Given the current combination of geopolitical and economic challenges, including a focus on U.S. college and university endowments, it is understandable that non-profit investors may be feeling some discomfort, or even fear about what may happen next. Even with this heightened uncertainty, we at Verger continue to firmly believe that our all-weather and antifragile investment approach remains well positioned to meet this moment and that our training and experience have prepared us to keep a steady hand on the wheel as we steer though these idiosyncratic conditions – all with the same long-term focus and discipline we have practiced through previous bouts of volatility and market cycles.
Market Review
In the first quarter of 2025 (and so far in April), U.S. financial markets have experienced heightened volatility due, in large part, to concern regarding the administration’s tariff policy, which was formally announced by President Trump on April 2nd. These measures have intensified fears of a global trade war and a potential economic recession.
Adding to the tariff challenges were the activities of DOGE (the Department of Government Efficiency). DOGE is seeking to reduce federal spending by targeting various agencies and programs. While intended to streamline government operations, these cost-cutting measures have led to mass layoffs and heightened economic uncertainty, further unsettling financial markets.
For the quarter, U.S. equities (S&P 500) declined 4.3%, with small cap stocks (Russell 2000) declining almost 10%. Helped in part by foreign currency appreciation vs. the U.S. dollar, non-U.S. stocks were positive during the quarter, with developed international markets (MSCI EAFE) up almost 7% and emerging markets (MSCI Emerging Markets) gaining almost 3% for the quarter. For the quarter, this was the worst relative performance for U.S. stocks compared to the rest of the world since 2009.
Across the globe, value stocks did materially better than growth stocks during the quarter. This reversal is notable, given large growth stocks have been outperforming value stocks by a historically wide margin in recent years.
Source: Bloomberg
Market Outlook
As we’ve pointed out in previous commentaries, we at Verger do not make speculative predictions about future events or market conditions. Instead, we remain grounded in our all-weather philosophy and nuanced approach to asset allocation – both of which are especially important in the current environment.
Despite the air of authority with which investment industry figures and pundits discuss economic and financial market forecasts, these estimates are primarily about probabilities. At Verger, we know that it is always difficult to assign probabilities, and only increasingly so in this swiftly changing landscape. The potential impacts of tariffs (within the U.S. and around the globe) are a particularly complicating factor. What’s more, tariffs can have (potentially significant) second order effects regarding inflation and the impact on corporate profits, with a range of implications for both economies and financial markets. Uncertainty around these impacts makes it very difficult for corporations (even more difficult than usual) to plan.
An additional complicating factor when it comes to corporate planning and probabilities associated with future profitability: the potential impact of lower government spending on corporate profits. We will point out that while questions about very large U.S. government deficits are warranted, the positive impact that trillions of deficit spending over the last decade or so has also coincided with a period of very high profit margins, and perhaps in an underappreciated way. We wonder if reduced budget deficits could lead to a negative knock-on effect for corporate profits.
A few more considerations relating to difficulties with assigning probabilities – not only with economic and financial changes themselves, but also with the magnitude of the changes. Areas we continue to monitor include a potentially fragile U.S. consumer, given that excess savings from the COVID pandemic have dried up. As the chart below demonstrates, lower consumer savings, coupled with higher interest rates compared to a few years ago, have led to delinquency levels that haven’t been seen in more than 10 years.
Source: BCA Research; Federal Reserve Bank of New York, series shown as a 4 quarter moving total
We also continue to monitor U.S. equity valuations, which, despite their losses this quarter, are still relatively high when viewed through a historic lens. As we’ve pointed out in previous commentaries, when valuations are historically high, the probability that investors will find reasons to be disappointed inevitably increases. To put it another way, equities are more fragile when valuations are high, given the price investors pay for an asset is an important determinant of expected return. Your margin of safety as an investor is lower when assets have stretched valuations. All in all, this may mean that the U.S. stock markets will react to surprising news in a correspondingly jumpy fashion.
Finally, we continue to monitor interest rate levels closely. While interest rates declined during the first quarter of this year, the 10-year Treasury yield increased during the first half of April. This trend could suggest that investors have not been turning to U.S. debt as a safe-haven and begs questions about inflation worries and foreign demand for our Treasuries, and, in both cases, the extent to which the new tariffs are connected, or even responsible.
