Things are a little crazy right now so time to abandon the personal stories and run through the current state of the stock market and my outlook.

We are all seeing it every day, so no need for a recap here. Tariffs, geopolitical tensions, inflation risk and US policy adjustments have commingled to introduce meaningful uncertainty into an environment that craves stability.

But what does all this mean for your portfolio and what will happen from here?

Let’s break it down.

Volatility is Not Uncommon

I feel compelled to start here.

In the last 45 years, the S&P has posted gains in 34 of those years. The lack of volatility in the past few years makes it hard to believe that the average intra-year decline exceeds 14%.

From 1990 to 2024, the S&P 500 has recorded a strong average annual return of 10.5%. This impressive performance, however, has been interrupted by intra-year drawdowns of -14.1%.

So, while gains have historically been significant in the S&P 500, they have not come without some pain along the way. This volatility is a feature, not a bug.

In the current year, the S&P 500 has experienced a year-to-date return of -2.4%, alongside an intra-year drawdown of -6.6%.

While it feels all-consuming right now, as headlines come from every direction -This volatility is completely normal.

I don't say this to downplay your concerns. It may be ‘normal’ from a statistical standpoint but that doesn’t mean it’s easy.

Watching your equity positions decline is never easy. A pullback only looks "healthy" when it’s happening to someone else’s portfolio.

That said, market corrections are a natural part of investing. The key question isn’t whether they happen, but whether they signal a deeper structural shift or just a temporary pause in the current bull market.

So - Where Do We Go from Here?

Structurally, some weakness has emerged, as longer-term technical indicators are rolling over while fundamentals continue to moderate.

Retail sales are softening, and durable goods have not done especially well lately (blame limited housing sales). Sentiment has been a drag for a while.

Throw in high relative valuations, lofty earnings expectations, tariffs, geopolitical tension and government lay-offs and you have all the ingredients you need for a short-term pull-back.

To be clear: the consumer data that determines my long-term economic outlook such as employment, income, and household wealth remain strong. The economy remains healthy, supported by strong consumer and business balance sheets. Job creation, while normalizing, remains positive. Hard data demand for goods and services is positive. And the Federal Reserve — having resolved much of the inflation crisis — has shifted its focus toward supporting the labor market.

I continue to watch GDP estimates, credit spreads, retail sales numbers, and labour data weakness to determine future outlook.

But for now, a momentary risk-off adjustment is appropriate. This has been our positioning at FigTree since the start of the year.

We continue to focus on diversification outside the US while reducing high beta and equity exposure until such time as clarity emerges around tariffs and the overall policy approach. From there, attractive buying opportunities will emerge.

And for those waiting with money on the sidelines, cursing previous missed opportunities - time to get organize as short term pull backs make for great entry points.

If you’re not sure where to start - reach out to me at [email protected]. I’ll take care of the rest.

Diversification Matters

Let’s start by dispelling a myth. There seems to be this idea that markets are crashing.

In reality, a select few of the more ‘high profile’ stocks are getting hit hard.

· Tesla has fallen 40% from its highs

· Bitcoin was more than 20% of its highs

· MicroStrategy (AKA Leveraged Bitcoin) is almost 50% off the highs

· Palantir dropped like a stone, losing 30% in a day

There is a simple lesson here - Volatility works in both directions. The parabolic gains you kicked yourself for missing out on go hand in hand with the rapid declines you thank God you avoided.

Over-Exposed

When all these high-profile names get hit there tends to be a presumption that this is the case across the entire global market. That’s simply not true.

Yes, some stocks are in pain. For high beta names like the ones listed above, it’s now as bad as the 30% drop in the S&P from March 2020.

And given many investors current positioning (over exposure to US growth and nowhere near enough of the other stuff) the pessimism is understandable.

But the S&P 500 sits 5% off all-time highs, the Euro STOXX 600 hit all-time highs this week, so did the DAX. Gold is sitting very close to all-time highs. Chinese stocks have had a great start to the year.

In February, we actually had more major stock indexes around the world hitting new all-time highs than at any other point in this entire bull market.

Does this sound like a global market collapse to you?

Yes, the rotation is happening on a global scale, but it is also happening at the sector level in the US. Look at how Technology (Largest weighting in S&P High Beta Index) and Consumer Discretionary (2nd Largest weighting) are the only sectors that are down this year. Everything else is up, some up a lot. (to end of Feb)

Yes, the tech darlings of recent years are suffering. And if your portfolio is tilted distinctly in that direction than you are suffering too.

Suddenly, diversification matters.

For the last decade, diversification has essentially been in a bear market. Having a diversified portfolio across assets and across geographies and styles would have reduced returns.

As it did during the Tech Bubble, narrow equity market leadership has led some investors to decide that growth equity index funds were the only game in town.

Individual investors are taking historic amounts of equity risk. The Chart below shows the equity beta of private client portfolios. At the beginning of the bull market in 2009, when opportunities, by definition, were the greatest, their equity beta was 0.75. Today, in the 15th year of the bull market, investors’ beta is a bizarre 1.70!

Risk management tends to go out the window when everything just goes up and to the right for 2 years straight. Everyone presumes the winners will just keep winning.

As a result, many investors are learning the hard way, just how over-exposed they really.

The world is a complex place, and nothing can remain absolutely invincible for long.

Thanks for reading

At FigTree, we help build, monitor and ensure you execute your financial plan. And as trusted advisor we will be there to help you overcome any stumbling block you encounter along the way.

I’m always happy to help wherever I can so if you want to learn more, please don’t hesitate to reach out to me at [email protected]

Mike 👋