Hope you are all doing well. All three indexes dropped this week with S&P as the best performer down only 1.7% compared to down 2.5% for the Dow and Nasdaq. Overall, despite bouts of uncertainty and market volatility in the early weeks of 2025, stock markets for the most part have moved higher across much of the globe. The S&P 500 is up about 4%, while the MSCI World index is up about 5%, as of February 20. This is an encouraging early result, particularly after the past two years of solid gains. Famed 94 year old investor Warren Buffett issued his annual letter to shareholders this week. I have broken down this week’s update using quotes from the letter.
“Berkshire shareholders can rest assured that we will forever deploy a substantial majority of their money in equities – mostly American equities although many of these will have international operations of significance.” – Warren Buffet
The mega-cap technology trade has cooled somewhat heading into 2025. I agree with Buffett, U.S stocks are the investment to own in the long term. After the Magnificent 7 (Apple, Alphabet, Nvidia, Meta, Amazon, Microsoft, Tesla) returned over 150% in 2023 and 2024. Valuations on these stocks are considered extended by many pundits and prognosticators. I disagree, it is not fair to compare this to the 1999 Tech Bubble. Earnings growth has been robust for most of these companies. There is a clear path forward to earnings growth and a favorable regulatory environment in the U.S.. Don’t be thrown off by the sector rotation to start this year. International is off to a good start but non U.S. companies may be more exposed to tariff and trade uncertainty. Not to mention European nations are more impacted by the conflict in Ukraine and are unsure about what the U.S role in the conflict will be going forward. Apart from the Magnificent 7, the remaining U.S. stocks are showing signs of improvement. Earnings growth in 2025 is expected to be more balanced.
Both tech and non-tech sectors are expected to contribute to earnings growth, which supports a broader set of market leadership. This has played out thus far in 2025, with 10 of the 11 S&P 500 sectors positive for the year. This data supports my prediction that we will see a second leg of this bull market with broader participation. Areas like financials, energy and health care will start performing, while technology and consumer discretionary will stay strong. It is for this reason any down swing we experience in stocks over the next month or two should still be viewed as a buying opportunity.
“We were aided by a predictable large gain in investment income as Treasury Bill yields improved.” – Warren Buffet
Short term treasury bills 3 to 6 months like Buffett invested in have minimal sensitivity to movements in interest rates and is a good place for your short term money. Longer term bonds prices are severely impacted by movements in interest rates. The good news this week is that it seems Treasury yields are now stabilizing. The U.S. 10 year Treasury yield had risen rapidly. Increasing by nearly 120 basis points (1.2%), from about 3.6% to 4.8%, from September to early January. The positive news is the bond market volatility did not lead to a significant downdraft in stocks. That sharp move higher in rates was driven by better-than-expected U.S. economic data. At least as far as stocks are concerned the positive economic news offset uncertainty around inflation and spending by the new administration. Most importantly the market seems to have digested the idea that the Federal Reserve would likely not be cutting interest rates much further in 2025.
“Thank you, Uncle Sam. Someday your nieces and nephews at Berkshire hope to send you even larger payments than we did in 2024. Spend it wisely. Take care of the many who, for no fault of their own, get the short straws in life. They deserve better. And never forget that we need you to maintain a stable currency and that result requires both wisdom and vigilance on your part.
” – Warren Buffet
Wisdom and vigilance are not the words many of you have used to describe some of the more recent actions taken to reduce the federal workforce. For those of you who are active federal employees you may have received an email this weekend. It came from the Office of Personnel Management’s new HR email address but had no signature. The subject line reads: “What did you do last week?” The email is assumed to represent Elon Musk’s latest move targeting the federal workforce. The email asks employees to explain what work they did last week. Musk announced on X (Twitter) earlier that “failure to respond will be taken as a resignation.” I have read that several national security agencies, including the FBI, and multiple other federal departments advised staffers not to respond to the email immediately.
I would defer to them in that regard. It is another unorthodox move by the Trump administration. I need more time to read, research and digest it before offering or suggesting individual advice. My initial gut reaction/opinion is Musk’s threat is not within the executive branch’s power to do. I don’t believe a court would uphold a mass termination by negative consent. The email itself did not use the same language that Musk used on social media about failure to respond. I know many of you have anxiety about this. I have received emails from many of you this weekend. I will try to respond to each of you individually, but will do so when I have more information on what is actually being proposed/threatened/offered and have a more full understanding as further details become available.
If you’d like to speak about your investments or your plan, or if it has been a while since our last review. Please use my calendar link below and schedule a phone or zoom appointment. Enjoy the game!
