May 2025 Market Update

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May Market Review: Volatility, Inflation, and Strategic Adjustments

In the latest episode of Money Matters, Chad Larson, a senior portfolio manager at MLD Wealth, discusses the market’s fluctuating dynamics in April. He reflects on the volatility and reactions caused by various economic indicators, particularly inflation, central bank rhetoric, and the influence of earnings reports on market sentiment. This summary encapsulates key points from his analysis, including inflation trends, market corrections, insights gained from earnings seasons, and global economic challenges.

Timestamps

Key Takeaways with Timestamps:

• • 00:00:06: Chad introduces himself and sets a casual tone for the podcast due to travel delays, emphasizing the importance of sharing insights despite the informal setting.
  • 00:01:11: The podcast discusses the volatility in April, attributing it to mixed signals from the Fed and market corrections, which highlighted the importance of remaining disciplined rather than making impulsive decisions.
  • 00:01:39: Key economic indicators like the Consumer Price Index (CPI) and Personal Consumption Expenditures (PCE) figures came in higher than expected, reducing market expectations for future rate cuts from the Fed.
  • 00:02:09: The Federal Reserve’s hawkish stance reinforces the idea that interest rates will remain high for an extended period, necessitating continued exposure to real assets and defensive sectors.
  • 00:03:10: April marked the S&P 500’s worst monthly performance since October 2022, driven by declines in big tech stocks like Apple, Meta, and Tesla, while defensive sectors managed to hold up better.
  • 00:04:12: Chad notes that the recent market pullback is being viewed as a recalibration rather than a cause for panic, advocating for careful investment in quality stocks and opportunities.
  • 00:05:40: Companies that offered strong forward guidance were rewarded, while uncertainty within the market led to sharp declines for firms lacking clarity on future demand and cost pressures.
  • 00:06:09: Global risks such as Middle East tensions, variability in China’s economic recovery, and rising gold prices necessitate a focus on safe-haven assets and hard commodities.
  • 00:07:11: The importance of disciplined implementation of investment strategies is highlighted, reaffirming MLDD’s focus on tactical portfolio management amidst volatility.
  • 00:08:13: A discussion on Canada’s economy reveals risks associated with elevated consumer debt, a vulnerable housing market, and potential recessionary trends that impact investment strategies in the region.
  • 00:10:21: Chad explains the need for selective equity exposure, prioritizing companies with robust cash flow and strong balance sheets, while also emphasizing the role of private credit and alternative investments.
  • 00:11:53: He underscores the importance of diversification through alternative assets, suggesting that proper allocation into private markets and structured notes remains a cornerstone strategy.
  • 00:12:26: The discussion pivots to the complexities surrounding private credit, stressing the importance of understanding various iterations of the asset class to navigate its risks effectively.
  • 00:13:54: Chad reiterates the need for agility in portfolio management, highlighting the challenge of maintaining balance in light of ongoing market volatility, especially concerning fixed income.
  • 00:14:28: Closing remarks emphasize that the market’s dynamic nature requires both conviction in investment strategies and the flexibility to adapt to changing environments.

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Summary

The video presented by Chad Larson, a senior portfolio manager at MLD Wealth, provides a comprehensive overview of the financial market dynamics observed during April 2023, following a strong start to the year. After experiencing significant volatility in April, Larson emphasizes the importance of remaining disciplined and tactical within investment strategies as the Federal Reserve's stance on interest rates evolves amidst persistent inflation.

Larson notes that inflation indicators, specifically the Consumer Price Index (CPI) and Personal Consumption Expenditures (PCE) index, have come in above market expectations, which has led to a revised outlook on interest rate cuts by the Fed. Instead of multiple cuts anticipated initially, investors can only expect one or two, reinforcing a "higher for longer" interest rate environment.

In April, the S&P 500 experienced a notable decline of over 4%, marking its worst monthly performance since October 2022, particularly influenced by profit-taking in big tech stocks after a robust first quarter. Highlighting the necessity of maintaining a diversified portfolio, Larson addresses the movement towards quality investments, real assets, and alternatives as essential to counterbalance the ongoing economic uncertainty.

He delves into earnings from key tech firms, portraying a mixed bag where firms possessing solid forward-looking guidance tended to be favored, contrasting with areas of uncertainty that displeased investors. He further contextualizes these developments against the backdrop of global events, such as Middle Eastern tensions and China's economic recovery challenges.

Examining Canada’s economy, Larson raises concerns about a potential recession fueled by elevated consumer debt, a cooling housing market, and lackluster GDP growth. He stresses the importance of being cautious on Canadian equities until clearer economic policies are established.

In conclusion, he highlights the need for vigilance in investment strategy, focusing on equity exposure reassessment, the benefits of alternative investments, and maintaining robust communication channels with clients during these uncertain times.

Highlights

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- 📉 Market Volatility: April showcased significant market volatility, with the S&P 500 dropping over 4% amidst profit-taking in big tech.
- 📊 Inflation Concerns: Inflation remains a serious issue, with CPI and PCE prints coming in higher than expected, signaling a 'higher for longer' trajectory for interest rates.
- ⚖️ Value vs. Growth: The shift of focus from momentum to fundamentals highlights the need for companies to showcase operational clarity and pricing power.
- 🌍 Global Economic Tensions: Ongoing geopolitical risks, particularly in the Middle East and China's economic challenges, affect global markets and commodity prices, especially oil.
- 🇨🇦 Canadian Economic Outlook: Elevated consumer debt and a slowing GDP raise recession concerns, warranting caution in exposure to Canadian equities.
- 📈 Focus on Alternatives: Larson advocates for continued emphasis on alternative investments and private credit to navigate the volatility.
- 📅 Proactive Strategy: Emphasizes tactical adjustments and the importance of having robust communication with clients to instill confidence amid market uncertainties.

### Key Insights

- 📈 Persistent Inflation: The rising CPI and PCE metrics indicate that the Fed is unlikely to cut interest rates until there is substantial evidence of cooling inflation. This highlights a scenario of prolonged elevated interest rates, which can impact growth stocks significantly as the cost of capital rises.

- 🤝 Disciplined Investment Approach: In light of the increased volatility, Larson emphasizes the importance of displaying discipline and tactical finesse in investment strategies. This approach enables the navigation of turbulent markets while avoiding rash decisions that could jeopardize returns.

- 💼 Earnings Insights Matter: Earnings season revealed that companies showcasing strong forward-looking visibility were rewarded positively, while those lacking clarity were penalized. This indicates the market's current preference for certainty over potential, urging investors to prioritize companies with solid operational forecasts.

- 🌐 Global Economic Interconnections: The events in the Middle East and challenges within China's economy remind investors of the interconnectedness of global markets and the necessity to remain aware of foreign policy impacts on domestic investment strategies.

- 📊 Sector Diversification: Defensive sectors such as utilities and staples exhibited resilience during market downturns, reinforcing the need for well-rounded portfolios that can weather various economic conditions.

- 🏡 Canadian Market Risks: The Canadian economy is facing notable headwinds that warrant caution. The slowing growth, coupled with high consumer debt levels, raises concerns about the viability and stability of investing in Canadian equities currently.

- 🔄 Alternative Investments as a Buffer: Larson advocates for an increased allocation toward alternative investments to buffer against market volatility. These assets can provide stability and income generation opportunities essential for weathering economic fluctuations.

In declaring the broad scope of discussion, Chad Larson articulates the essentials of maintaining a vigilant and adaptable investment posture, underscoring the import of data-driven strategies amidst a landscape fraught with uncertainties. By remaining informed and active in tactical positioning, investors can navigate effectively through the complexities of the current financial environment.

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