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- January 2025 Performance
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- Inflation
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- Trade Wars?
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- U.S. Economic Policy
- U.S. Economic Policy
3 Minute Read: Executive Summary
Full Transcript
Derek
Hello. Hello. We are in February of 2025. It feels like it’s been like six months, but it’s only the second month of the year. We’ve got our usual crew, Dave Wagner, Head of Equities, John Luke Tyner, Head of Fixed Income. A lot went on last month and we’re going to touch on not everything but some of the key ones. Thanks for coming on, guys.
John Luke
Yeah, thanks, D-Hern.
Derek
I’m actually down in headquarters today,
Dave
Have some fun. New office.
Derek
So seeing the new office in Fairhope.
John Luke
New digs.
Derek
It’s nice. I’ll tackle the disclosure. The opinions expressed during this call are those of the Aptus Capital Advisors Investment Committee and are subject to change without notice. This material is not financial advice or an offer to sell any product. Forward-looking statements are not guaranteed. Aptus reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs. More information about Aptus’s Investment Advisory Services can be found in its form ADV Part Two, which is available upon request.
So we had a pretty positive month. Here’s the stats. Anything you’d like to cover from a high level?
Dave
Obviously, one month down, 11 to go. It felt like the month of January was about two quarters long. John Luke, add to this list that I’m about to give here. Think of what the market endured here just in January. Tariffs, you had DeepSeek, you had a debt ceiling come back onto play, you had Stargate.
John Luke
Inauguration.
Dave
Half of earnings, an inauguration, a Fed meeting, inflation prints. We had a lot to deal with over the span of January and it feels like the synopsis of January is going to continue for the rest of the remainder 11 months that there’s a lot more emotional volatility that happened in January than market volatility. To Derek’s point, the S&P 500 was almost up 3% off the back of, I would say, the Dow Jones Industrial Average, but no one really follows that anyway. But off of small caps performing pretty well, off of international actually performing even better, returning 5.3%. EM took a little bit of a break this past month relative to their international benchmark because of China. But all in all, the pain trade feels like it continued, the pain trade of stocks continuing to work after two really strong years in ’23 and ’24.
But also the pain trade of some of the under performers over the last 12 months really actually took some market leadership here over the past, call it, three, four, five weeks, really since Christmas itself. But as John Luke most likely would point out, correlations between stocks and bonds continued. It’s something we continue to see both to the upside and to the downside. But all in all, the market had to endure a lot of different extraordinary events over this past month, yet the market continued to climb higher. So I think it just shows you that the resiliency still remains for the market and the burden to proof remains with the bears moving forward into the future.
Derek
Awesome. I’m going to go and we’ll touch on some of those. You touched some of the subjects that were obviously key. You had to narrow it down to get through a discussion here. But the first one that is really obviously present now, it was out there before, now we know a little more about specifics at least a little bit from day to day. So I don’t know what you want to cover here on tariffs, but this was a slide you had selected.
Dave
Yeah, so I’ll have a musing out hopefully this week. I had a musing out last week on DeepSeek, which is going to be another topic of the conversation today. You could probably name the slide “Trade Wars, Drug Wars, Political Wars,” a whole slew of different things. And I might let John Luke talk a little bit more about the tariffs themselves, but I think I need to set the tone of talking about the emotional volatility of tariffs. Okay. I’d actually be the first to say that I’m not worried about tariffs. I think deregulation on a net basis versus tariffs is going to be a net positive for the market, taking consideration the potential cons of tariffs themselves. But the biggest thing you could say to yourself over and over again or to your clients is that investors need to be careful that they do not let their feelings about current President Trump, whether it’s positive or negative, inform their investment decision-making abilities.
Our job is to interpret the market reaction to try to determine whether the portfolio changes are necessary and, if so, when and how they should be implemented. You’re going to notice that statement right there. It says nothing about trying to guess what the Trump administration is going to do next or what policy you or I think could be better. At the end of the day, we’re not politicians, we’re not policymakers, and there’s no point in wasting our time on things which we have no influence or no control over. We have to invest in the world that we have, not the world that we want. I would say, of the 30, 40 calls that I’ve taken over the last two days, there’s a lot of emotional volatility out there and we just cannot let that get the better use of our judgment, whether pro or con Trump.
Because, at the end of the day, I told you you have to follow what the market is telling you. And on Monday, February 3rd when we had the whole tariff debacle, the market was down 50 basis points, y’all. That’s it. Read what the market is telling you. The market’s trying to digest a lot of this stuff underneath this, I understand that, but the market was still only down 50 basis points. If you look at tariffs, I saw a really cool chart, which I actually probably should have put in here instead of this one. Obviously, there’s some movements underneath the hood of the market given these potential changes in government policy and the local movements of currency over the past few days. That should be understood and noted. But that’s over the short run where the market was moving.
