{"id":1681,"date":"2025-08-20T16:14:07","date_gmt":"2025-08-20T16:14:07","guid":{"rendered":"https:\/\/advisor.wellington-altus.ca\/trivestwealthcounsel\/?p=1681"},"modified":"2025-08-20T18:05:32","modified_gmt":"2025-08-20T18:05:32","slug":"august-2025-from-caution-to-melt-up-what-a-roller-coaster-year-2025-has-been","status":"publish","type":"post","link":"https:\/\/advisor.wellington-altus.ca\/trivestwealthcounsel\/august-2025-from-caution-to-melt-up-what-a-roller-coaster-year-2025-has-been\/","title":{"rendered":"August 2025: From Caution to Melt-up: What a roller coaster year 2025 has been"},"content":{"rendered":"

INSIDE<\/b><\/span><\/h3>\n

From Caution to Melt-up: What a roller coaster year 2025 has been<\/strong><\/span><\/p>\n

After a volatile start to the year, markets have stabilized and are trending higher, buoyed by strong earnings from mega-cap tech leaders like Microsoft and Meta. While 80 per cent of S&P 500 companies have beaten expectations and overall earnings growth is robust, the gap between winners and losers is widening, with some sectors showing signs of strain. The rally is being fueled by artificial intelligence (AI)-driven optimism, abundant liquidity, and the prospect of new fiscal stimulus, but risks are building beneath the surface: labour market indicators are weakening, core demand is soft, and tariff and geopolitical uncertainties are rising. Market valuations are stretched, concentration is at record highs, and the equity risk premium is at a two-decade low. Investors should enjoy the current momentum but remain vigilant, as overlooked risks and policy shifts could quickly change the narrative.<\/span><\/p>\n

When Luck Meets Timing: The Hidden Risk in Every Portfolio<\/strong><\/span><\/p>\n

Timing risk can have a profound impact on portfolios, especially for those who go all-in on volatile markets like the S&P 500\u2014where a single bad year can set you back for years, or even derail retirement plans. Diversification offers a smoother ride, but even traditional strategies were tested in 2022, when stocks and bonds fell together and correlations broke down. The real lesson? Investing isn\u2019t about being right or wrong in the short term, it\u2019s about being ready for whatever comes next. Managing risk isn\u2019t about being bearish; it\u2019s about building resilience, protecting your ability to stay invested, and making sure your portfolio bends but doesn\u2019t break when the cycle inevitably turns.<\/span><\/p>\n

When the Index Isn\u2019t Diversified: Rethinking Portfolio Protection<\/strong><\/span><\/p>\n

The S&P 500 is often seen as a diversified benchmark, but today\u2019s index is more concentrated than ever, with the top 10 stocks making up a record 40 per cent of its weight\u2014well above the dot-com bubble peak. Nvidia alone represents nearly 8per cent and, together with Microsoft and Apple, the top three account for 21 per cent of the index, despite generating only about 30 per cent of total earnings. This concentration creates the illusion of diversification and increases systemic risk, as a stumble by one giant can ripple through the entire market, amplified by passive flows and algorithmic trading. History has shown that such periods of concentration\u2014whether the Nifty Fifty, dot-com, or FAANG (referring to Facebook (now Meta), Apple, Amazon, Netflix, and Google (now Alphabet)) eras\u2014often end with sharp corrections. Today\u2019s risks are heightened by structural forces like the dominance of passive investing and shared macro exposures among top companies. In response, our TWC Risk-Managed Balanced Growth Fund and segregated model portfolios take a multi-asset, multi-strategy approach: balancing cash, fixed income, structured notes, equities, private equity, and commodities. This diversified positioning is designed to provide resilience, income, and risk-adjusted growth, helping clients weather volatility and avoid the pitfalls of overconcentration that can undermine even the strongest markets.<\/span><\/p>\n

Please reach out to any of our team members should you have any comments or questions about markets, your portfolio or just wanting to catch up. All the best, and keep investing wisely!<\/span><\/p>\n

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August 2025: From Caution to Melt-up: What a roller coaster year 2025 has been<\/strong><\/span><\/p>\n

