August 29, 2002. New York City. Radio City Music Hall.

Once upon a time, the MTV Video Music Awards were a big deal. In addition to the usual star-studded glitz and glamour, the lead-up to the 2002 show was highlighted by rumors of a secret guest performer. As the date of the show drew closer, whispers started congealing around a surprise Guns N’ Roses reunion.

Once the show began, the tension continued to build. One of the best-selling bands of the 1980s and early 1990s, Guns N’ Roses had not toured together since 1993 and all of the original members except lead singer Axl Rose had left the band by the mid-90s. It was widely thought the band would never get back together, but, for one night, hope was renewed. Axl. Slash. Duff. Izzy. Welcome to the Jungle. Sweet Child O’ Mine. November Rain. All the ingredients were there for a magical performance.

As the show neared its end, a young Jimmy Fallon, who was hosting the show, came on stage to introduce the mystery closing act. He could barely contain his excitement. After a breathless intro, where an astute viewer may have noticed the Guns N’ Roses t-shirt partially concealed under his jacket, Fallon finally revealed the identity of the secret performer by shouting “Guns N’ F!@#ing Roses!” The crowd screams. From behind a slowly rising curtain, the first few chords of “Welcome to the Jungle” ring out. Here we go . . .

The curtain came fully up. Axl Rose started singing. And you could hear the same silent thought going through millions of heads at once: “What the . . . ?”

Axl sounded awful. Instead of Slash and his signature black, leather top hat on lead guitar, there was some guy in a mask wearing an upturned bucket from Kentucky Fried Chicken on his head. No Duff. No Izzy. While still processing the disappointment that this was not, in fact, a reunion, Axl started running around like a maniac. Within 30 seconds, he completely lost his breath and could barely sing. Like parents at a 4th grade recital, the crowd continued to smile and clap politely, but their heart was clearly not in it.

After an eight-minute set that felt like a year, the crestfallen crowd was left to ponder the hard lesson that reality sometimes does not live up to expectations no matter how much you wish it always did. 

April 2nd, 2025. Washington DC. The Rose Garden outside the White House. 

This is supposed to be a commentary on the events of the first quarter of 2025, but the most impactful economic event in 2025 happened to occur in the first two weeks of April. This commentary would be pretty useless if we did not discuss it, so please forgive us for exchanging the first quarter for the first seven twenty-fourths of 2025.

The event to which we refer is of course President Trump’s Rose Garden press conference announcing substantial tariffs to be levied against U.S trading partners around the globe. While the President had made no secret of his desire to impose tariffs on imported goods and had already done so on China, Mexico, and Canada, the tariff rates to be paid by U.S. importers announced on April 2nd were much higher than expected. The announcement outlined a plan for tariffs of a minimum 10% on all countries, 20% on the European Union, 24% on Japan, an additional 34% on China, and, especially surprising, rates ranging from 25% to 49% on Asian countries previously not thought of as rivals, such as South Korea, India, Taiwan, and Vietnam.

In reaction to the magnitude and breadth of the tariffs, U.S. stocks[1] immediately sold off 3%-4% in after-hours trading. The selling pressure was sustained when markets opened the following day and the resulting 10.5% sell-off in the two days following the tariff announcement ended up being the fourth largest two-day drawdown in U.S. stocks since World War II. Only sell-offs during the 2008 Global Financial Crisis, the 2020 COVID era, and the freakish, technical-driven Black Monday in 1987 saw worse back-to-back days in the stock market.

With the following week marred by relentless selling of global stock markets, rising interest rates, and a Federal Reserve seemingly unable to provide monetary policy support due to tariff-induced upward pressure on inflation, the President changed course on April 9th by offering a 90-day delay in implementation of his tariff policy to “any country that isn’t retaliating”. In one of the largest intraday relief rallies of all time, U.S. stocks recovered much, but not all, of their lost ground, rallying nearly 9% in a matter of minutes. Yet, shortly thereafter, tariffs on Chinese imports were substantially increased. Combined with the digestion of the fact that the minimum 10% tariffs on all imports were still in place, concerns of a protracted trade war were reignited. At the time of this writing, U.S. stocks remain 12.5% below their February peak.

