Second Half – 2025 Investment Strategy
“Don’t fight the Fed, and don’t fight the tape” were truisms that guided my early investment career at Kidder Peabody & Co. in the mid-1980s. Flash forward 40 years to June of 2025 and the Fed is stuck between pending tariff inflation, countered by pending lower earnings (lower employment), and the ever-higher government spending (higher interest rates). In the battle between DOGE and the US Senate, the citizens of the United States lost by $2.4 trillion.
The market is high by historic measure, as seen by the inflation-adjusted P/E chart by Shiller below. A normal market, not cheap, has an Inflation Adjusted P/E of 20 while today it stands at 39.
Raise cash to buy small and mid-cap equites and select European equities when the market returns to normal. This is not a blanket statement, rather a signal in direction that is loud and clear.
Lower portfolio risk.
If inflation rises to 4% by tariffs and government spending, long term interest rates will increase to counter the inflation. If earnings decline by the part of the cost of tariffs (taxes paid by US corporations), 1% to 3%, and P/E ratios return to normal, the market could see a 20% to 40% decline in the next 6 months.