After a rocky start to the year, markets have not only stabilized, they\u2019re showing signs of turning higher. Volatility has eased, investor sentiment has improved and the S&P 500 continues to climb. Last week\u2019s earnings from Microsoft Corp. and Meta Platforms, Inc. added fuel to the rally, with both companies delivering standout results that exceeded expectations and lifted guidance. Microsoft\u2019s AI business is now running at a US$13 billion annualized pace, up 175 per cent year-over-year, while Meta\u2019s ad revenue surged past US$46 billion. These results underscore the strength of market leadership and the role mega-cap tech continues to play in driving index performance.<\/span><\/p>\n

But this isn\u2019t just a tech story. Beneath the surface, there\u2019s a broader narrative unfolding\u2014one of momentum, but also of divergence. This earnings season has been strong overall, with 80 per cent of S&P 500 companies beating expectations and blended earnings growth rising to 6.4 per cent year-over-year as of last week. Yet the gap between winners and losers is widening. United Parcel Service, Inc. for example, dropped more than 10 per cent after missing slightly on earnings and declined to issue forward guidance. United Parcel Service chief executive officer Carol Tom\u00e9 cited \u201cuncertainty around trade policy and peak season demand\u201d \u2014 a reminder that global trade flows are softening and U.S. manufacturing and consumer demand are cooling.<\/span><\/p>\n

AI and liquidity are keeping the rally alive<\/strong><\/span><\/p>\n

What is keeping markets afloat is a powerful combination of AI-driven optimism and abundant liquidity. The artificial intelligence investment cycle is in full swing, with hyperscalers and chipmakers leading the charge. Meanwhile, financial conditions are as loose as they\u2019ve been since the post-financial meltdown zero-rate era. U.S. money supply hit a record US$22.02 trillion in June, up 4.5 per cent year-over-year\u2014the fastest pace since July 2022. Even inflation-adjusted money supply\u00a0is rising.<\/span><\/p>\n

And now, there\u2019s a new potential tailwind: fiscal stimulus. The Trump administration is pushing for a wave of pro-growth spending and pressure is mounting on the U.S. Federal Reserve to accommodate. Two Fed officials recently dissented from the decision to hold rates steady\u2014one of the biggest splits in a generation. If the Fed bends to political pressure and liquidity continues to expand, the risk may not be a slowdown\u2014but a melt-up, with an unsustainable increase in the price of assets.\u00a0<\/span><\/p>\n

But cracks are still forming<\/strong><\/span><\/p>\n

Despite the momentum, signs of weakness are emerging\u2014they\u2019re just not getting much attention. The U.S.\u00a0Conference Board\u2019s labour-market differential\u2014the gap between the percentage of consumers saying jobs are \u201cplentiful\u201d versus those saying they\u2019re \u201chard to get\u201d\u2014has fallen to its lowest level since 2017. Second quarter U.S. gross domestic product (GDP) came in at a strong three per cent, but much of that was driven by a collapse in imports, which artificially boosted the headline. Real final sales to private domestic purchasers\u2014a better measure of core demand\u2014rose just 1.2 per cent. Business investment is slowing, labour supply remains constrained, and tariff uncertainty is rising.\u00a0<\/span><\/p>\n

On the geopolitical front, the EU\u2013U.S. trade deal helped avoid a 30 per cent tariff shock, settling instead at 15 per cent. But the calm may be short-lived: U.S. President Donald Trump has threatened to impose 35 per cent tariffs on Canadian exports not under the Canada-United States-Mexico Agreement\u00a0 (CUSMA) starting in August. Japan\u2019s sovereign debt stress and concerns about the Fed\u2019s independence are also lurking in the background.<\/span><\/p>\n

The S&P 500\u2019s equity risk premium is just 2.25 per cent\u2014the lowest in two decades. The index\u2019s market cap now equals a record 28 times\u00a0real disposable personal income. For context: It was 13 times at the 2000 dot-com peak and 25 times during the 2021 meme stock frenzy. Ten stocks now make up 40 per cent of the index\u2014a level of concentration that makes the market more vulnerable to shocks in just a handful of names.<\/span><\/p>\n

