week’s CPI, which will be closely watched as a rebound in inflation is not at all priced into stocks (or bonds) at these levels and would cause immediate volatility.

Looking at this month's data, the key growth report was the ISM Services PMI. In December, this number got uncomfortably close to 50 and a drop below that level would be a clear, negative economic signal. However, the January ISM Services PMI bounced back and rose to 53.4 vs. (E) 50.5 and the details were strong as New Orders, the leading indicator in the report, rose to 55 from 52.8, implying future strength.

However, the one negative in this report was a jump in the price index to 64.0 from 56.7. That is a multi-month high and, disconcertingly, it matches the jump we saw in prices from the January ISM Manufacturing PMI two weeks ago. Now, those numbers do not mean inflation is rebounding, but they cannot be discounted either, so we will need to watch inflation metrics (including this week’s CPI) because a surprise rebound in inflation would push yields higher, stocks lower and jeopardize a May rate cut and the idea of five-six rate cuts in 2024.

For now, they are just two numbers, and for a rebound in inflation to pressure stocks we will need to see higher-than-expected readings from CPI and the Core PCE Price Index.

The other notable number this month was weekly jobless claims, which declined slightly to 218k vs. (E) 227k. The weekly claims data continues to confirm other labor market readings that the jobs market remains strong. For us to become worried about the economy, we would need to see weekly claims move through 250k towards 300k and there is simply no evidence of that happening now and as such, the economy remains remarkably strong.

Looking at the growth data, all the important reports come on Thursday. The key growth reports this week is retail sales for the simple reason that the U.S. economy is consumer-driven and as long as retail spending is solid, it is very hard to envision a real economic slowdown.

We also get the first look at February economic activity via the Empire and Philly Fed manufacturing indices (both out Thursday morning). These regional indices have been especially volatile lately and not correlated to the more important ISM Manufacturing PMIs, but they still matter and if both show significant weakness that will be an incremental negative, while coordinated strength will be a positive for markets.

Bottom line: This market has rallied on the ideas of 1) Fed rate cuts (meaning May or earlier), 2) Stable growth and 3) Continued falling inflation. The data this week has the opportunity to continue to reinforce those expectations (and support S&P 500 5,000) or refute them (and pressure stocks), so this is an important week for investors.

Commodities, Currencies & Bonds

Commodities rallied moderately last week thanks mostly to gains in oil, as a lack of a ceasefire in Gaza increased geopolitical tensions and sent oil sharply higher on the week.

Commodities remain mixed as a stronger dollar, fading hopes for economic growth overseas and easing inflation worries continue to weigh on the metals, while escalating geopolitical tensions resulted in energy bucking, the otherwise heavy trend, with oil posting a solid gain.

Trading in gold has remained quiet as futures remained pretty well pinned to the $2,050 level, oscillating on either side before revisiting the key technical level. The modest rise in the dollar and rebound in Treasury yields were negative fundamental influences on gold; however, and there was some meaningful technical weakness in the price action into the weekend leaving risks of a near-term pullback in gold elevated. Look for initial support at $2,000/oz. as the long-term outlook remains bullish given the new record highs in late 2023.

For now, the outlook for the oil market remains cautiously bullish supported by the fact that the term structure of the futures market reverted to backwardation, indicating a bullish imbalance in supply and demand in the physical market.

Bottom line: the best-case scenario for the Israel-Hamas conflict, a ceasefire, is the worst case for the oil market right now.

Special Reports for Advisors and Advanced Renders

Market Multiple Table Update

The February update of the Market Multiple Table clearly and efficiently delivers this message:

The current drivers of stocks and bonds are positive, but at these levels the market has priced in essentially zero chance of disappointment. If we do get negative news from any of these drivers, a 10% correction is not just warranted, it’s likely.

Looking at the changes in this month’s Market Multiple Table, there were several positive changes. Starting with Fed policy expectations, the biggest point is that the Fed formally acknowledged that rate cuts are coming and as such, that is a positive, as it increases the market multiple (which rose to 18.5X-19.5X). Now, our team did see some slight deterioration there, as Powell did push back against a March rate cut. However, as we have pointed out, March vs. May does not really matter and markets do still expect five or six rate cuts in 2024, so the outlook for the Fed remains dovish.

Turning to growth and inflation, the news for the month was also positive. Economic data is showing some signs that momentum may be plateauing, but at the same time there are no hints of a soft landing. On inflation, metrics have largely continued to decline and most importantly, the past six month’s core inflation readings annualized have been below 2.0% y/y, meaning that the Fed has reason to think inflation has returned to target.

Finally, on earnings, the important takeaway from the Q4 earnings season (which just ended) was that the $240-$245 2024 S&P 500 earnings range remains intact; but we have seen mild deterioration as the consensus is now around $243, down from the previous $245.

The market has more than priced in the “Gets Better If” scenario from last month, as the S&P 500 traded above that estimate. The problem, of course, is that while the current drivers of the market are positive, all of them still have the potential to reverse. None of them is a “done deal” and as such, pricing in the “Better If” scenario is aggressive and it is why these levels are not supported by fundamentals (but they are supported by momentum).

Bottom line: The net takeaway is that the outlook for stocks remains positive, but this market also remains “over its skis” from a valuation standpoint. That does not mean the rally cannot continue on momentum, but it is a clear signal that a sudden, sharp pullback in real disappointment should not be a surprise.

Current Situation: The Fed has pushed back on March rate cuts, but May is still likely and markets expect five or six cuts in 2024, economic growth remains solidly positive but not “Too Hot,” inflation continues to trend lower towards the Fed’s 2% target making a rate cut likely sooner than later (May). The current situation reflects the positive drivers that have powered stocks higher since the start of the year, as the Fed has acknowledged rate cuts are coming, economic growth has remained resilient but has not been “Too Hot” while inflation metrics, including the most recent data, are pointing towards a continued decline in inflation. This generally positive set-up has underwritten the gains in stocks YTD.

Things Get Better If: The Fed confirms a May rate cut, economic data stays Goldilocks and inflation continues to decline towards the Fed’s 2% target. This environment would solidify the positive macro environment for stocks and bonds and extend the reasonable valuation for this market above 4,900. This would essentially reflect a “perfect” environment for stocks of 1) Imminent rate cuts (so a higher market multiple), 2) Strong but not “Too Hot” growth and 3) Falling inflation. While not totally justified by valuations, given momentum, in this environment a run in the S&P 500 towards 5,000 would be reasonable.

