Often quoted in major national media, Adam is a Chartered Financial Analyst (CFA®), a CERTIFIED FINANCIAL PLANNER™ (CFP®), and has been included on the Forbes NextGen Best-in-State Wealth Advisors 2019 list. He is a member of the CFA Society of Los Angeles and the CFA Institute. Adam helps establish asset allocation strategy as a member of the EP Wealth Investment Committee, which supports all EP Wealth Advisors and their clients. The Committee’s top-down approach to portfolio construction begins with an outlook on the economy’s likely direction, followed by the implications for different economic sectors and asset classes. This culminates in strategic selection of the individual stocks, bonds, mutual funds or other investments deemed most appropriate for each individual client’s portfolio.
Year-To-Date Market Returns
Markets Recover After Two Hits
Moody's Downgrade U.S. Debt
Retailers Updates On Tariffs
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Video Transcription:
Rob Black
Welcome in to the informed investor. Long-term thinking market outlook with Ep. Wealth. I'm Rob Black joining me today, the managing director of investments at Ep. Wealth, Adam Phillips. Let's do a quick market report card, surprisingly to me. The S&P 500 is up 1.3% for the year. It's been a bit of a roller coaster up and down. Now we're up the Dow Jones industrial average up 3 tenths of a percent, just a little bit of a skosh, the Nasdaq down one half a percent. The S&P Mid-Cap.. 400 down, 1.1%, and the Russell 2,000, lagging down 5.2% year to date as of market Close on Friday. Adam, what do you think about these market numbers? We've come a long way from just a month ago. It seems.
Adam Phillips
No doubt we've seen a really strong rebound here over the last few weeks, and I think that tells you just how bearish sentiment was coming out of Liberation Day on April second we saw some really steep declines, and you know, Dow, a couple times, falling more than a thousand points in a day. And so we're not used to those moves. But I think that tells you just how we really shifted from one end of the boat to the other in terms of sentiment, very, very quickly. And so we saw this abrupt move. We've seen a really sharp rebound here. The rebound has really been driven by an improvement in sentiment, and really more by the headlines, less by more concrete improvements around trade policy. And so we'll wait for that. We're still. We still have a way to go here during this 90-day pause that we're all living through, waiting for some updates around trade announcements. But the market so far has responded to some of these positive headlines that we've seen. Hopefully. We see more of them to keep the markets coming along here.
Rob Black
So let's look big, Picture, and want to get your insights on this. We've had 2 big hits to the market this year that I can count. Maybe there's more, but I can count. The 1st one was the deep. Seek, stumble for AI stocks kind of caught people off guard, and the markets swooned, the other one would be the Rose Garden reciprocal tariff day. That's the best way I could say it, but that really sent things tumbling lower, but we've recovered on both of them. What's your take on this, Adam?
Adam Phillips
The take is that it's never fun to live in these volatile periods. But it's normal, I think. What we've talked about in the past, Rob, is the 25% gains that we saw in 2023 and 2024 for the S&P 500. That's not necessarily normal. It's certainly fun when you're living in it, and you don't see a lot of downside volatility. But what we've seen historically is that you do see these drawdowns from time to time. And so, yeah, we saw 2 fairly meaningful drawdowns enough to certainly get our attention here at the beginning of the year, but we've recovered from both of them, and we came into this year with coming off 2 very strong years and valuations. As we talked about coming into the year were elevated, and so we were kind of bracing for this volatility, and we didn't know what that catalyst would be for a sell-off. But obviously, we found out what those catalysts were, and we recovered from both. And I think that's really the takeaway here for investors is that if you stick to your long-term discipline, you ride these periods out as uncomfortable as they are, then you're better off for it. The markets do reward discipline over time.
Rob Black
And I think it's fair to say we'll probably have another disruption coming up sometime soon, and we won't see it coming. It'll just hit us, and we'll deal with it, and capitalism will be capitalism, and the markets will figure it out. I think it's kind of like the demon known as Wall Street likes versus the demon unknown. Can you address that mantra real quick for me?
