July 2025 | Signs of Stability

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As we cross the halfway mark of 2025, the U.S. economy continues to show impressive resilience despite policy uncertainty and shifting global dynamics. The big picture remains encouraging: inflation is cooling, the job market is holding steady, and financial markets are adjusting to a new, more normalized environment.

The Federal Reserve’s aggressive rate hikes seem to have had their intended impact. The Fed’s preferred inflation measure, the Core PCE, has been moving gradually back toward its 2% target. While inflation hasn’t fully settled, the downward trend gives us confidence that interest rate increases from the Fed are likely behind us for this cycle.

As the chart below indicates, consumer spending, the primary driver behind the US economy, remains steady. The chart looks at consumer spending from multiple angles, with each suggesting a healthy trend has re-established itself following the extreme volatility of the Covid years. We will be watching these numbers closely, particularly if and when significant tariffs are enacted. If tariffs lead to higher prices, this would likely have an impact on consumer behavior. To this point, consumer spending has been gradually increasing, a good sign for continued economic expansion.

The most important driver of consumer spending is job stability. At the moment, the job market appears quite healthy, as indicated by our very low unemployment rate shown in our final chart (next page). With the advent of Artificial Intelligence and its ability to make workers more efficient, businesses are hiring more selectively. In spite of this new and growing trend, the unemployment rate remains near historical lows and wages are rising modestly. We view this as further evidence that an impending recession is unlikely.

Equity markets have started to reflect this more positive outlook. After falling as much as 17% from its highs, the S&P 5001 has regained ground on the back of relatively strong corporate earnings and optimism that the Fed is now more likely to cut rates than to raise them.

We view stock valuations as extended but reasonable, assuming corporate earnings continue to grow as we expect. The current environment has favored the high-quality, cash-generating companies that play a prominent role in our client portfolios.

On the policy front, President Trump’s recent tariff announcements have understandably caused some market jitters, but the relatively muted reaction suggests that investors are taking a measured view. We would agree, and see the tariff news as part of a broader negotiation strategy rather than the beginning of a global trade war.

Overall, we believe the outlook for the second half of 2025 remains constructive. Inflation is easing, the economy is normalizing, and both the stock and bond markets are adjusting to this more stable environment. At Cornerstone Capital, we are focused on building durable, diversified portfolios designed to weather uncertainty and capture long-term opportunity. As always, we appreciate your trust and look forward to navigating the rest of 2025 together.

— Brad Dinsmore

1. The S&P 500 Index is a market-capitalization weighted index that includes the 500 most widely held companies chosen with respect to market size, liquidity, and industry. Investors cannot invest directly in an index.

April 2025 | Sniffing Out a Path Forward

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Walking Yogi, my 3-year-old Bernese Mountain Dog, is a study in patience. If you are looking to go for a run or even a brisk walk, Yogi is not your guy.

Bernese are well known to be smart and exceedingly kind but also a bit stubborn, and they are blessed with a sense of smell purported to be up to 100,000 times that of their owners. This leads us face-first into virtually every plant, flower, tree, dog or human in our path. I have no idea what he’s learning, but his curiosity is boundless. Watching his endless investigation on our walk this weekend left me wondering if maybe he is the one creature capable of sniffing out where the current tariff turmoil might lead.

President Trump’s “Liberation Day” tariffs have walloped the stock market, and unless negotiations with our trading partners yield prompt results, they will significantly impact the real economy in short order.

We see two potential paths forward:

Scenario 1. The Trump Administration, in an effort to bring as much manufacturing as possible back to the U.S., sticks to these massive tariffs and fully abandons the idea of comparative advantage. This outcome would likely lead to stagflation (slower growth and higher prices). In previous periods of stagflation, stocks in defensive sectors like consumer staples, healthcare, and utilities performed relatively well, but the overall market suffered.