Things Get Worse If: The Fed materially pushes back on the idea of rate cuts in May and the expectation for five or six cuts this year, economic growth suddenly rolls over or materially accelerates, and inflation metrics (CPI/Core PCE Price Index) rebound. This scenario would essentially undermine the assumptions behind much of the Q4 and January rally and given how stretched markets are, the net result would be substantial declines in stocks and a giveback of much of the October-to-January rally would not be out of the question. While it seems like this outcome is not possible given the current positive outlook, none of this is set in stone and this is a legitimate scenario we need to be mindful of, because it is possible if data breaks the wrong way.

Is NYCB A Canary in the Commercial Real Estate Coal Mine?

New York Community Bank (NYCB) stock has continued to decline following its disastrous earnings report and because the main reason for NYCB’s unexpected quarterly loss was two poorly performing commercial real estate loans (one on a co-op building and one office building) that has resurrected worries that the commercial real estate market may be a brewing crisis on the horizon.

Those concerns are not unfounded and commercial real estate is a legitimate risk to this market and the economy, but it has to be viewed in the appropriate context. So, we wanted to cover:

Why commercial real estate worries are legitimate,
If it can be compared to what occurred in ’07/’08 and,
What any type of commercial real estate stress means for markets.

Why Are People Worried About Commercial Real Estate? The commercial real estate (CRE) market is facing stress and prices are declining thanks to the dramatic Fed rate hikes of the past two years and the lingering impact of the pandemic. Commercial real estate loans are very different from residential mortgages, but two particular differences make CRE especially susceptible to quickly rising rates. First, most CRE loans are “interest only” meaning there is no principal reduction. Second, they are mostly variable rates, meaning the interest rate resets every several years. That means CRE is especially sensitive to a sharp and intense increase in rates (like we have seen over the past two years) because the amount of principal outstanding never declines and because a big increase in interest expense can make CRE projects unprofitable, which can result in fire sales that further depress property values.

This is what has started to happen in recent months as the CRE market is performing poorly. Based on Fed data, the delinquency rates on CRE loans have risen to 1.07%, which is only slightly below the 1.13% Q4 2020 high (at the peak of the pandemic shutdowns). That 2020 reading was the highest level since 2015, so if we see the default rate rise above 1.13%, that will be a nine-year high and a clear sign of deterioration.

Looking forward, it is reasonable to expect delinquency rates to rise as the IMF estimates there is $1.2 trillion in CRE debt that is maturing (and will have to be renegotiated at potentially higher yields) in the next two years. The whole CRE market is valued at slightly over $5 trillion, so we are talking about 20% of the market, not an insignificant amount.

Finally, the deterioration in the CRE market is impacting prices. According to the IMF, an aggregate measure of CRE prices has dropped more sharply than during any other Fed tightening cycle over the past 50 years. Aggregate prices of CRE have declined more than 12% over the past two years, much more than during any other tightening cycle. The office portion of the CRE market is especially weak thanks to the slow return of the American worker to the office and the permanent changes to demand for office space as more workers go hybrid. Default rates for office related CRE projects (which make up more than 13% of the CRE market according to Vanguard) have risen above 5% and are pricing in stress.

Bottom line: a combination of higher rates and workplace changes have negatively impacted the CRE market and default rates are rising, and prices are declining. However, for this to be material, negative influence on broad markets, we must see evidence of contagion, as that is the key to determining when one sector’s stress becomes a major problem for markets.

Can What is Happening in CRE Be Compared to the Origins of the Housing Crisis? So far, thankfully the answer is “No,” but the list of similarities is growing. One of the key factors that made the subprime implosion so damaging to the economy and markets was the failure of regulators and investors to understand the reach and depth of leverage in the deals. In 2007, it would have been laughable to think a collapse in subprime housing would have bankrupted AIG (an insurance company) and General Motors (via the GM Financing unit). Yet, that is what happened.

So, it was disconcerting to learn about rising stress in the mezzanine funding portion of the real estate market, which is linked to CRE. Mezzanine financing is utilized by investors who are looking to buy a property and either 1) Can not obtain enough equity for a conventional purchase or 2) As a way for investors to increase total leverage and boost returns (and risk). Essentially, think of mezzanine financing as covering the gap between equity and a conventional mortgage, but with a higher interest rate and higher risk.

In many ways, it is reasonable to expect any real, significant stress in the CRE market to appear in these mezzanine deals, and according to the WSJ, that is what is starting to happen. The WSJ compiled a list of what it believes to be mezzanine-related foreclosures filed through October 2023 and the number was a record high. The WSJ estimates there were 62 mezzanine-related foreclosures (which are very hard to track because they are not conventional mortgages) in 2023, nearly double the amount in 2022; and given the difficulty in identifying these foreclosures, it is reasonable to assume there are many more in the pipeline.

This is concerning for two main reasons. First, it implies the stress in the CRE market is getting progressively worse. Second, it reveals the liability from CRE debt may run deeper and stretch wider than it is currently believed. We say that because while regulated banks are much better capitalized compared to before the GFC and the Fed and other institutions can quantify those banks’ CRE risk, it is much harder to do so with the mezzanine deals because many of the loans are made by private investment groups such as PE firms and asset management companies. If these mezzanine deals go south, it has the potential to create contagion across previously thought to be unrelated assets. Thankfully, at this point, it would be an exaggeration to link what could happen with the CRE market to the housing crisis.

First, the size of the markets is vastly different. The residential real estate market is valued at over $50 trillion. The CRE market is valued at around $5 trillion. The point being, that the potential problem is much smaller than what we were facing in the residential real estate market in 2007. Additionally, the key from a systemic standpoint remains the large banks and they should be mostly insulated from any substantial CRE risks due to 1) More stringent capital requirements and 2) The fact that they are too big to fail, and in the end, we know how this goes if it gets bad enough (with the Fed extending funding).

But just because this is not lining up to be a repeat of ’07/’08 does not mean it could not impact markets directly and intensely. Headwinds in commercial real estate (CRE) have the potential to impact markets from both a macro and micro-economic standpoint as stress in the CRE market would pressure most assets broadly and specific sectors directly.

Macro Impact: All about contagion. From a macro/broad-market standpoint, the concern here (as it is with all industries facing stress) is contagion, so the focus first is to monitor for any signs of contagion and that brings us to the banks, specifically regional and community banks.