Adam Phillips
Well, you know, the way that we think about it is we're we watch a lot of the data, and we are very data-focused and data-driven here. But it's really, you know, when you talk about the Black Swan events, those things that you don't necessarily see coming. I think that's what can really create a lot of this upheaval in the markets. And so we were surprised by a couple of events that most didn't see coming, and Deep Seek really being one of them. And so I think that can exacerbate periods of volatility over time. But what we've seen is that events that aren't related to a crisis. They can be relatively short-lived, and they can easily reverse. And so that's what we've seen in both cases, which is not going to be the end of volatility. I wouldn't suggest we could see some more before the year is over. We know that there's still a lot of uncertainty. We're focused on the economy, on trade policy, on fiscal policy. So it's a question of, okay, is the volatility related to those events? Or is there something other black Swan-type of event that people don't see coming that really throws investors for a loop here? But in the end, we'll remain disciplined, and that's what we always do is you manage through these periods. And, as I said, that discipline is ultimately rewarded over the long term.
Rob Black
One of the scariest moments of my life was being 8 years old and going to New York City and going to Times Square, and seeing the National Debt Clock, and how fast it was rising. The debt. The United States has. Believe it or not. I was such a nerd, then a financial nerd, that it really upset me visually to see. Now, on Friday, after the markets closed, Moody's came out and downgraded the US. Debt, which means it's going to be more expensive for us to borrow, and I have to imagine that debt clock is just racing up faster and faster. Can you interpret the Moody's downgrade for me?
Adam Phillips
Yeah. Well, look, I, we're recording this on a Monday. I think we need to mention that, just given how quickly things move these days, and the markets aren't really responding to it. We've seen a little bit of a move higher in the long-term bond yield. But really, when we saw this news hit on Friday from Moody's. It was after the market closed, and we said, You know, we kind of greeted it with a shrug. And I think it appears based on the market's reaction or lack thereof today that we're not the only ones doing that. I think you certainly don't want to minimize it, but I think it's important to just highlight the fact that they are the 3rd major rating agency to downgrade the US. The 1st was S&P, and that was back in 2011, and then Fitch back in 2023. And so we were all basically waiting for this to come along. So they're not really doing anything new. Treasury Secretary Scott Besson referred to this as a lagging indicator, and so I think that's fair. I do want to acknowledge that we certainly don't like the trajectory that we're on and running a. Our budget deficit currently is about 2 trillion dollars, about just over 6% of GDP. So this is not sustainable. And you don't normally see this during periods of full employment, when the unemployment rate is around 4%. And so obviously this is not, this is not good. But does this really change anything compared to, say, before the announcement on Friday? I don't think so, but you know it's definitely, I think, just speaks to the fact that we need to get our house in order and in their comments. Moody's did acknowledge the fact that this is not a Trump problem. This is something that has been going on throughout administrations, both political parties, that they just haven't taken the steps necessary to address our growing debt and ongoing deficits. So yeah, I mean, look, I think this could be. It's an interesting time to make the change because we are going through the tax bill right now, and the negotiations in Congress right now to get a lot of the trump tax cuts across the finish line that he campaigned on. So I think that's going to be. It's a really interesting timing. Does it really change things for the US? Treasury or rates over the long term. I don't think so. I will just provide some additional context here when the S. And p. 5. When Sandra and Poor downgraded the US. Back in 2011, we actually saw, following that announcement, we saw that foreigners continued to buy treasuries. We actually saw that the number of Treasury holdings owned by foreigners actually doubled to about 9 trillion dollars. After the Fitch downgrade in 2023, we saw foreigners continue to buy as well, so I don't think this is necessarily a catalyst for the death of the dollar, or for people looking for alternatives to treasuries. But I do think it's just another sign that the path that we're on is not sustainable. We really need to take this seriously.
Rob Black
And put some context into it. I read that our interest payments on our debt. 1.1 trillion dollars a year, and that's higher than our defense spending budget for the Pentagon. That's not a wise way to spend money, paying interest and not getting planes and cars and things made. Is it a productivity issue that I should be worried about? Is there anything I should worry about with this? Because I know you're saying it's kick the can down the road, but that 1.1 trillion is a little worrisome.
