Monthly Outlook: April 2025
It’s been a brutal six weeks for “the market” if by the market you mean the NASDAQ 100 (QQQ) or the S&P500 (SPY) stock market indices. Since the peak six weeks ago, QQQ is down 13% and SPY is down 9%. YTD, they’re down about 9% and 5%, respectively. If your entire portfolio was invested in just one of these US stock market benchmarks, then yes, it probably hurts. But most investors, and all of our investors, are much more globally diversified and are invested in many markets. Combined with our systematic, rules-based, buy and sell signals, we’ve softened the blow, and our managed portfolios are nearly flat, about -2% to +1%, YTD. We’ll discuss “markets” and then “active allocation,” below.
The Market vs The Markets
It’s understandable why so many U.S. investors think of “the market” as the S&P500, or sometimes the NASDAQ 100 or Dow Jones Industrial Average. The media quotes these market indicators ad nauseum as if they’re the only market that exists, or at least the only market that matters. That’s a shame because there are so many other markets available to any investor.
Today, the U.S. stock market is about 63% of the global stock market, as measured by market capitalization (price x outstanding shares). That’s huge considering that the U.S. GDP is only about 27% of the global GDP. The S&P500 index, a basket of 500 large U.S. companies, represents about 81% of the total U.S. stock market. So yes, SPY is a good proxy for the U.S. stock market, though it misses the other 19% of the U.S. stock market in the mid- and small-cap size range.
But here’s the problem with SPY (and QQQ): because they’re “market cap” weighted, the biggest stocks are more heavily weighted. The top 10 stocks in SPY comprise 34% of the entire SPY index. These top 10 stocks drive the return of the entire SPY index. This concentration is even more pronounced for QQQ, with the same top 10 stocks comprising a whopping 49% of the QQQ index. We’re all invested in the same narrow list of stocks and buying more just pushes up their prices to record valuation levels like we have today. This made it hard for many portfolio managers to keep up with SPY and QQQ on the way up. But now that the top 10 leaders in these narrow and concentrated indexes are stumbling, it’s easier to perform through diversification. In other words, just because you hear the media say “the market tumbled today” doesn’t mean that your well-diversified, global portfolio is doing as poorly.
There are many other markets that should find a place in a portfolio including European stocks, Asian stocks, Emerging Market stocks, US Bonds, international bonds, real estate, and real assets. Would it surprise you to know that the international stock index (MSCI EAFE index) is up 8%, YTD? Even the Mexican stock market is up 9%, YTD. So much for tariffs and deportation. Bonds are up about 2.7%, YTD, as interest rates continue to drift lower on expectations of a slowing global economy. We can also separate markets into growth and value, or by sectors. The point is, there are many good markets, and we already invest in many of them.
Active Allocation – Manage the Mix of Markets in Your Portfolio
Too many investors take a buy & hold approach to managing their portfolios. They may choose a 60%/40% target mix of stocks/bonds, for example, and stick to it, come rain or shine. That just makes no sense to us, because like everything in life, markets ebb and flow, and there are better and worse times to be invested in them. But knowing when to over- or under-weight a market allocation is difficult using fundamental research, valuations, or worst of all, forecasts. And we don’t recommend trying.
However, we do recommend using a systematic, rules-based, trend following strategy to measure the price trend of any market and invest accordingly. We stay fully invested in any market when its price is above its moving average price trendline, and we trim back our positions that are below their price trendline. As you might guess from the first paragraph, we’ve already sold US Growth, QQQ, and SPY, but we’re still fully invested in Bonds, US Value, international, and emerging markets.
Our message is clear and it’s consistent: Invest globally across many markets and actively manage your allocation based on price trends. It’s the most responsible way to invest for growth and protection.