Perhaps what has spooked investors the most about this tariff debacle is that it shattered expectations of how the President would conduct policy during his second term. The generally accepted view of the President amongst the business and financial community was the often-quoted instruction to “take Trump seriously, but not literally”. This mantra acknowledged that his words had the tendency to provoke strong reactions and deviate from economic norms, but, ultimately, the administration would promote policies generally favorable to capital, such as reducing taxes and regulatory burdens. The outcome of Trump’s first term seemed to support this notion and positive comments from virtually every corner of the business community between the election and inauguration indicated this was clearly the expectation at the outset of his second term.

However, the reality has thus far been something quite different from what was expected. Even before the tariff announcement, there were signs that the current Trump administration would not look to signals from financial markets to guide policy to the same degree as in the President’s first term. Whereas the first Trump administration began with an agenda involving various tax cuts and reducing regulations, the current administration’s economic policy instead started off by levying an initial round of tariffs on imports from China, Mexico, and Canada and empowering the Department of Government Efficiency (DOGE) group to slash government spending, an effort that proved more disruptive than expected.  

What Now?

We concur with the overwhelming majority of economists that dramatically reducing international cross-border trade would be damaging to economic growth. The success of the post-WWII U.S.-led global economic order based on free trade is self-evident. In that time, the standard of living in every country that has participated in that economic order is at the highest it has ever been under any reasonable metric. Real GDP per capita in the U.S. has nearly quintupled during this time period, growing at an average of 2% in excess of inflation annually.

Source: U.S Bureau of Economic Analysis Via FRED

Meanwhile, U.S. stocks have returned a cumulative 605,533% (not a typo!) during that 80-year period.

The Business Roundtable, a group of over 200 CEOs of leading American companies, also expressed agreement with this sentiment, issuing a statement shortly after the April 2nd tariff announcement that began:

“Business Roundtable supports President Trump’s goal of securing better and fairer trade deals with our trading partners, including by lowering tariffs on U.S. exports and expanding market access. However, universal tariffs ranging from 10-50% run the risk of causing major harm to American manufacturers, workers, families and exporters. Damage to the U.S. economy will increase the longer the tariffs are in place and may be exacerbated by retaliatory measures.”

There are always exceptions, such as folks or even entire geographies directly or indirectly reliant on disrupted industries, where the adverse effects of the creative destruction wrought by a free-market, capitalist system are most keenly felt – and those who find themselves in these circumstances deserve a proportionately supportive response from society at large. However, the extraordinary claim that the average American would be better off if global economies had abandoned the economic theory of comparative advantage, with its roots dating back to Adam Smith’s 1776 treatise The Wealth of Nations, and instead maintained high levels of protectionism is directly contradicted by the observable evidence of our country’s exceptional economic achievements in the post-WWII era. 

Whether the President backing away from the April 2nd tariff policy proves to be temporary or permanent, it’s clear that the foundation of the U.S. economy is not as stable as it was thought to be, the actions of the President are not as predictable as they were thought to be, and the range of outcomes going forward is necessarily wider.

During the sell-off following the tariff announcement, we saw a flurry of communications issued by folks with impressive-sounding titles from impressive-sounding financial institutions. While generally informative about the facts of the matter at hand, they also contained a long list of recommendations of how to reallocate capital in the face of this new trade paradigm. We understand the comfort such pronouncements can give investors. When markets are in freefall and emotions are high, the urge to DO SOMETHING is unavoidable. Unfortunately, it is also the absolute worst possible time to give into that urge and make sweeping financial decisions. At a time when fiscal policy is undergoing major shifts on a daily basis and the definition of success for these policies is just as fluid as the changing policies themselves, how could one have any confidence – to the upside or downside – when moving capital between asset classes or sectors?

The time to prepare for a flood is before it starts raining, not when the river has already overflowed its banks. This is a bedrock philosophy at Kovitz and our client portfolios reflected this coming into the year.

