2025 First Quarter Commentary
- mmoll34
- Jun 4
- 11 min read
For a printable version, click here.
If you are a client, click here for a copy of the client commentary which includes discussion of recent investment activity.
Tariffs - What To Do
“There are only two kinds of forecasters – those who don’t know and those who don’t know they don’t know.” – John Kenneth Galbraith
We spend the days following a quarter-end discerning what themes we should discuss with our clients in our commentary. Our aim is usually to refocus our clients on what should matter most regarding their investments, to explain our thinking behind the securities we own and inform them of any changes we have made in their portfolios. The volatility since this quarter-end has resulted in our redrafting this commentary several times, which is very unusual. Tariff uncertainty has clouded the economic outlook and caused market turmoil. No one knows how or when that market turmoil will be resolved; however, we would like to relay our thoughts on the subject. While we are not so naive as to believe there has ever been true “free trade” among the nations of the world, we believe that progressing toward more free markets has contributed to a higher standard of living for all participating countries. After World War II, the United States and Western Europe essentially made a pact that the United States would police the oceans to keep them open and safe for trade. In return, the U.S. Dollar became the global reserve currency. Unequal tariffs and trade barriers implemented by U.S. trading partners were tolerated, because U.S. trading partners invested their trade surplus in U.S. Treasuries. The Trump administration believes the current state of world trade is disadvantageous for the United States. All of the largest U.S. trading partners’ simple average tariff rates exceed U.S. rates (see Chart 1). Furthermore, this does not adjust for quotas and currency manipulation.
Chart 1: Average Tariff Rates – US & Top 10 Trading Partners
No matter which side you might fall on the tariff debate, prudence requires an investor to consider the risks. Even if you accept the argument that tariffs are necessary for the country’s long-term fiscal health or national security, it is impossible to replace most imports with locally sourced goods overnight. Factories have long lead times and workers have to be recruited and trained. Doing so might be more expensive than expected given the current low level of unemployment and higher cost of expanding domestic industrial capacity due to tariffs levied on construction materials and machinery that may not be currently available domestically. While some foreign companies have announced plans to invest in new production within the U.S., the amount of uncertainty generated by tariffs has and will cause businesses to slowdown and possibly cancel their plans for growth. If the goal was to create an incentive for nations to come to the bargaining table, the Trump administration’s tariff approach might be beneficial in the long run. However, the heavy-handed manner in which this policy has been implemented leaves us unsure of the exact intent. So, what is an investor to do?
To avoid being panic stricken, we encourage you to maintain a long-term perspective. Even if you are close to retirement or newly retired, you are still investing for the long-term. With life expectancies in the mid-80s for those who are in higher income brackets (a proxy for access to healthy food and healthcare), even at the age of 65 you have approximately twenty or more years to live. Clients close to retirement or newly retired likely have a decent amount of cash and quality bonds that can meet spending needs during this time of market turmoil. If you don’t have any bonds, it is most likely because you have sufficient wealth to withstand a recession while maintaining your focus on long-term objectives. Importantly, even if you feel you are nearing the great beyond, you should also maintain a long-term perspective. While you may not be long for this Earth, your heirs will likely be around for decades. If you expect to leave something for your heirs or your favorite charitable organizations, the investment time horizon for your portfolio does not end with you.
While unpleasant, past large single-day stock price declines have not had a dramatic impact on long-term returns. Chart 2 shows that large single-day declines have a smaller impact on returns as the time invested increases. Importantly, we believe that most investors, at the time of the market disruptions listed in Chart 2, would have gladly accepted an offer to lock in their future returns at any of the respective annualized returns since these dates. Even at the lowest return in the table, 7.09% annualized from April 13, 2000 through April 9, 2025, performance was likely high enough to allow most investors to achieve their investment objectives. So, we encourage you to turn off CNBC, limit the number of times you check your portfolio’s market value and maintain a long-term perspective regarding your investments.
Chart 2: Worst Single Day S&P 500 Moves
“The evidence on investment managers’ success with market timing is impressive – and overwhelmingly negative.” – Charles D. Ellis
Secondly, trying to time the market is folly for all but a few elite investors. Opting to drop out of the market and missing the turn is more likely to have a greater negative impact on your standard of living than riding out the storm. As Chart 3 from Hartford Funds shows, 78% of the stock market’s best days occur during a bear market or during the first two months of a bull market.[1] Moreover, those best days can be very costly for an investor – 10 days alone cutting long-term returns in half. We all watched how volatile a single day of trading can be last Wednesday, April 9 when the S&P 500 swung intra-day from -0.70% to close at +9.52%.