But as it relates to the long term, I think you could look at a chart of Trump’s presidency 1.0 versus Obama’s presidency from what, January 2009 to January ’17, if you look and juxtapose the sector returns under those things, you’ll see a very distinct difference in sets of policies and philosophies yet the sectors that won the most during Trump’s first term and Obama’s two terms were almost identical. Investment tech was outperforming, consumer discretionary was outperforming, healthcare outperformed. But even if you look at the bottom end of the stack, which is probably interesting for different reasons, but you saw energy, real estate, and consumers also be the worst performing sectors under Trump 1.0 and Obama. I know there’s probably holes that you could probably poke in this because it’s very simplistic in its nature and different starting points were remarkably different, but it just really shows that this could be an illustration of some just old macro wisdom.
Economics and earnings supersede politics. At the end of the day, economics and earnings drive everything. It trumps policy, it trumps geopolitics. It’s what we need to be focusing on because, at the end of the day, that’s what matters. We need to tune out the noise and focus on what matters. Don’t let our emotional biases drive investment decisions. We just can’t let that happen. John Luke, would you have anything after that diatribe there?
John Luke
No. I think it’s a good rundown. Is it a mechanism to increase taxes or is it a negotiation tool to get what you want from border security, from more participation in defense spending and things like that. And you quickly saw both Mexico and Canada’s tariffs delayed a month as they acquiesced or bent the knee to Trump’s request. And so I think that while Trump will continue to push the tariff narrative that a lot of it’s going to be focused on shoring up domestic policy in a sense to get his way. And you’ve seen pretty positive reactions from a U.S. perspective to everything that he’s done, whether it’s the Panama situation with the canal, whether it’s the Colombian refugees that we were sending back that weren’t accepted and then were accepted after some heavy-handed measures, to both Canada and Mexico’s response yesterday. So I think it’s newsworthy, but like Dave said, it’s really not going to have tremendous longer-term impacts, and I think our last slide will hopefully sum it up together.
Dave
I want to say one more thing, D-Hern before you go there. John Luke, correct me on the statistic. I think Goldman Sachs put it out. It said, for every 5% increase in a universal tariff, it affects earnings per share of 1% to 2%. So say he puts on a 10% universal tariff, that could affect earnings 2% to 4%. And that’s why I’m a believer that deregulation that we could see over the next four years is actually more important than the tariffs themselves on a net-net basis. While tariffs are important and terrifying (pun) here, that we’re using for the topic, I want to focus, I think deregulation needs more attention.
John Luke
I think just keep your eyes peeled for Dave’s musing. It’s going to be full of a lot of stats and just some verbiage, but everything we try to do circle back to the asset allocation and what matters.
Derek
And so you’re saying it just doesn’t matter, Dave? To quote the great Bill Murray.
John Luke
That saying never goes away.
Dave
Multiple different applications, for sure.
Derek
All right, well, let’s get on to what might matter. This has not a near term thing. This has been going on for a few years now. JL, you had included this chart just talking about inflation and where we are with that and where the Fed might take action or not take action. So I’ll let you jump into this one.
John Luke
Yeah, so it’s like tongue-in-cheek talking about inflation still. We would’ve hoped that 30 months later that it would’ve dissipated and been back to normal, but still continue to be above trend. So CPI, ex food and energy, IE headline CPI, is shown in this graphic and it’s looking at a year over year, a three month annualized, and a six month annualized. And, of course, the market is razor focused on the year over year. That’s where you get that number back in the ballpark range of what the Fed’s looking for. We’ve said from the get-go that we thought that the inflation target was very likely more like 3% or at least two point something, more than two. And you can see that you couldn’t drive a truck through these numbers between the different averages or right in the same ballpark, which continues to see some improvement.
I think two more second derivative thoughts of this moving forward is, number one, you’ve seen a significant improvement in new tenant rents, which is a Cleveland Fed shelter inflation tracker. And that we expect will continue to flow through to bring down your headline inflation numbers, especially given that shelters 3-4 odd percent of the calculation. So if you continue to see some improvements, or specifically if we see some drops, that could put the Fed right back in that range. Because remember, they’re targeting PC inflation, which typically runs about 50 to 60 bits less than CPI inflation. So if we’re at 3.2-ish, we’re really not that far off target to get them to actually get involved. The second point is that the comps from last year were pretty difficult, pretty high. And so as those roll off the next four months, that year-over-year number I think will continue to track downward.
So you’re at a backdrop that, while the Fed did not cut last week in their meeting as was expected, I do think that they’re going to continue to watch this data and it very likely could increase the number of cuts that’s expected for the year from between one and two to maybe at least two or maybe even a few more if you see shelter data continue to comply. And I guess one last thought, deficits and deficit spend has been a big topic of ours for the last couple of years as we’ve been running these massive deficits. Obviously, you’ve got the new change in political regime and with that has come the Department of Government Efficiency, DOGE, and what you’re seeing is that they’re quickly at bat at trying to cipher through a lot of the government spending and where the money’s going to.