Planning for periods of market distress begins with having an asset allocation where the mix of risk-based and more stable assets contemplates the inevitable possibility of significant market declines and accurately reflects each client’s ability and willingness to weather these periods of market distress while still meeting their financial goals.

The next step is to populate that asset allocation with investments that diversify exposure to any single risk factor, meet our definition of quality, and offer sufficient reward in exchange for the risk being taken. At Kovitz, growth is accomplished primarily through allocation to our Core Equity strategy and, where appropriate, an assortment of private investments with exposure to real estate, private equity, and private credit. Portfolio stability is achieved through ownership of high-quality government, corporate, and municipal bonds with limited duration risk and, where appropriate, allocations to hedged equity and other alternative strategies.

The last, and most important step, is to stick to the plan. It was created for a reason and that reason was not to discard it as soon as stocks fall 10%. Periodic, systematic rebalancing is part of sticking to the plan as market values change. This is quite different from either selling risk assets in a panic or impulsively “buying the dip” during a downturn, which are two sides of the same wealth management sin: trying to time the market. Rebalancing should be periodic and systematic.

Managers of individual strategies also express their opinions on market prices in relation to the intrinsic value of their investment universe. For example, exiting 2024, our Core Equity team had noted that valuations for stocks and other risk-based assets were elevated after two straight years of 25%+ returns for U.S. stocks. With these returns largely derived from the appreciation of a handful of Tech or Tech-adjacent companies exposed to the unbridled enthusiasm for Generative AI, the team had adopted a moderately defensive tilt to the portfolio, pruning some of last year’s “winners” and replacing them with companies whose share prices reflected a larger gap between price and their estimate of value.

The investment landscape does appear to be shifting more than usual as the foundations of the global economic order that were previously taken for granted have recently come under attack. However, in this environment, like all environments, the foundation of a sound financial plan does not change. From this position of strength, we have every confidence that we and our clients, in partnership, will safely navigate this inherently uncertain future.
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[1] All references to U.S. stocks and their returns are represented by the S&P 500 Index and the total return of that index.

DISCLOSURES

Fees: Gross-of-fees composite returns incorporate the effects of all realized and unrealized gains and losses and the receipt, though not necessarily the direct reinvestment, of all dividends and income.  Gross-of-fees returns are presented before management fees, but after all trading expenses.  From inception through December 31, 2020 and after July 1, 2024, the Beginning Value Method (BVM) method was used to calculate returns. From January 1, 2021 through June 30, 2023, the Average Capital Base (ACB) method is used. Beginning on October 1, 2020, the net-of-fees returns are calculated by deducting model investment management fees, which are defined as the highest, generally applicable fees for the strategy of 1.00% of all composite assets. Prior to that, generally applicable fees were 1.25% for equity assets and 0.50% for cash assets. The firm's current management fee schedule is as follows: 1.25% on assets below $1 million, 1.0% per annum for assets from $1 million to $5 million, 0.85% per annum on assets from $5 million to $10 million, 0.75% per annum for assets from $10 million to $20 million, 0.65% per annum for assets from $20 million to $35 million, 0.55% per annum for assets from $35 million to $50 million, and 0.50% per annum for assets over $50 million. Such fees are negotiable. Where applicable, the total bundled or wrap fee charged to each portfolio is dependent on the end client’s financial advisor and wrap sponsor. The composite includes accounts that do not pay trading fees.

Definition of The Firm: Kovitz Investment Group Partners, LLC (Kovitz) is an investment adviser registered with the Securities Exchange Commission under the Investment Advisers Act of 1940 that provides investment management services to individual and institutional clients. From October 1, 2003 to December 31, 2015, the Firm was defined as Kovitz Investment Group, LLC. Effective January 1, 2016, Kovitz Investment Group, LLC underwent an organizational change and all persons responsible for portfolio management became employees of Kovitz. From January 1, 1997 to September 30, 2003, all persons responsible for portfolio management comprised the Kovitz Group, an independent division of Rothschild Investment Corp (Rothschild).

The description of products, services, and performance results of Kovitz contained herein is not an offering or a solicitation of any kind. Past performance is not an indication of future results. Securities investments are subject to risk and may lose value.