Losers: Banks. Community and regional banks provide the majority of CRE funding and if what we saw with NYCB is an initial sign of CRE-related bank stress, we should start to see it materialize more fully in the community and regional bank ETFs and stocks. QABA is the First Trust NASDAQ ABA Community Bank Index Fund. It has $90 million in AUM and is mostly traded by appointment, but it contains some of the more liquid publicly traded community banks such as Commerce Bancshares (CBSH), Wintrust Financial (WTFC), Bank OZK (OZK), and United Bankshares (UBSI). The community bank stocks in the index are liquid enough that if we see CRE increasing bank contagion risks, it should show up in these names. Bottom line, QABA is a decent indicator for CRE-related banks stress and if it begins to drop sharply, that is a negative signal (it is already down 10% YTD but if that keeps going, it is a clear negative). Regional banks (of which NYCB is considered one, although it is on the larger end of the spectrum) are also a useful indicator for increased contagion signs and like QABA, KRE is down 10% YTD with the majority of the declines coming after the NYCB earnings announcement.

Winners: Treasuries. If we see contagion risks begin to spread regarding CRE risks, we will see a standard risk-off move across assets that will include a flight to Treasuries. Additionally, markets have revealed that they expect any CRE-related stress to result in more aggressive Fed rate cuts, which is why the 10-year yield fell 30 basis points following the NYCB earnings release. If the market believes contagion is spreading, then TLT, the iShares 20+ Year Treasury Bond ETF, should be one of the biggest beneficiaries as investors move to 1) Capture risk-free yields as rates fall and 2) Position for a more likely economic slowdown.

Bottom line: Contagion is the major, macro risk to markets and if we see CRE-related contagion concerns start to grow and spread, that will hit the bank stocks and specifically the community banks (QABA) and the regional banks (KRE) and that is what we will watch going forward to monitor contagion concern. But that contagion will almost certainly result in sharply falling yields and a risk-off move across assets that will benefit Treasuries (but not corporate bonds) and TLT is a likely place to hide and outperform.

Micro Impact: REITs. The majority of publicly traded REITs are focused and exposed to commercial real estate via office and retail properties (malls) and multi-family housing. As such, they are acutely susceptible to a declining CRE market.

Most Vulnerable: Office & multi-family housing focused REITs. We have seen that play out as XLRE, the Real Estate Sector SPDR, has declined 4% YTD. But commercial real estate is a diversified space and for some contrarians out there, the declines in REITs on CRE worries may present some interesting longer-term opportunities, especially if one thinks the Fed will dramatically cut rates.

Within the CRE space, office related CRE projects are considered the most vulnerable to declines. That was the belief before the NYCB earnings debacle and that is even more so, now.

Similarly, there are also concerns about the multi-family CRE segment, which is defined as buildings and projects with more than four residences and this one is of particular importance because while the office segment is just about 13% of the 5% Trillion CRE market, the multi-family segment is about 40% of the CRE market or about $2 trillion dollars. From a macro sense, if we see weakness in the multi-family segment starting to spread (remember one of NYCB’s delinquent loans was on a co-op building), that is a clear broader negative. But from a tactical standpoint, it also makes us want to avoid residential REITs until there is more clarity.

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March 2024 Market Insight | Vann Equity Management

Highlights

Key Takeaways

Market Preview: Updated Risk/Reward Outlook
Economic Update: What you need to know in plain English
Special Reports:
What Is the Bitcoin ‘Halving?’
What the Fed Decision Means for Markets: Still All About Growth

Stocks

The S&P 500 accelerated to new all-time highs thanks to the Fed upgrading its outlook for economic growth this year (and inflation expectations) while critically keeping three rate cuts penciled in for 2024, which reignited soft/no landing hopes in the back half of the week.

✓ What’s Outperforming: Growth factors, including tech and communication services have outperformed thanks to strong earnings and continued “AI” enthusiasm while energy and financials have both had solid runs into the end of the quarter.

✓ What’s Underperforming: Defensive sectors, including real estate and utilities as well as value styles have underperformed recently as Treasury yields have risen, although they are poised to rebound substantially if growth slows down.

This month the stock market rallied to new record highs as the Fed (FOMC) maintained its expectation for three rate cuts this year while simultaneously upgrading its outlook for domestic economic growth. The uptick in inflation expectations was largely dismissed because, as long as, growth holds up, “slightly sticky” high inflation will be tolerated.

However, growth is the key variable as an economic slowdown is not at all priced into the market with the S&P 500 trading above 5,200 at a never-before-sustained next, 12-month multiple of 21.5X expected current-year earnings.

To be sure, history has proven on multiple occasions that markets can remain irrational longer than even the most seasoned investors can remain solvent, which is why it would be a fool’s errand to try to short this market based on fundamental caution right now. There is simply too much bullish momentum behind the advance. To that point, the bullish fundamental mantra for 2024 is still intact based on the expectations for:

imminent rate cuts this year,
continued disinflation,
resilient growth, and
ongoing AI optimism.

All that is great, and we are hopeful this rally can continue to new highs.

Playing devil's advocate, using the round number of 10% to perform a quick risk-reward assessment of the market, the S&P 500 is up nearly 10% YTD; and another 10% gain from here would take the S&P 500 to just shy of 5,800. This would mean an extremely stretched multiple of 23.8X this year’s expected earnings. Conversely, a 10% pullback from here would take the S&P 500 down towards 4,735, which would mean a much more reasonable multiple of 19.5X this year’s earnings and match the “Current Situation” midpoint price target from the March Market Multiple updates.

So, if everything remains perfectly “Goldilocks” between economic growth, inflation, earnings, and Fed policy, there is a case to be made for that next 10% to the upside. However, the number of risks to the overextended rally leaves our investment team a bit skeptical about meaningful further upside and cautious (not bearish) about the YTD gains as one negative catalyst (i.e. a hot inflation print or weak growth report) could spark volatility and a pullback in stocks, which would likely be amplified by the combination of an increased amount of leverage in the long mega-cap tech trade, and a historically overcrowded short-volatility position.

Economic Data (What You Need to Know in Plain English)

This month the market’s focus was on the March Fed meeting, which proved to be a bullish catalyst for markets. Economic data was mixed, as several reports met the perfect “Goldilocks” criteria needed for a soft landing, while others were a bit less encouraging.