This expansive range of considerations and complicating factors underscores our point that, as always, it is difficult to make economic and financial forecasts – and especially so in the current tumultuous environment.
Market Opportunities
We continue to believe that the range of possible outcomes and associated probabilities is very wide – therefore it’s ever important to have a diversified portfolio. Essentially, Verger’s approach to diversification calls for a disciplined, long-term focus and helps us ensure we stay on course despite short-term fluctuations. As always, we remain focused on finding a long-term balance between participating in market upside and protecting on the downside.
To this end, we continue to view real assets and absolute return-oriented strategies as important sources of diversification. For example, gold (and gold miners) performed well during the quarter, and we continue to believe that gold can serve as an effective portfolio diversifier over the longer-term. In a period when U.S. equities declined, absolute return oriented investments (e.g., strategies such as “long cheap value, short expensive growth” and closed end funds) provided good diversification benefits.
One space we’re keeping an eye on for potential future opportunities is distressed debt –given our ongoing concerns about U.S. corporate credit, both investment grade and high yield, and our belief that spreads are currently too tight. Consider, for example, the rising amount of payment in kind (PIK) income. Instead of making an interest payment in cash, a PIK payment effectively just adds more to the ultimate principal payment that needs to be made by the borrower. Per the chart below, PIK has been steadily increasing since 2022. With rising economic uncertainty, it seems reasonable to assume that these figures will continue to grow. How much longer can this trend continue before companies are forced to restructure? Not now – but at some point in the future, we believe there will be a very good opportunity to invest in distressed and/or restructured debt.
Source: Pitchbook
Within public equities, we find non-U.S. small cap value attractive. As the chart below illustrates, this recent outperformance of global ex-U.S. small value breaks with over a decade long pattern. If this quarter’s reversal is the beginning of a trend, it could have a long way to go. We continue to believe that equity diversification is prudent and appropriate, both geographically as well as by style. And, as previously mentioned, equity valuations outside the U.S. are notably cheaper than the U.S.
Sources: Topdown Charts, Bloomberg
Especially in this market environment, we continue to believe it’s important to have some liquidity available as dry powder to take advantage of future (and potentially even more pronounced) market dislocations and resulting opportunities. We expect to once again have the chance, at some point in the future, to act as opportunistic buyers when others are looking to sell at any price.
Closing Thoughts
Because we know how difficult it is to assign precise probabilities to possible economic growth, tariff impacts, or inflation (especially in this swiftly changing climate), we have not made any notable portfolio changes based on recent events. However, we are, and will remain, deeply focused on monitoring markets closely, staying in close contact with our investment managers, and evaluating if and how the long-term drivers of risk and return are shifting. All the while, we feel strongly that our nuanced approach to diversification remains a key tool for Protecting, Performing, and Providing for our non-profit clients, no matter what kind of market environment lies ahead.
All investments involve risk, including possible loss of principal.
Not all strategies are appropriate for all investors. There is no guarantee that any particular asset allocation or mix of strategies will meet your investment objectives. Diversification does not ensure a profit or protect against a loss.
One cannot invest directly in an index, and unmanaged indices do not incur fees and expenses.
This article is being provided for informational purposes only and constitutes neither an offer to sell nor a solicitation of an offer to buy securities. Offerings of securities are only made by delivery of the prospectus or confidential offering materials of the relevant fund or pool, which describe certain risks related to an investment in the securities and which qualify in their entirety the information set forth herein. Statements made herein may be materially different from those in the prospectus or confidential offering materials of a fund or pool.
This article is not investment or tax advice and should not be relied on as such. Verger Capital Management (“Verger”) specifically disclaims any duty to update this article. Opinions expressed herein are those of Verger and are not a recommendation to buy or sell any securities.
This article may contain forward-looking statements relating to future events. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expect,” “anticipate,” “believe,” “potential,” or “continue,” the negative of such terms or other comparable terminology. Although Verger believes the expectations reflected in the forward-looking statements are reasonable, future results cannot be guaranteed. Except where otherwise indicated, all of the information provided herein is based on matters as they exist as of the date of preparation and not as of any future date and will not be updated or otherwise revised to reflect information that subsequently becomes available, or circumstances existing or changes occurring after the date hereof.
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