Enjoy the ride\u2014but stay alert\u00a0<\/strong><\/span><\/p>\n

This is a market with momentum, leadership, and liquidity\u2014and the potential for a melt-up if fiscal tailwinds and AI enthusiasm persist. But it\u2019s also a market where risks are being overlooked. Seasonal weakness could return this fall, just as the full impact of tariffs begins to bite. If the Fed grants Trump his wish and keeps liquidity flowing, the rally may continue. But if not, the narrative could shift quickly. For investors, the message is clear: enjoy the ride, but don\u2019t lose sight of the risks.<\/span><\/p>\n

When Luck Meets Timing: The Hidden Risk in Every Portfolio<\/strong><\/span><\/p>\n

Lately, been catching a bit more flack on social media for what some interpret as his overly conservative\u2014or even bearish\u2014market views. Without context, we can understand how that perception can form. But this isn\u2019t unusual. Those of us who focus on managing risk tend to hear the \u201cI told you so\u201d chorus after markets rebound. It comes with the territory. Ironically, that kind of sentiment often shows up near the end of a cycle.<\/span><\/p>\n

But here\u2019s the cold, hard truth: we didn\u2019t know where the market was going next, and nor do we now. Nor does any other portfolio manager or financial pundit, no matter how confident\u2014or loud\u2014they sound.<\/span><\/p>\n

Because in investing, it ultimately comes down to two decision paths. Both are valid. But each comes with a cost of entry and some luck<\/span><\/p>\n

Path One: Go long and hold on<\/strong><\/span><\/p>\n

The first path is to go long during highly volatile markets such as the Nasdaq or the tech-heavy S&P 500. If you want to target double-digit annual returns, you have to be willing to accept the large drawdowns that come with it. And you better hope your timing is right because going all-in just before a 1999, 2007, 2019, or 2021-style peak can be devastating, especially if you\u2019re retired or nearing retirement and don\u2019t want to experience sudden, large drops to your life savings.<\/span><\/p>\n

Let\u2019s look at the numbers. Since January 1994, over the past 30.5 years, the S&P 500 has delivered an impressive annualized return of 10.4 per cent. The best year saw a gain of 35.8 per cent. But the worst? A gut-wrenching 37 per cent drop.<\/span><\/p>\n

Now ask yourself: If you had spent 20 years saving $1 million, would you be okay watching it fall to $560,000 during the 2002 bottom? Or to $499,000 in February 2009? Or even to $775,000 in September 2022? The two largest drawdowns were underwater for 4.5 years and took three to more than 3.5 years to recover.<\/span><\/p>\n

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If you\u2019re young, with decades ahead of you, maybe that\u2019s acceptable. You have time to recover, and you can even take advantage of those drops to add more to your portfolio. But if you\u2019re in or near retirement, those drawdowns aren\u2019t just numbers, they\u2019re lifestyle-altering events. They can derail plans, delay retirement, or force you to sell assets at the worst possible time.<\/span><\/p>\n

Path Two: Diversify and sleep at night<\/strong><\/span><\/p>\n

The second path is to diversify. Let\u2019s say you allocate 35 per cent to bonds and five per cent to gold. That\u2019s not radical, it\u2019s just balanced. Over the same 30.5-year period, this diversified portfolio still delivered a solid 8.4 per cent annualized return. The best year? A gain of 27.9 per cent. The worst? A loss of 20.2 per cent.<\/span><\/p>\n

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That\u2019s still a drawdown, but it\u2019s a very different experience. Your $1 million would have dropped to $780,000 in 2002, $700,000 in 2009, and $880,000 in 2022. Not painless but far more manageable. And for many retirees, that difference is the line between staying the course and panicking. The two largest drawdowns were underwater for only 2.5 years and only took one to more than 1.5 years to recover.<\/span><\/p>\n

Sometimes Traditional Diversification Strategies Don\u2019t Work<\/strong><\/span><\/p>\n

2022 was a wake-up call for traditional portfolio construction. For decades, bonds have served as a reliable counterbalance to equities rising when stocks fell and cushioning portfolio drawdowns. But in 2022, that relationship broke down.<\/span><\/p>\n