Chairman Powell and the company did not disappoint with their Summary of Economic Projections which revealed an upgraded outlook for growth and still mentioned three rate cuts anticipated for this year, which overshadowed a modest increase in their inflation expectations for 2024. Powell confidently proceeded through the Q&A session and there were no surprises, statements or comments that discounted the dovish-leaning outcome of the FOMC meeting. That saw stocks sprint to record highs amid firming confidence in the prospects of a soft landing in 2024.

No material moves in the weekly jobless claims data and a strong Philadelphia Fed Business Outlook Survey provided very optimistic forward-looking indicators and evidence of easing price pressures, as well as, improving corporate margins. Those reports followed modestly soft Composite PMI Flash releases in Europe, which were received as slightly dovish.

Bottom line: There were a few less-favorable reports sprinkled into the economic data this month, but for the most part, the widely followed economic releases supported the idea that the Fed is on track to cut rates multiple times between now and the end of the year with an initial cut still being priced in for some time in the summer. Any data that challenges that thesis, such as hot inflation or very strong growth will present a risk to the 2024 rally.

Commodities, Currencies & Bonds

Commodities traded with a bias to the downside last week with copper the notable laggard with a 3% pullback after previously breaking out to YTD highs. Gold edged higher on dovish money flows while oil retreated from a test of $83/barrel, but the space remains in a long-term uptrend.

Commodities were volatile: Copper extended its 2024 rally early in the week during solid Chinese economic data as Retail Sales and Industrial Output figures both topped estimates. On the charts, the outlook for copper is still bullish after the breakout through resistance earlier in March, and last week’s 3%+ pullback should be viewed as a countertrend pullback in an up-trending market.

Gold has been trading in a broad range of more than $75/oz. as futures closed at a new high in the wake of the dovish Fed. The reason for the new high close was a spike in market-based inflation expectations to the highest in more than four months, and that sent futures to new highs before the less-favorable economic data (Composite PMI Flash and Existing Home Sales) sent the dollar to six-week highs, which poured cold water on the gold rally.

WTI crude oil advanced into technical resistance above $83/barrel ahead of the EIA report and Fed. The EIA data was mostly bullish but not enough to prevent a profit-taking pullback that carried the price down towards $80/barrel.

Bottom line: oil remains in a 2024 uptrend with a solid support band lying between $78 and $79/barrel while the YTD high of $83/barrel is the level to beat for the bulls.

The Dollar Index rallied solidly as the Fed was dovish, but not as dovish as other global central banks. That dynamic paired with still-stronger economic data in the U.S. vs. other major developed countries supported a weekly gain in the greenback.

Dollar strength was the theme in currency markets as the greenback initially pulled back from a test of the March highs after the Fed was initially received as dovish.

The outlook for the dollar remains universally bullish as we approach the end of the first quarter with the U.S. economy holding up as the most resilient, while cracks in growth overseas and faster-than-expected disinflation trends in other major developed economies are weighing on most of the G7 currencies.

The Treasury market reaction to the Fed decision and last week’s economic data was largely dovish and that is an encouraging sign for stocks near term, as it is not just equity investors but also bond traders buying into the idea that the Fed will be able to achieve a soft landing with multiple rate cuts in the second half of the year.

Special Reports for Advanced Renders

What Is the Bitcoin ‘Halving?’

Our investment committee does not focus a lot on Bitcoin for numerous reasons, primarily because it has been largely an un-investable asset class for most clients (either practically or from a risk management standpoint). However, the approval of the Bitcoin ETFs has changed that, and as such, we will be modestly increasing our Bitcoin analysis in our Vann Equity Market Insight, as it is simply a very popular topic among investors. To be clear, please do not take this as an endorsement or opinion on Bitcoin, it is just our team reacting to the changing investing landscape and wanting to make sure our clients have the analysis. Appropriately, a popular Bitcoin-related topic: “The halving.”

Bitcoin’s “anonymous” creator, Satoshi Nakamoto, wanted Bitcoin to stand out from all paper currencies (i.e., dollar, euro, franc, etc.). Nakamoto wanted Bitcoin to hold its (or gain in) value over time, so he built an “anti-inflationary mechanism” into its code.

Per its code, the “block subsidy is cut in half every 210,000 blocks, which will occur every four years.” Therefore, every four years, there is a 50% reduction in the number of new Bitcoins that come to market. This continuous four-year cycle – built into Bitcoin’s code – is fixed and cannot be altered. This is what is known as “the halving” (also called “the halvening”).

The 2024 halving will reduce the number of new Bitcoins mined (the “block reward”) from 6.25 to 3.125 per block – or from 900 Bitcoins produced each day to 450 Bitcoins produced daily. Eventually, the number of Bitcoins will hit its maximum supply of 21 million coins – expected to be by the year 2140. There are roughly 19.6 million Bitcoins in existence today.

Now, Bitcoin has gone through three of these cycles so far. The first was in November 2012. The second was in July 2016. The third was in May 2020. And every time, Bitcoin’s price has rallied substantially.

As one can see in the chart above, the value of Bitcoin lifts off in a four-year predictable schedule. Each gain was realized within approximately 12-18 months from the halving trigger date.

Although nowhere near the gains after the halving occurs, there is also typically a considerable bump in price leading up to the halving. (Like we have seen this year, with Bitcoin breaking $73,000.)

Why does this predictable event result in these outsized gains? It is pretty much Economics 101: As supply decreases and demand remains constant (or increases), the only thing left to move is price.

The next halving is projected to take place around April 19-20, 2024. So, if the past is prologue, some of these gains have been driven by halving anticipation, but more is still to come.

Again, our investment team is not making a “call” on Bitcoin, but we do want you to know 1) What the halving is and 2) The historical impact of it on Bitcoin prices; because while history does not repeat itself, it often rhymes. At a minimum, our team wants our clients to be able to turn any questions on this topic into opportunities to impress their friends.

What the Fed Decision Means for Markets: Still All About Growth

The Fed decision was essentially “not as hawkish as feared” given the recent firm price data, and the practical impact of last week’s decision was to 1) Keep markets expecting a June rate hike and 2) Keep the “impending Fed rate cuts” part of the bullish mantra powering stocks higher intact. So, a not-as-hawkish-as-feared result combined with a still-intact bullish narrative pushed stocks to fresh highs in the wake of the Fed decision.

But if there was a “beneath the surface” take away from the Fed, it is that the major focus for investors right now needs to be on growth and specifically whether growth can hold up. There were some small hints that Powell and the Fed may be a bit more worried about growth than the market currently expects, but the bottom line is that the market is not getting more than three rate cuts in 2024 unless growth rolls over and at that point, it is too late anyway. That matters because it implies that rates are indeed going to be mostly higher for longer and higher rates will continue to act as a headwind on growth.