Chart 3: Good Days Happen in Bad Markets and Missing the Best Days Has Been Costly
We never know when the turn will happen. The COVID bear market began after the February 19, 2020 high, bottomed on March 3, 2020 and permanently moved on to new highs by early November of 2020. The pressure on stocks could continue, but countries may also decide to begin bargaining. The Trump administration has claimed that 70 countries have already reached out to the White House. Also, European Commission President Ursula von der Leyen said that the EU wants to negotiate and has offered zero-for-zero tariffs for industrial goods and it has been reported that U.S. Treasury Secretary Scott Bessent has been told to begin trade negotiations with Japan. This will take time even if it is successful and any news, positive or negative, will likely continue to cause volatility. Any news of positive progress on trade negotiations, stocks could reverse the market downturn. Of course, the opposite is true as well. Additionally, if the impact of tariffs has significant negative economic consequences, the Fed might become more accommodating. Such a response could resurrect investors’ faith that the Fed will always protect investors against losses. We must reiterate that we do not claim expertise in market timing and have rarely observed someone consistently succeeding at it.
“You can have cheap equity prices or good news, but you can’t have both at the same time.” Joe Rosenberg
Finally, the market often throws the baby out with the bathwater. This type of volatility often presents investment opportunities. In the past, when whole markets or the investors of one stock or an industry fell into panic, we have had the opportunity to purchase a number of high-quality companies at bargain valuations. Some of these purchases during times of market turmoil included: AbbVie Inc., Berkshire Hathaway, Chevron, Cisco Systems, Dollar General, Exxon Mobil, Gilead Sciences, Kraft-Heinz, Merck, Pfizer, Valero and Verizon. In our next quarterly commentary, we will report to you on a very high-quality company we added to our clients’ portfolios since the quarter ended.
A Portfolio with Resilient Operations
The vast majority of investors’ portfolios are heavily weighted in growth stocks, if not for any other reason than the major stock indexes have a growth bias. As value investors, we have chosen a different path; one we feel is more prudent and resilient. In times of extreme pessimism and uncertainty, correlation among most assets approach 1.00, meaning there is nowhere to hide. Consequently, we would not expect to have positive returns during such a period. However, we would remind clients of a chart we showed in the 3rd Quarter Commentary of 2024 which demonstrates that over our 34-year track record we have tended to protect our clients’ capital during extended down markets (periods in which the S&P 500’s five-year average annual return was negative.) While we do not know what the rest of the year holds and cannot promise any level of performance, we have been encouraged that our portfolios have been more resilient than the broad market during this year’s higher volatility. We believe this is in part due to many companies in our portfolios having protective attributes other than simply being priced at a valuation that should reduce downside risk.
The one investment that should be considered the golden child has been treated more like the black sheep of the family. Only recently have gold miners caught the interest of institutional and retail investors in any meaningful way. Almost all gold miners of significant size are earning record profit margins of nearly $1,300 per ounce as illustrated by the blue shaded area in Chart 4 on the next page. Meanwhile, the ratio (GDX/Gold price) of the value of VanEck’s Gold Miners ETF to the price of gold is depicted by the gold line in Chart 4. The steep decline in the GDX/Gold price ratio, and the fact that it is lower today than it was in past periods when miners had significantly lower profit margins further suggest that gold miners are undervalued.
Chart 4: All In Sustaining Cost Margin (Blue) and Relative Performance of Gold Equities vs. Gold Bullion
Without the easy access to capital that the days of ZIRP (zero interest-rate policy) provided, gold miners have become much more discerning with their capital. For a decade, these miners have been exercising strict discipline in allocating capital toward debt reduction, mine expansion, new technological advancements, acquisitions and limiting new mine development to the most promising prospects. Additionally, gold prices have risen due to a renewed interest from central banks in accumulating gold as a means of reducing their dependence on the dollar-based financial system. While we are pleased with the performance of our gold mining stocks year-to-date, we believe even a small amount of interest shown from institutional and retail investors could cause gold mining stocks to rise significantly. We also appreciate gold for its tendency to attract funds in search of a port in a storm during market disruptions.