Adam Phillips
No look, no doubt. And so last year we actually did hit that point where we were spending more on servicing our debt than on defense, and that number is only expected to grow further as we continue to finance these ongoing deficits by debt issuance, then the amount that we're paying to service. That debt is only going to continue to increase, not to mention the fact that we have over the next couple of years. We have a lot of treasuries that are actually maturing, that we're going to have to reissue, and we're going to be reissuing them at much higher rates than what we were originally paying for that debt. So I think just naturally, we're going to see the interest payments continue to increase, and what that risks doing is crowding out other investments. And so that is something that Moody's acknowledged in the fact that between the interest payments and increases that are expected in entitlement spending going forward with the baby boomer population that we are expected to see tax revenues continue, but they're not going to necessarily increase, and they're not going to keep pace with the increases on the spending side. And so for that reason, Moody's actually does see over the next 10 years, ending in 2035, a budget deficit, that is, 9% of GDP compared to just over 6%. Right now, I will say, most estimates that I see are closer to 6 or 7%. So this one was an outlier. But yeah, look, I think it's not something that we necessarily enjoy seeing. So it's something that we need to get a handle on relatively soon. I think the hard part is well, what do you do? What are your options? We all know that cuts to entitlement spending are hard. They're not politically palatable when we're going through right now with the tax bill negotiations, and many in the House are pushing back on proposals to cut Medicaid and other types of entitlements because they know that it's not going to be too popular among their constituents. And so, historically, those haven't really been touchable. And so what is the option? Do you want to cut defense spending? Or are there other types of discretionary non-defense spending that you can cut, but really, that will only get you so far? And this is actually one reason why we are looking at tariffs as another way to get some revenue for the country. So I think all this stuff is really related. I think it's just a it's a very hard problem to solve.
Rob Black
I knew you'd have a good take on it, and we spent a little extra time there because it's what everyone's talking about at the water cooler. So, final thought, what's on tap? We've talked about what went on last week. We've talked about current market numbers. What are you looking out for the rest of this week or even?
Adam Phillips
Yes.
Rob Black
A month or year.
Adam Phillips
Yeah. So well, I'll just start with. Over the weekend. We got the House Budget Committee to pass the budget, the reconciliation package. So it's going to the House now for a vote later this week. And this is really just the plans for tax cut extensions from the 2017 tax Cuts and Jobs Act, some additional tax cuts that President Trump campaigned on, no taxes on tips, no taxes on overtime things of that nature, so things that would potentially expand this deficit. But there are also ways to potentially pay for it or offset some of it cuts to Medicaid, as an example, cuts to potentially snap benefits or what they call food stamps. So this is what's going to. It's now passed the House Budget Committee. It's going to the House for a vote likely towards the end of this week. So that's what we'll be keeping an eye on. I will just say there's a lot of disagreements still around this and around cuts to Medicaid, around cuts to SNAP, around what's going to happen with the salt deductions from blue States like California? New York, want to see the State and local tax deduction actually increase? I think right now they've settled on 30,000. I think many are still looking for that to go higher. And so we'll see. We know that there is a razor-thin majority in the House as well as the Senate, so they really need to get everyone on board. So I would expect some really tough negotiating to continue this week. That's 1 thing that we're looking at on the earnings side. So last week we actually got Walmart's earnings, and they're a bellwether for the economy. So we were all paying attention to what they would say. I think one of the interesting takeaways from them is that they do expect they are seeing increases in their own costs, due to tariffs, and so they said that they basically told everyone they said, Look, start setting your expectations. You're going to see this sometime in May, and certainly in June. And if you aren't seeing it from other retailers yet, you will, based on what we're seeing. And so that was really interesting to hear. I mentioned that because this week we're going to hear from a couple of other really important retailers. Home Depot is reporting earnings tomorrow, which is Tuesday, and on Wednesday, we're hearing from Target. And so I think it's going to be really interesting to hear what they say, as it relates to tariffs, as it relates to the health of the consumer as they see it. So some really interesting data points coming this week.
Rob Black
Well, thank you very much. It's been very informative, as it usually is. It's the informed investor, long-term market thinking update. I'm Rob black, he is Adam Phillips, managing director of investments at EP Wealth. We'll talk to you in another week or so. Good day.