Put differently, the relief from high rates that investors keyed on during the Q4 rally is not coming. Yes, there will be two to three cuts barring a growth rollover, but we are still going to exit 2024 with fed funds over 4.5%.

Markets have tolerated that disappointment well so far in 2024 for two reasons. First, AI enthusiasm continues to rage and that is helping keep the bull market alive and well. Second (and this is more fundamentally important), it is because growth has held up. The market does not care if we get fewer rate hikes as long as growth is not showing any signs of cracking. But if those signs of cracking do start to appear, then the fact that there will only have been one rate cut by July will matter, a lot, because policy will be viewed as restrictive and the outlook for markets will change, potentially violently.

Bottom line: With Fed policy known and major relief on rates not coming in 2024, we must focus on growth and make sure we see, as early as possible, any evidence of a rollover because if that happens, it is a major problem for this market. And that is exactly what we will be doing for our clients.

For now, the bullish mantra of solid growth, falling inflation, impending Fed rate cuts and AI enthusiasm is alive and well and the S&P 500 has hit new highs. Until multiple points in the mantra are invalidated, the path of least resistance in this market remains higher and pullbacks should be viewed as entry points. While AI headlines have been strong, we expect the rally to continue to broaden.

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Schedule your portfolio review to discuss how these market dynamics may impact your allocation strategy.

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January 2024 Market Insight | Vann Equity Management

Highlights

Key Takeaways

Weekly Market Preview: Five Market Assumptions to Know as we Start 2024
Weekly Economic Cheat Sheet: Jobs Report in Focus
Special Reports and Editorial:
Two Important Differences in 2024
Thoughts On 2024

Stocks

Stocks were little changed last week in very quiet trade as investors wanted a quiet end to a very strong 2023 as the S&P 500 rose more than 24% on the year.

✓ What’s Outperforming: Growth factors, tech, consumer discretionary and communication services, the worst performers in 2022, have outperformed YTD. However, higher yields remain a headwind and as such we do not think this outperformance will last over the longer term.

✓ What’s Underperforming: Defensive sectors and value have underperformed YTD but are still massively outperforming since the bear market started in 2022, and since our primary concern in 2023 was economic growth, we think underperformance will be temporary.

Five Market Assumptions to Know as We Start 2024

The S&P 500 is starting 2024 trading at a very lofty 19.5X valuation and while we are not going to say that valuation is unjustified, we will say that valuation makes several key, positive assumptions about critical market influences in the coming year. How reality matches up with those assumptions will determine whether stocks extend the rally (and the S&P 500 hits new highs and makes a run at 5,000) or give back much of the Q4 Santa Claus rally.

As such, we want to start 2024 clearly defining the five most important assumptions investors are making right now because it is how these events occur vs. these assumptions, and not absolute values, that will determine if stocks and other assets rise or fall in Q1 and 2024.

Assumption 1: Fed cuts rate six times for 150 basis points of easing and a year-end fed funds rate below 4.0%.
The main factor behind the S&P 500’s big Q4 rally was the assumption that the Fed was done with rate hikes and would be cutting rates early and aggressively in 2024. How do we know this is a market assumption? Fed fund futures. According to Fed fund futures, there is a 70%-ish probability the Fed fund rates end 2024 between 3.50% - 4.00%.

Assumption 2: No Economic Slowdown.
Markets have not just priced in a soft landing, they have priced in effectively no economic slowdown as investors expect growth to remain resilient and inflation to decline, the oft-mentioned “Immaculate Disinflation,” a concept that is possible, but to our investment team’s knowledge has never actually happened. How do we know this is a market assumption? The market multiple. The S&P 500 is trading at 19.5X the $245 expected S&P 500 earnings expectation. A 19.5X multiple is one that assumes zero economic slowdowns (if markets were expecting a mild slowdown, a 17X-18X multiple would be more appropriate).

Assumption 3: Solid Earnings Growth.
Markets are expecting above-average earnings growth for the S&P 500 to help power further gains in stocks. How do we know this is a market assumption? The consensus expectations for 2024 S&P 500 earnings per share are mostly between $245-$250. That is nearly 10% higher than the currently expected $225 per share earnings for last year (2023), which points to very strong annual corporate earnings growth.

Assumption 4: No Additional Geopolitical Turmoil.
Despite the ongoing Russia/Ukraine war, Israel/Hamas conflict and escalating tensions between the U.S. and Iranian-backed militias throughout the Middle East, the market’s assuming no material increase in geopolitical turmoil. How do we know this is a market assumption? Oil prices. If markets were nervous about geopolitics, Brent Crude prices would be solidly higher than the current $77/bbl. Oil prices in the high $80s to low $90s reflect elevated geopolitical concern while prices above $100/bbl reflect real worry.

Assumption 5: No Domestic Political Chaos.
This is an election year in the U.S. The Republican front runner, Donald Trump, is facing a long list of various civil and criminal charges along with challenges to whether his name will be on the ballot in certain states. Meanwhile, there has been no long-term compromise on funding the government, so shutdown scares remain a real possibility; and that is before we get into the heart of election season later this year. How do we know this is a market assumption? Treasury yields. A 3.80%-ish yield on the 10-year Treasury does not reflect much domestic political angst. If markets become nervous about the U.S. political situation and/or fiscal situation in the U.S., the 10-year yield would be sharply higher than it is now (well above 4%, like we saw in the late summer/early fall).

Bottom line: These market assumptions are not necessarily wrong. Events could unfold the way the market currently expects. However, these assumptions are aggressively optimistic, and it is how events unfold versus these expectations and not on an absolute scale that will determine how stocks and bonds trade to start the year.

Economic Data (What You Need to Know in Plain English)

The year starts off with a proverbial “bang” from an economic standpoint as we get the three most important economic reports of each month over the next four days. Now that the Fed has dovishly pivoted, “bad” data will not remain “good” for stocks very long, so expect the markets to begin to react negatively to soft reports here. The reason is clear: Now that the Fed has pivoted, bad economic data just means an increased chance of an economic slowdown, something that is not priced into markets with the S&P 500 trading at a 19X multiple.

The key report this week is Friday’s jobs report, which should be a solid, yet unspectacular, number of job adds with a slight drift higher in the unemployment report. Put simply, markets continue to need Goldilocks jobs data to support stock prices, but the margin for error of the report is much smaller now that the Fed has dovishly pivoted.