Scenario 2. The recently imposed tariffs are an opening salvo in the administration’s plan to negotiate more favorable trade agreements. Under this scenario, as negotiations progress, tariffs will be significantly reduced and the world will settle into a new, but relatively familiar era of global trade. We would expect this to lead to a revival in stock prices across the market.

In our view, scenario two is the more likely outcome – Mr. Trump has spent a lifetime working on “The Art of The Deal” and we expect he has brought that mindset to the Presidency. That said, trying to predict short-term outcomes to jump in or out of the market has generally proven to be a mistake. The following charts are instructive when dealing with this kind of volatility. The first shows market returns since 1970, alongside the crises and events that have shaped both markets and investor sentiment over that period.

As you can see, despite numerous challenges over the past 55 years, the economy has continued to grow, and the stock market has reflected this long-term progress. The second chart (below) shows the significant detrimental impact of being out of the market if/when a rally occurs. Missing just a handful of key days can dramatically reduce long-term returns.

While the stock market has experienced significant volatility with each tariff announcement, the bond market has remained relatively stable. From April 2 (“Liberation Day") through April 7, 3-5 Year Treasuries have risen by 0.39%, while the S&P 500 Stock Index(1*) has declined by nearly 10%. Bond traders may be reflexively pricing in the simplest scenario – a short-term economic shock followed by a rapid return to the status quo. Even if this rosy scenario fails to play out, the relative predictability of bond payments often leads to greater stability for high-quality bond investments in times of crisis.

If unusually high volatility continues, which we view as probable in the near-term, equityonly portfolios should benefit from an allocation to more stable and predictable sectors. Balanced portfolios will likely see further benefit from an allocation to high-quality bonds. We fully understand that living through these periods can be stressful, and we want to remind our clients that we are here and happy to talk through your financial circumstances at your convenience. And if a chat with Brad, Mason or me doesn’t fully put you at ease, Yogi is available for long (very slow) walks any time.

— Brad Dinsmore

1. The S&P 500 Index is a market-capitalization weighted index that includes the 500 most widely held companies chosen with respect to market size, liquidity, and industry. Investors cannot invest directly in an index. Indices and other financial benchmarks shown are provided for illustrative purposes only, are unmanaged, reflect reinvestment of income and dividends and do not reflect the impact of advisory fees. Comparisons to indexes have limitations because indexes have volatility and other material characteristics that may differ from client portfolios.

October 2024 | Running With Scissors

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Raising three sons has been the joy of my life, but it has not always been easy. Rules that seemed self-evident were often ignored even when repeated (and repeated). Risks were rarely fully-assessed before actions were taken. Consequences were dismissed, even when their likelihood was a virtual certainty. Only my Dad seemed to take endless joy in the chaos, as he had raised not three, but FOUR boys – apparently payback is hysterical.

A healthy respect for risk is a necessity in both economics and investments, and I believe my Dad (ultimately) taught me well. As our name implies, Cornerstone Capital endeavors to build highquality, durable portfolios that we believe will not only withstand the test of time, but benefit from it. As Warren Buffett said, “Successful investing takes time, discipline, and patience.”

The Federal Reserve faces a similar challenge. They must maintain a disciplined focus on the longterm health of US businesses and consumers, while balancing countless risks that confront the world’s largest economy. This is parenting at an exponential scale. At their most recent meeting, the Federal Reserve voted to cut the Federal Funds Rate, the interest rate it controls and which then drives interest rates across the economy, by 50 basis points, or 0.50%. In our view, a 25 basis point reduction would have been more prudent, and in line with the gradual normalization we have seen across the economy over the last two years. As the chart below illustrates, a more gradual approach has also led to stronger stock market returns in the past. Cutting by 50 basis points brought to mind running with scissors – in our view, a bit more caution was advisable.

