Charts for the Beach 2025

It’s been a hot summer in New York City, and the markets have been red hot as well. Speculation abounds and a record portion of NYSE volume is now in stocks with prices under $5, portfolio betas are at or near all-time highs, and companies are being encouraged to jettison their business models to borrow to hoard crypto.

It’s always fun to return to classic novels for summer reading and accordingly, this year’s Charts for the Beach returns to the time-honored basics of the economy and of investing.

So, wiggle your toes in the sand, grab a beer or a Hugo spritz, and enjoy!

1. Don't forget dividends!

Dividends are a major part of our current portfolios because investors seem to forget the power of compounding dividends during heady times. Our first chart points out that the Dow Jones Select Dividend Index is – believe it or not – actually neck-and-neck with NASDAQ over the last five years.

The competition between the two indices is even more interesting because Technology comprises only about 4% of the dividend index, but Utilities, Financials, and Consumer Staples comprise nearly 2/3rd of the index.

2. Has stagflation arrived?

Some stagflation (i.e., stagnating growth with rising inflation) appears in every late-cycle environment simply because inflation is a lagging variable relative to growth. As the cycle ages, growth tends to slow but inflation doesn’t.

The current cycle is following that historical path. More importantly, though, it is the first time since prior to the Global Financial Crises that stagflation has appeared.

The following chart shows the ISM Services Prices Paid Index (a proxy for inflation) versus the ISM Services New Orders (a proxy for growth). One can see stagflation potentially forming for the first time in more than 15 years.

3. The Maseratis and the Blahniks are on sale

Every consumer purchase involves a value proposition. If one could purchase a Maserati for the price of a Chevy or a pair of Manolo Blahnik shoes for the price of Skechers, most consumers would certainly do so. In fact, they’d probably ask for two!

However, somehow people forget the value proposition when they buy stocks. Today, the Maseratis and the Blahniks are on sale.

Non-US high quality companies offer virtually the same earnings growth as the US’s Magnificent 7 stocks (17% vs. 16%), offers nearly 10 times the dividend yield (2.3% vs. 0.3%), and is valued at about a 35% discount.

4. Analysts won’t warn you if there’s a profits slowdown looming

Analyst estimates tend to follow performance. If stocks go up, then analysts tend to raise estimates. If stocks go down, then they tend to lower estimates.

The “Liberation Day” selloff prompted analysts to significantly cut their estimates when stocks fell. The subsequent rebound in the market then encouraged analysts to raise their estimates, and those upward revisions have fostered a new consensus that the profits cycle will accelerate. Contrary to that view, our forecast remains that profits are decelerating.

A look back at the Tech Bubble indicates it might not be prudent to follow estimate revisions during a speculative period. In December 2000, several quarters past the peak of that profits cycle, analysts were still forecasting nearly 9% earnings growth for 2001. They gradually lowered their growth forecasts, but never enough to account for the actual drop of 31%.

5. Not getting paid to take credit risk

Perhaps our most out-of-consensus position right now is that our fixed-income portfolios have virtually no credit exposure. Historically, the time to take credit risk is when credit spreads are abnormally wide and the profits cycle is troughing. Today, credit spreads are abnormally narrow and the profits cycle is peaking.

The next chart shows that today’s high yield bond spreads are similar to those prior to the Asia/Russia credit crises, the global financial crisis, and 2022’s inflation fears and Fed tightening. That suggests to us caution might currently be warranted toward credit especially within the context of profits decelerating.

6. Gold as a ballast against uncertainty

Some investors like to trade gold, but we prefer to think in terms of an allocation to gold. We hold gold not to make short-term gains, but rather to act as a ballast against the unexpected.

There has historically been a relationship between gold returns and uncertainty. The chart below shows gold’s year/year returns versus the National Federation of Independent Businesses (NFIB) Uncertainty Index.

This explains a lot about gold’s recent returns, but also suggests that gold might not provide outsized returns should uncertainty subside.

To us, the only certainty in the markets is there will likely be continued uncertainty, and we are maintaining our gold allocations within our multi-asset portfolios.