The next most important economic reports this week come on Wednesday and Friday via the ISM Manufacturing and Services PMIs. The ISM Manufacturing PMI remains below 50 and is expected to stay there while the ISM Services PMI remains slightly above 50. The reason these two reports are important is that if both reports drop below 50 for a few months, that would be a very accurate historical indicator of a looming economic slowdown. The point is that markets will want to see improvement in the ISM Manufacturing PMI and stability (so staying comfortably above 50) in the Services PMI.

The final important economic reports of the week are labor market-related via today’s JOLTS (Job Openings and Labor Turnover Survey) and Thursday’s weekly jobless claims. As mentioned, the labor market broadly remains strong but not too hot and markets will want to see data that reinforces strong employment, but not so strong it increases wages and a bounce in inflation.

Bottom line: Now that the Fed has dovishly pivoted, investors will want to see stability in the economic data above all else in Q1, because if economic data starts to roll over from here, more expected Fed rate cuts will not help (they will be too late) and with the S&P 500 trading above 19X next year’s earnings, there simply is zero economic slowdowns priced into stocks (although Treasuries would rally in the face of soft economic data).

Commodities, Currencies & Bonds

Commodities decline slightly following a reduction in geopolitical tension and despite a continued decline in U.S. dollar.

Commodities declined broadly in the last week of 2023, thanks mostly to declines in oil as geopolitical tensions eased slightly.

Gold changed little during the week as there was little data or Fed speak to trade-off. Midweek dollar declines helped boost gold, but the impact was modest, although gold remains within striking distance of the new all-time highs hit in early December. Looking forward, we can expect gold to continue to trade inversely off the U.S. dollar and as long the dollar remains broadly under pressure the outlook for gold will remain positive.

OIL MARKET UPDATE

Looking forward, geopolitics will remain an important influence on oil but, barring a major escalation in the Russia/Ukraine war or Israel/Hamas conflict, the larger supply/demand picture will drive oil prices, and as we start the year there remain real concerns 1) If global demand can stay resilient (there are hints the global economic is slowing) and 2) If OPEC+ can remain disciplined on supply (their actions late last year underwhelmed traders) and as such the outlook for oil prices remains mixed over the longer term.

Special Reports and Editorial

Two Important Differences in 2024

Each year in markets is different (it is one of the reasons this is such an interesting business) and there are usually many changes from one year to another. However, there are two important changes that will occur in 2024 that we want to point out because these changes mean that events that were tailwinds for stocks in 2023 (falling yields and earnings results) will become neutral to potentially negative in 2024.

Change 1: Falling Yields Will not be Positive for Stocks
There were two overarching reasons for the rally in 2023: The first was AI enthusiasm powering the “Magnificent Seven” stocks higher and pulling the S&P 500 with it. The second was the expectation of a dovish Fed pivot that essentially saved the 2023 rally in late October.

Falling interest rates were a clear positive in 2023 because they 1) Eased valuation headwinds and 2) Signaled that Fed hikes were ending, which reduced recession changes. However, as we start 2024, the dovish Fed pivot is fully priced into stocks with the S&P 500 just under 4,800 and the market has priced in six Fed rate cuts and year-end 2024 fed funds below 4.00%.

So, the dovish pivot and expected easing policy is already priced into stocks and Treasuries. If we see the 10-year Treasury yield continue to fall to the low 3% or sub 3% range, that is not going to be a major tailwind for stocks because that will not be forecasting a dovish Fed, it will be forecasting slowing growth. Those falling yields will then become a harbinger of a potential economic slowdown and not the welcomed signal of a Fed that is finally turning dovish.

Change 2: Earnings Results Will not Have Low Expectations to Excuse Poor Performance
S&P 500 earnings were not particularly great in 2023 but they were much better than some of the awful expectations that were prevalent when the year started.

To put some numbers on it, many analysts penciled in 2023 S&P 500 earnings between $220 and $225, but there was a definite minority that had estimates much lower, anywhere from $185 to $215, as these analysts expected the recession that never appeared.

Now, as we start 2024, it is the total opposite. Consensus S&P 500 earnings growth is nearly 10% year over year, well above the longer-term averages of around 5%-ish annual growth. Keep in mind, at 4,800 the S&P 500 is trading over 19.5X that $245 earnings estimate, which means there is little room for disappointment from a valuation perspective.

So, “ok” earnings will not be good enough and we got a preview of that in the Q3 numbers (which were not great) and especially in December as results were generally poor. That does not mean the upcoming Q4 earnings season (which begins in mid-January) will not be positive, but for it to be positive it will have to be because of actual good results, not “better-than-feared” results that were good enough in 2023.

Bottom line: The markets will need something “new” to power stocks higher in 2024 because the dovish pivot (which powered stocks higher since October) is fully accounted for while low expectations for earnings and economic growth no longer exist. That does not mean we will not get new, positive influences on stocks, but it will have to come from something new in 2024 because the “low-hanging fruit” of dovish pivot and not-as-bad-as-feared earnings have already been picked to fuel the Santa rally.

Thoughts On 2024

As we look towards 2024, we cannot help but feel as though we are all in a proverbial canoe; and the investing public is violently running to one side of the canoe and then the other, causing it to nearly tip each time. Here is what we mean.

Think back to December 2021. The S&P 500 had just hit an all-time high. The impact of the pandemic was still being felt but tech companies were surging and leading the market higher. The investing public was convinced we were in a new “hybrid” world that was here to stay, fueled by stimulus and forced savings, growth was strong, inflation was rising, and markets admitted that the Fed needed to hike rates in 2022 but did not think it would be that bad. Put simply, market sentiment was resoundingly bullish and while investors admitted there were some issues, they were minimized and the outlook was very, very positive.

Of course, that optimism was unfounded. The Fed was much more aggressive on rate hikes, inflation exploded, growth slowed, and the S&P 500 dropped 19.4%. Put simply, consensus was universally bullish, and consensus was wrong.

Now think back to December 2022. Investors were despondent. The S&P 500 was ending the worst year in over a decade, the Fed was massively hiking interest rates, inflation was not breaking, recession fears were surging, and investors were convinced we were facing either 1) Stagflation or 2) An imminent recession.

Of course, that pessimism was unfounded as growth remained resilient, inflation was broken and the Fed dovishly pivoted. Put simply, the consensus was universally bearish, and the consensus was wrong.