Another example of a more tariff-resilient business is portfolio company Dollar General (NYSE: DG), which derives most of its sales from products that they source domestically. Also, if there is a recession, the company’s low prices coupled with convenience tends to attract customers who “trade down” from larger retailers.
Cameco Corporation (NYSE: CCJ) is one of the world’s largest suppliers of uranium and fuel rod assemblies for nuclear power plants and is another example of a company we believe will be more resilient in a higher tariff environment. Uranium has been exempted from the most recent round of tariffs. However, if that were to change, we believe the effect on Cameco’s profits would be muted. Fuel for nuclear reactors is such a small percentage of operating costs for nuclear power generators that the utilities demand for fuel will not be significantly affected by higher uranium prices. Also, over two-thirds of Cameco’s uranium sales are via long-term contracts whose pricing is less volatile than prices for immediate purchase (spot-market prices).
Pharmaceuticals were exempt from the recent round of tariffs. However, if they are included at a future date, while it may strain one’s budget, most people who need medicine are not going to stop taking it because the price goes up 25%.
Finally, as a domestic communication services provider, Verizon (NYSE: VZ) should not be impacted by tariffs as drastically as companies that derive a lot of revenues from exports or whose supply chains include a large amount of imports. While there is no way to control the short-term movement of stock prices, we believe we own a number of companies that have some resilient operating characteristics relative to tariffs.
Lee Bodenhamer, You will Be Missed Greatly
When a person looks back on their career, he or she realizes that, if they are very fortunate, someone has had a disproportionately positive influence on them professionally and personally. Lee Bodenhamer has had that kind of impact directly on Mark Millsap and Greg Hartz and indirectly on our entire firm. Lee Bodenhamer died on February 20, 2025. We at FRM are all disciples of Lee’s whether we worked directly with him like Mark did from 1989 until Lee’s retirement in 2000 or whether we were influenced by his way of thinking as a devotee of value investing. Lee brought Mark from Alabama to Arkansas in 1989 to teach him the discipline of value investing and to pass it on to the next generation. At the time, Lee was looking for a younger value practitioner to come work alongside him. Mark said, “I don’t know what Lee saw in me, but I knew after one phone call that I was willing to move my young family to have the opportunity to learn from him.”
Lee was a reserved yet brilliant investor that at the time of Mark’s hiring, was probably much better known professionally out of his own state than within. However, when he created the highly impactful Bodenhamer Fellowships Program at the University of Arkansas in 1998, more Arkansans began to take note of his business success and generosity. To date, Lee has supported 174 “full-ride” recipient scholars. Talk about leaving a legacy! Lee’s desire was to combat the “Brain Drain” as he had witnessed so many bright students going to college out of state and never returning. While Lee earned a PhD from Harvard, he ended up moving back to his home state of Arkansas and building a successful business. In recognition of his contributions to the Arkansas business community and his numerous philanthropic activities, Lee was inducted into the Arkansas Business Hall of Fame in 2008.
As you know, two months ago, Greg and Mark sold their remaining interest in Foundation Resource Management to their next-generation partners. Lee, these are your professional grandchildren. Your legacy lives on!
Mark Millsap (left), Lee Bodenhamer (right)
Disclosure
Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Foundation Resource Management, Inc. “FRM”), or any non-investment related content, made reference to directly or indirectly in this commentary will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this commentary serves as the receipt of, or as a substitute for, personalized investment advice from FRM. Please remember to contact FRM if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services or if you would like to impose, add, or modify any reasonable restrictions to our investment advisory services. FRM is neither a law firm, nor a certified public accounting firm, and no portion of the commentary content should be construed as legal or accounting advice. FRM claims compliance with the Global Investment Performance Standards (GIPS®). GIPS® is a registered trademark of CFA Institute. CFA Institute does not endorse or promote this organization, nor does it warrant the accuracy or quality of the content contained herein. A copy of FRM’s current disclosure Brochure (Form ADV Part 2A) discussing our advisory services and fees or our GIPS-compliant performance information is available by emailing Abby McKelvy at amckelvy@frmlr.com.