And so I do think if we can just cut back towards the 2019 type of government expenditures and all of the excess that came basically after COVID, if they can just walk that back to 2019 levels, actually, the statistic is we would be running a surplus now. And so I think that that’s pretty exciting because, number one, nominal growth continues to dominate and grow out of this problem as we think is more than likely to come. But if we get in a situation where the government gets its checkbook in balance a little bit better that you could definitely see some of the pressures on the long end of the curve maybe dissipate where you don’t see the 10-year back knocking on 5% types of levels. And so all to put that in a smaller condensed thought is we’re seeing inflation measures make improvements. There’s a couple steps that I think could be in place over the next couple of months in the short run that give the Fed some ammunition to cut.
And then if you look at the little bit longer trajectory between deregulation and clamping down on spending, that you could see the government get their books back in order. And that’s generally a good environment all around for maybe a little bit more softening in Fed policy.
Derek
Awesome. Yeah, I mean it’s been highly discussed and debated on where the Fed needs to be, where they’re going and they’re really at this point seem to be just hanging out, waiting. So your data points are obviously helpful for thinking through that perspective.
John Luke
And you have Chairman Powell saying that policy is restrictive, and I think I generally agree, there’s been so many things that we’ve talked about in the past that have impacted or lessened the impact of all of the rate hikes, but I do think that they do want to try to get rates back down to something a little bit more in line with inflation. So if the Fed could get rates cut to three and fix some of the other problems, boy, I think that could be a pretty exciting backdrop for stocks.
Derek
Awesome. Well, let’s hit on one of the other exciting, but maybe not as long-term sustainable. This may not matter for the S&P 500 down the road, but it mattered for a whole bunch of companies last week. Dave, this is right up your alley with all the individual names. So I don’t know if you have any comments here or whether you think this is the beginning of concerns and dispersion here or if this is mostly factored in.
Dave
Yeah, the DeepSeek, I do think it was pretty important news. I always tell people that they need to follow the tape and what the tape is telling them and that there’s a lot of noise out there and we need to just focus on what matters to the market. Obviously, tariffs and a few other things that occurred from a headline basis in January I think could help figure out what the market could be doing for the residual part of the year. But I think DeepSeek actually falls in that same exact bucket because a lot of the narrative that has driven the market really since November of 2022 has really been AI focused. We all know that NVIDIA has absolutely crushed it from an earnings perspective and from a return perspective. But what this chart shows you is that the names that have been the biggest beneficiaries from artificial intelligence as we move to artificial general intelligence AGI, is that a lot of the names that have benefited off that especially have actually seen their increase in their valuation, they sold off the most.
So when you’re trying to figure out what the market’s dissecting underneath the hood when it came to DeepSeek, I would have two knee-jerk reactions of what it means moving forward. The first one being, and it really pretends to this chart here, is that it was almost a correlation of one type of sell off that we saw on Monday, January 23rd or whatever day it was. I mean, you had NVIDIA down 16.97%. You had Broadcom down 17.4%. So a lot of people from a momentum perspective, especially levered hedge funds, really moved into this space. And once you started to see the sell off that we did, a lot of these lever players had to unwind their positions and that’s why correlations went to one. And as you see, a lot of these names were down about 20%. So I’d say one aspect of what happened on that fateful Monday of the DeepSeek Monday, it was just an un-leveraging of a lot of long positions in hedge funds.
So that move by the market might be a little bit more Draconian than what we would’ve originally prognosticated knowing this type of information. But I think the more important thing that we need to learn what the market is telling you is that the market might have to have the realization that we’re moving from the performance at any cost into an optimization phase much quicker than anyone anticipated. I mean, I don’t want to talk about the illegitimacies of DeepSeek and how it utilized Meta’s Llama from an open source perspective to maybe make this new-found technology. Well, it’s not new-found technology. The new utilization of this technology off of some older NVIDIA chips didn’t cost as much. But I would say that, as the market transition from performance at any cost to optimization, it actually makes me even more optimistic for this artificial intelligence trade moving forward into the future, that a lot of the names that just got hit on that DeepSeek Monday were just the largest beneficiaries from CapEx spend.
And that’s the market trying to digest, “Hey, maybe we’re moving to that heavy CapEx spend period into where we actually started to see some return on invested capital components amongst the residual 493 stocks or some of the smaller companies.” Because, obviously, they don’t have the CapEx resources needed of what Meta is doing, Google’s doing, a little bit of Apple, what Microsoft’s doing, Broadcom and NVIDIA, the CapEx beneficiaries, that now they get to utilize all that CapEx spend from all those other companies and utilize it for their own personal optimization. And I think that movement, I forget the new theory and law, the Jensen’s of whatever saying, the more output, the more efficient you get, the actually more usage and output you tend to have.