Now, in December 2023, the consensus was absolutely bullish. The soft landing was all but assured. The Fed will cut six times in 2024 but not because of slowing growth and instead because inflation is about to go into some sort of freefall. Despite numerous geopolitical hot spots, none of them will get materially worse, U.S. politics will not be a problem and despite a potentially slowing economy and margin compression, companies in the S&P 500 will grow earnings by nearly 10% this year. The 5,000 mark on the S&P 500 is not a matter of “if,” it is a matter of “when.”

That all may come true and that might be exactly how it works out, but we have been in this industry long enough to know that when everyone seems to be on one side of the proverbial canoe, it is time to get nervous and move to the middle.

In December 2021, we cautioned against this universally bullish outlook as too complacent. Last year, we cautioned against the very bearish outlook saying under the surface, positives were in place.

Those were not predictions. Rather, they were observations stemming from 20+ years of “new year’s” in the markets. The reality of a market in any given year hardly ever matches the consensus and it almost never matches the consensus when it is this sure of the outcome.

We hope the consensus is right. We hope that in the year we are writing to you and the S&P 500 is above 5,000 and that it has been a great year for your businesses. But this universally bullish expectation makes us think everyone is on one side of the canoe when in reality, we need to be in the middle because things can go wrong.

We can still have a growth slowdown and a recession. It is not impossible. Earnings growth can falter as demand slows and margins compress. Geopolitics can provide real, negative surprises. Inflation can bounce back. Domestic politics can present a surprise (it is an election year). None of these events would be shocks, although thankfully, they are not the most likely case.

Bottom line: We view part of our job as making sure you have someone giving you agenda-free analysis that pulls you back to the middle of the proverbial canoe, and as we start 2024 that is what you can expect our Investment team to continue to do.

Ready to Navigate These Markets Together?

Schedule your portfolio review to discuss how these market dynamics may impact your allocation strategy.

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Future-Proof Your Wealth: Top Investment Strategies for 2025 | Vann Equity Management

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Future-Proof Your Wealth: Top Investment Strategies for 2025

By Vann Equity Management • August 20, 2025 • 5 min read

Graph showing investment growth trends for 2025

As we approach 2025, market dynamics are shifting with technological advancements, economic uncertainties, and global changes. While no strategy guarantees success, these five steps can help you consider ways to build a resilient portfolio. Remember, this is educational information only.

1. Assess Your Financial Goals and Risk Tolerance

Begin by evaluating your long-term objectives, such as retirement or education funding. Understanding your risk tolerance—whether conservative, moderate, or aggressive—helps in aligning investments accordingly.

Why It Matters

Clear goals provide a framework for decision-making, ensuring your portfolio matches your timeline and comfort with volatility.

Key Takeaways:

Define short-term vs. long-term goals.
Evaluate how much risk you can handle.
Consider consulting a professional for personalized assessment.

2. Diversify Across Asset Classes and Sectors

Spread investments across stocks, bonds, real estate, and alternatives to potentially reduce risk. In 2025, consider exposure to emerging sectors like renewable energy and AI.

Diversification Insight

“Diversification does not eliminate risk but can help manage it by avoiding over-reliance on any single asset.”

Include a mix of domestic and international assets.
Explore ETFs for broad market exposure.
Monitor correlations between assets.

3. Incorporate Sustainable and Innovative Investments

Look into ESG-focused funds and technology-driven opportunities, as these areas may offer growth potential amid global trends.

Emerging Trends

Sustainable investing aligns with regulatory shifts, while innovation in tech could drive future returns.

What This Means:

Research ESG criteria for alignment with values.
Consider sectors like clean energy and digital transformation.

4. Implement Risk Management Techniques

Use tools like stop-loss orders or hedging to protect against downturns. Stay informed about economic indicators that could impact markets in 2025.

Risk Considerations

Volatility from inflation or geopolitics requires proactive monitoring.

Set allocation limits for high-risk assets.
Build cash reserves for opportunities.
Review insurance and estate planning.

5. Regularly Review and Adjust Your Portfolio

Schedule periodic reviews to rebalance and adapt to changes. Continuous education on market trends is essential.

Ongoing Process

Markets evolve, so flexibility is key to long-term resilience.

Key Takeaways:

Rebalance annually or after major events.
Stay educated through reliable sources.
Seek professional guidance as needed.

The Bottom Line

Implementing these steps can help you navigate 2025's investment landscape thoughtfully. Always remember that past performance is not indicative of future results.

Building wealth requires patience and informed decisions—start with education and professional consultation.

This content is brought to you by Vann Equity Management, dedicated to providing insights and guidance to help you achieve your financial goals.

Disclaimer: Investing involves risks, including possible loss of principal. This content is for educational purposes only and does not constitute financial advice nor a solicitation for services. Always consult with a licensed financial professional before making any investment decisions. Vann Equity Management is a registered investment advisor, and all information provided complies with SEC and FINRA regulations. No guarantees of performance are made, and individual results may vary.

Vann Equity Management

Sophisticated Portfolio Solutions for Institutional and Individual Investors

info@vannequitymanagement.com vannequitymanagement.com

The ABCs of Stock Market Investing: A Beginner's Guide | Vann Equity Management

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The ABCs of Stock Market Investing: A Beginner's Guide

By Vann Equity Management • August 20, 2025 • 6 min read

Venturing into the stock market can feel like stepping into a vast, uncharted territory. The financial jargon, the dizzying array of options, and the fear of losing money can be daunting obstacles for any beginner. But understanding the stock market is as straightforward as learning your ABCs. This guide breaks down the complexities of stock market investing into three fundamental components: Awareness, Basics, and Commitment.

1. Awareness: Understanding the Stock Market Landscape

The stock market is a marketplace where shares of publicly held companies are bought and sold. When you purchase a stock, you're buying a small piece of ownership in that company, giving you a stake in its success or failure.

What Is the Stock Market?

Imagine the stock market as a giant supermarket. Instead of groceries, the shelves are lined with shares of companies from all over the world. Investors buy and sell these shares, hoping to make a profit based on the company's performance.

Why Invest in Stocks?

Stocks historically offer higher returns compared to bonds or savings accounts.
Stocks can help outpace inflation, preserving your money’s value.
Some companies pay dividends, providing a steady income stream.

Recognizing the Risks

“Stock prices can fluctuate due to economic conditions, company performance, and global events. Awareness of these risks is key to informed investing.”

