April Madness
It’s been a while since I’ve had the chance to share a little update from our vantage point high above Bellevue Way, and I must admit, the pace of life seems to be accelerating every year! As we wrap up the first quarter—which ended with a bit of a thud—it feels like the perfect moment to pause and reflect on the trends we’re watching, the actions we’ve taken across portfolios, and what keeps us up at night.
Looking back over the past six months, it’s clear there’s been a shift in leadership within the market. The largest companies—think Microsoft, Amazon, Google, Nvidia, and their peers—have notably lagged the broader market. This outcome aligns with a thesis we’ve held for some time. While being early in our business sometimes brings a touch of discomfort, our conviction began to take shape last October and remains strong today. Of course, we still maintain exposure to tech—after all, it wouldn’t be the same without it—but our strategies have maintained a clear underweight, and this approach is paying dividends. Rather than chasing the popular names, we’ve focused on classic companies like Oshkosh, SLB, SOFI, James Hardie, Digital Ocean, and, within our ETF strategies, Lazard International Equity. You talk about these with your friends, right?
Our investment philosophy continues to be guided by the principle that valuation matters deeply—a legacy passed down by our group’s founder, my father. This commitment led us to hold an elevated level of cash at the turn of the year, which expanded further in late February as we exited some AI plays and trimmed infrastructure winners ahead of the new tax year. Speaking of taxes, we believe it’s crucial to build tax-efficient portfolios. While we don’t discuss this as often as we should, our tax loss harvesting strategies are always at work behind the scenes, even when markets have been steadily climbing for three years.
Now, on to the worries—thank you for asking! After 27 years of managing portfolios and engaging with clients, there’s a certain resilience that develops. Most of you know I don’t put much stock in the daily noise from legacy media, cable, or social platforms. Likewise, despite the current polarized political climate, I’m convinced politics rarely impact markets in the short term. While good policy matters over the long run, its immediate influence is marginal.
My concerns are mainly threefold. First and foremost, inflation continues to unsettle me. As predicted a couple of years ago, inflation has remained stubborn, still trending around 3.4%, above the Federal Reserve’s long-term target of 2%. Although I expect this number to gradually decline—energy noise notwithstanding—the risk posed by persistent inflation to the economy and markets cannot be ignored. Second, our federal debt worries me. Higher inflation means higher interest rates, which in turn create a daunting fiscal debt situation. Astonishingly, our country now spends more on interest than on defense. We have a spending problem, and, much like a household budget, we have two options: increase revenue or cut expenses. While government spending restraint seems elusive, I remain hopeful that we can grow our way out of this dilemma through entrepreneurial spirit, innovation, and investment. Notably, the 1989 installation of the National Debt Clock in NYC serves to underscore our collective, longstanding concern with the national debt. Finally, an emerging concern is the current operation in Iran. Not because I anticipate an extended conflict or subscribe to dire predictions, but due to the simple fact that most of the world—especially Europe and Asia—relies on external energy sources. If elevated energy prices persist for years rather than months, the global economy may face significant headwinds. Interestingly, the energy infrastructure in the Middle East remains largely intact, which I believe is no coincidence.
Looking ahead, our equity strategies maintain a bias toward value over growth, with a growing preference for mid-sized and select smaller capitalization companies. Despite recently trimming our exposure to international equities, we’re still above our long-term tendencies. In fixed income, we continue to champion a ‘keep your safe money, safe’ philosophy. Our high-quality corporate and muni intermediate-term strategy has served us well so far, and I expect it will continue to do so.
Warm regards,