Wild Ride in the Market, Sustainable Investing in 2025 and Cash on the Sidelines
This has been one of the wildest markets I’ve seen in my 26 years of investing. The year kicked off with a downturn, which was quickly intensified when Trump threw fuel on the fire by announcing sweeping tariffs, a move that jolted the economy and nearly manufactured a crisis.
You would think the market would be way down by now, right? But surprisingly, it has held up with remarkable resilience, despite all the chaos in the headlines.
The S&P 500 was down 19 percent after the Trump administration shocked the markets by announcing sweeping tariffs. What followed was one of the fastest recoveries from a correction in history. Corrections, defined as a drop of 10 percent or more, are completely normal and have occurred on average every 1.6 years since 1950.
What made this one unusual was that it was almost entirely manufactured by the administration. Once the tariffs were partially walked back, the market rebounded and recovered most of its losses within just a couple of weeks. Typically, it takes three to six months for the market to bounce back. Now, we are back at all-time highs.
As of this posting, the S&P 500 is up north of 8 percent for the year. Developed international markets have remained strong and are now up roughly 18 percent year to date. One of the key differences between this year and last is the broadening of market performance. In 2024, the so-called “Mag 7”, Tesla, Meta, Apple, Alphabet, Microsoft, Nvidia, and Amazon, led the charge and accounted for nearly half of the market’s gains. This year, however, the rest of the market has stepped up, and the Mag 7 have actually been a drag on overall performance.
How has sustainable investing fared so far this year? One major bright spot has been our human rights focused emerging markets fund, which is among our top performers and is up more than 27 percent year to date.
At Impact Fiduciary, we currently have about 10 percent of our equity portfolio allocated to companies that are actively addressing climate change, or you may even say our “changed climate” at this point. This includes clean energy companies, many of which have recently come under pressure from the Trump administration.
Surprisingly, these companies have held up well and are actually outperforming the broader market. Why? Because despite political headwinds, the global demand for energy continues to grow, and the cheapest way to add new energy capacity today is through clean sources. That dynamic has helped support performance in the sector, with our clean energy returning around 11 percent year to date.
One area we do not have exposure to is fossil fuel energy. This has actually worked in our favor this year, as the fossil fuel energy index, XLE, is essentially flat year to date. In fact, the sector has been a drag on performance compared to the broader market.
Sometimes, the market does what surprises everyone the most. Green energy outperforming while oil companies lag is not the outcome many would have expected, especially given the current political backdrop.
Could the market slow down? Could we be headed for another correction or even a bear market? The answer is always yes. In the short run, no one truly knows what will happen. History, however, shows that maintaining a diversified approach and keeping a long-term perspective has consistently delivered the best results.
One thing that Chris and I have noticed lately is a reluctance to put cash on the sidelines to work. We always recommend keeping an emergency fund, along with any money earmarked for short-term purchases over the next year in a safe place such as an FDIC insured money market.
However, holding excess cash for too long can be detrimental to your financial health, or at the very least represent a significant opportunity cost. While it might feel reassuring in the short run if the market experiences a downturn, study after study shows that it can ultimately drag down long-term performance.
Think of it this way. Say you have a 4 percent yield in a money market account. That sounds great, right? But historically, inflation has averaged about 3 percent, which means your real return is closer to 1 percent. And then there are taxes. The government will take its share of that return as well. Let’s do some quick back-of-the-napkin math. Suppose you pay 20 percent in federal taxes and another 9 percent in state taxes.
After accounting for inflation and taxes, the real return on a money market investment drops sharply from 4% to just 0.71%. By comparison, investing in the stock market, with an average historical return of around 9%, allows you to defer most taxes until you sell.
Hold the investment for more than a year and you will likely qualify for the long-term capital gains rate of about 15%, which is often significantly lower than your marginal income tax rate.
The real return, roughly 6% after inflation, is actually going to be over 8 times higher on a historical basis. And that is before we even start talking about the power of compounding interest.
Yeah, but is now really a good time to put that money to work in the market? In the short run, no one knows for sure. However, if you look at the next five to ten years, history gives a resounding yes.
Not sure if your current strategy is the right one? Let’s talk. Chris and I are always happy to be a sounding board and walk through your approach, your goals, and your options. Whether you are sitting on too much cash, wondering about the right allocation, or simply want a second opinion, we are here to assist you.
Disclaimer: This article is provided for general information and illustration purposes only. Nothing contained in the material constitutes tax advice, a recommendation for purchase or sale of any security, or investment advisory services. I encourage you to consult a financial planner, accountant, and/or legal counsel for advice specific to your situation. Reproduction of this material is prohibited without written permission from Patrick Dinan, and all rights are reserved.