2. Basics: Building Your Investment Foundation

Before investing, define your financial goals. Are you saving for retirement, a major purchase, or an emergency fund? Clear goals guide your strategy.

Key Investment Terms

Familiarize yourself with basics: Stocks represent ownership; bonds are loans with interest; mutual funds pool money for diversified portfolios; ETFs trade like stocks; diversification reduces risk; and your portfolio is your collection of investments.

Assess risk tolerance: conservative (stability), moderate (balanced), or aggressive (high risk, high reward).
Choose the right account: brokerage accounts for flexibility or retirement accounts like IRAs for tax advantages.
Diversify across sectors, asset types, and geographies to manage risk.

3. Commitment: Cultivating Long-Term Investment Habits

Start small, even with $100, and contribute regularly. Automating deposits ensures consistency.

Stay Educated and Disciplined

Keep learning through financial news, seminars, and investment communities. Avoid emotional investing by focusing on long-term goals and maintaining discipline.

What This Means:

Monitor and rebalance your portfolio to align with goals.
Stay informed to adapt to market changes.
Patience and consistency drive long-term success.

4. Common Pitfalls to Avoid

Steer clear of mistakes that can derail your investment journey.

Risky Behaviors

Timing the market is challenging, even for experts. Lack of diversification increases risk, and high fees can erode returns. Avoid following trends blindly—conduct your own research.

Avoid timing the market; focus on consistent investing.
Diversify to spread risk across assets and sectors.
Choose low-fee options to maximize returns.
Base decisions on research, not popular opinion.

The Bottom Line

Embarking on your investment journey doesn't have to be overwhelming. By embracing Awareness of the stock market landscape, mastering the Basics of investing, and committing to long-term strategies, you're well on your way to building a secure financial future.

Every expert was once a beginner. Start today with patience, knowledge, and perseverance to navigate the stock market confidently.

This content is brought to you by Vann Equity Management, dedicated to providing insights and guidance to help you achieve your financial goals.

Vann Equity Management

Sophisticated Portfolio Solutions for Institutional and Individual Investors

info@vannequitymanagment.com vannequitymanagment.com

Boost Your Credit Score: Do's and Don'ts | Vann Equity Management

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Boost Your Credit Score: Do's and Don'ts

By Vann Equity Management • January 19, 2025 • 5 min read

A good credit score opens doors to better financial opportunities—from lower interest rates on mortgages to better credit card offers and even improved insurance premiums. Whether you're building credit from scratch or recovering from past mistakes, follow these proven do's and don'ts to boost your score and keep it strong.

Understanding Your Credit Score

Before diving into the strategies, it's essential to understand what makes up your credit score. The FICO score, used by 90% of lenders, ranges from 300 to 850 and is calculated based on five key factors:

Credit Score Ranges

Score Range	Rating	Impact
800-850	Exceptional	Best rates and terms available
740-799	Very Good	Above-average rates
670-739	Good	Average rates
580-669	Fair	Subprime rates
300-579	Poor	May be denied credit

The Do's: Building Strong Credit

Pay Your Bills on Time: Payment history is the most significant factor in your credit score, accounting for 35% of your FICO score. Make sure you pay all bills by their due date. Set up automatic payments or calendar reminders to never miss a payment.
Keep Credit Card Balances Low: Aim to use less than 30% of your available credit, but ideally keep it under 10% for the best scores. High credit utilization can negatively impact your score. This accounts for 30% of your FICO score.
Diversify Your Credit Types: A mix of credit cards, loans, and mortgages can positively affect your credit score by demonstrating your ability to manage various types of credit. This credit mix accounts for 10% of your score.
Check Your Credit Report Regularly: Regularly reviewing your credit report helps you spot and dispute any errors that could hurt your score. You're entitled to one free report from each bureau annually at annualcreditreport.com.

Pro Tip: The 30% Rule

If you have a credit card with a $10,000 limit, try to keep your balance below $3,000. Even better, keep it under $1,000 for optimal scoring. Remember, this applies to both individual cards and your total credit utilization across all cards.

The Don'ts: Avoiding Credit Pitfalls

Don't Close Old Credit Accounts: The length of your credit history matters, accounting for 15% of your score. Keeping older accounts open can help maintain or improve your credit score, even if you don't use them regularly.
Don't Apply for Too Much New Credit at Once: Multiple hard inquiries in a short time can signal financial distress, potentially lowering your score by 5-10 points per inquiry. Space out applications by at least 6 months when possible.
Don't Ignore Your Debt: Ignoring debt can lead to collections, which can severely damage your credit score for up to 7 years. If you're struggling to pay, reach out to your lenders to discuss payment plans or hardship options.

Warning Signs to Avoid:

Missing even one payment (can drop score by 60-110 points)
Maxing out credit cards
Letting accounts go to collections
Filing for bankruptcy (can drop score by 200+ points)

Quick Wins for Credit Improvement

Immediate Actions You Can Take

Become an Authorized User: Ask a family member with good credit to add you as an authorized user on their account
Pay Down Balances: Focus on cards closest to their limits first
Request Credit Limit Increases: This can instantly improve your utilization ratio
Dispute Errors: 79% of credit reports contain errors—fixing them can boost your score quickly

How Long Does It Take?

Credit score improvements don't happen overnight, but with consistent effort, you can see meaningful changes:

Expected Timeline

1-2 months: Payment history updates, utilization improvements visible
3-6 months: Consistent payment patterns established, score improvements of 20-50 points possible
6-12 months: Significant score improvements of 50-100+ points for those recovering from major issues
2+ years: Full recovery from bankruptcy or foreclosure begins

The Bottom Line

Building and maintaining a strong credit score is a marathon, not a sprint. It requires consistent good habits, patience, and strategic planning. By following these do's and avoiding the don'ts, you're setting yourself up for better financial opportunities and lower costs throughout your life.

Remember: Your credit score is a tool, not a measure of your worth. Focus on steady improvement rather than perfection, and celebrate the small wins along the way to financial wellness.

This content is brought to you by Vann Equity Management, dedicated to providing insights and guidance to help you achieve your financial goals.

Disclaimer: The information in this article is intended to be general in nature and should not be construed as financial advice. Always seek the guidance of a licensed financial professional for advice tailored to your specific situation.

Vann Equity Management

Sophisticated Portfolio Solutions for Institutional and Individual Investors

📍 Dallas, Texas 📞 (214) 985-0546 ✉️ info@vannequitymanagement.com 🌐 www.vannequitymanagement.com