I do think that is going to be real and I think that could mean to the market, this is the most important thing, that this is another arrow in the quiver for the thesis of the marketing broadening out to the residual 493 stocks, but also maybe small caps because they can use the AI technology to their benefit to produce some type of productivity. So I don’t see it as a bearish game changer whatsoever to the market. I see it as a reason to be very much optimistic moving forward.
Derek
And I think equally the S&P might’ve ended up that day or at least pretty darn close to it. It was pretty flat.
Dave
Yep.
Derek
It’s just a big, like you said, money flow thing where these earnings were, basically, maybe they’re being pulled forward and now it’s like, all right, who’s going to benefit from all this stuff? Which will fall nicely into your world, I’m sure.
Dave
I hope so.
Derek
Yeah. So the other thing that I think y’all wanted to finish with, and it does make a ton of sense, we’re just seeing a lot of headlines and noise out of D.C., the Fed and fiscal policy, taxes, tariffs, all of it. And clients get concerned about it and ask advisors. Our clients are the advisors, they ask questions. This chart helps show a little bit about, has that even mattered in the long term? So I’ll let one of you jump in here.
John Luke
I’ll tee it up and let Dave comment, if he’s got any to finish on. But basically this is just looking at an uncertainty index of economic policy, which is at the bottom of the chart with the red line. And then the top part, of course, is the S&P. What the author of the chart, which was Strategis, connected was, during periods of high policy uncertainty, it’s actually typically been associated with relative lows in the market. And I think it gets back to the point that Dave has crammed in my head of it’s better to be patient than it is to be clever. And so while things are maybe scary or uncertain, hence the name of the index, that it’s typically a good time to just hold in and trust your strategy. When you think about a lot of the things that we do, whether it’s with the allocation, whether it’s with the individual funds and how we manage risk at Aptus, a large piece is focused on avoiding the left-tail outcomes, the scary outcomes that inject volatility, inject volatility tax into portfolios, and disrupting the compounding path.
And so I think that while things are uncertain, looking back, markets typically go up. So who’s to say that this specific bout of uncertainty is a doomer? But the second part is, even if it is, and we do see some market pressures, we’re well protected and the cost to protect continues to be pretty inexpensive. And I think what it positions us for is the best of both worlds. We can stay in markets and participate. There’s a lot of things I think that could go right, and if not, then we’ve got the ability to protect, but also to create capital to redeploy back into markets. And so it puts us in a spot that we can navigate these environments even though they’re uncertain and keep clients confident in what we’re doing in the process of being able to compound over the long term, which is the goal, not necessarily very well advised to get caught up in the day-to-day news cycle. Dave, did I miss anything on that?
Dave
I think you crushed it. I’ve said my piece on that side. So I think that’s a great job bringing it all together to focus in on what matters, and that’s the allocation itself.
Derek
Yeah. And I think it’s important to note, this chart maybe goes back 30, 40 years, but for 100 years we’ve had uncertainty from policy constantly. You never know what the policies are going to be going forward, and yet here we are 1% away from all-time highs and in a stock market that has compounded it pretty close to double digits over 100 years. Obviously, this is nothing new and it’s all been tackled before. I think clients appreciate the fact that we’ve got a durable approach to capturing what’s going to happen from a positive, but protecting against what could happen in the short term from negatives, anyway.
But I guess we’ve covered it and I appreciate you guys taking the time, and I’m sure we’ll have a lot more to talk about next month. We’ve got more earnings. We’re already into February, but there’s a lot of earnings still to come from year-end. So I’m guessing that’s where you’ll spend your time this week, Dave.
Dave
Buried.
Derek
It’ll be another busy month. So appreciate you coming on and we’ll talk again in a few weeks.
John Luke
Thanks guys. Thanks, Derek.
Dave
God bless America.
Derek
Thanks, guys.
Disclosures
Past performance is not indicative of future results. This material is not financial advice or an offer to sell any product. The information contained herein should not be considered a recommendation to purchase or sell any particular security.
The opinions expressed are those of the Aptus Capital Advisors Investment Team. The opinions referenced are as of the date of publication and are subject to change due to changes in the market or economic conditions and may not necessarily come to pass. Forward-looking statements cannot be guaranteed.
Aptus Capital Advisors, LLC is a Registered Investment Advisor (RIA) registered with the Securities and Exchange Commission and is headquartered in Fairhope, Alabama. Registration does not imply a certain level of skill or training. For more information about our firm, or to receive a copy of our disclosure Form ADV and Privacy Policy call (251) 517-7198. ACA-2502-5.