The Fed has a dual mandate – maintain price stability and maximize employment. Prices, as measured by the Consumer Price Index, increased by 2.4% y/y in September. This is above the Fed’s stated target of 2.0%, but prices have been trending steadily toward this goal over the last two years. On the employment side, the most recent numbers came in far stronger than economists had expected. The U.S. economy added more than 250,000 jobs in September, far above the expectation of 150,000. With inflation still above target and employment trends quite strong, we would expect further rate cuts in 2024 to be minimal.

Not surprisingly, the primary topic in recent client meetings has been the U.S. election in November. While we are not political prognosticators, one interesting historical trend has been that the markets tend to be volatile early in an election year, and then move higher just ahead of the election. We believe this happens because as we get closer to the election, likely outcomes become discounted in the markets as investors and businesses begin to adjust to the political environment to come. This pattern has certainly held in 2024, with markets advancing even more rapidly than the historical norm, as shown below.

All data sourced from the U.S. Bureau of Labor Statistics https://www.bls.gov/

As a result of this rally and the strong markets of 2023, stock market valuations have become fairly extended. The following chart shows the Price-to-Earnings ratio of the S&P 500, (1*) which is now well above its historical median. Given these valuation levels, we believe further market advances in 2024 are likely to be fairly muted.

To be clear, we are not forecasting a significant decline. The economy has shown remarkable resilience, inflation and interest rates are daeclining, and corporate earnings continue to expand. But with valuations above their historical norms, much of this good news appears to be priced into the markets. Our intention is always to maintain a disciplined strategy, balancing a long-term focus with a healthy respect for risk. This mindset must have some merits - it has even allowed my Dad and me to get seven adventuresome boys to adulthood.

— Brad Dinsmore

1. The S&P 500 Index is a market-capitalization weighted index that includes the 500 most widely held companies chosen with respect to market size, liquidity, and industry. You cannot invest directly in an index.

July 2024 | The Benefits of Diversification

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“It's tough to make predictions, especially about the future.”

— Yogi Berra, Former New York Yankee Catcher

Yogi Berra won 10 World Series and was an All-Star 18 times, but even with his remarkable consistency he saw the future as shrouded in mystery. For investors, discerning a path forward for the economy and markets might be as difficult as catching a no-hitter in baseball (though Yogi caught three, including the only Perfect Game in World Series history). Economists search for patterns and indicators that tend to move ahead of the economy, believing that the past might shed light on the future. But the world often spins unpredictably like the best curveball, and an indicator that has worked very well over multiple cycles will suddenly prove ineffective. For example, a so-called ‘Inverted Yield Curve’ - wherein long-term interest rates fall below short-term interest rates - has long been an excellent indicator of coming recession. And yet, 2-year and 10-year Treasury Bond yields have been inverted since July of 2022, the longest inversion on record (1*), but no recession has occurred. Similarly, the Conference Board’s Leading Economic Indicators (LEIs) had an outstanding track record over several cycles but signaled a coming recession more than two years ago, before recently reversing course and suggesting no recession on the horizon. The failure of these historically dependable gauges suggests to us that looking at a broad and diversified group of indicators, while certainly not fool-proof, is more likely to provide useful insights as to our economic future. Yogi didn’t win 10 World Series by himself, it takes a team to be successful.

The chart (2*) provides an excellent example of the value of a broader look at the economy. The top section illustrates economic growth in the US over the past 75 years. The bottom section shows the Economic Timing Model from Ned Davis Research. The model takes into account 27 different indicators, each monitoring a different sector of the economy. This broad model has been quite effective, providing a correct signal of either expansion or contraction 88% of the time over several decades. Its current reading suggests the economy will continue to grow at a moderate pace.

Since WWII, the US has experienced a recession approximately every 6 years. Other than the very brief, Covid-driven contraction of 2020, we haven’t seen a serious recession since 2008-09, some 15 years ago. Given this run of consistency, it’s not surprising that investors have become a bit complacent. The chart below (3*) shows the S&P 500 (4*) above and the VIX Index below. The VIX Index is a measure of the stock market's expectation of coming volatility. The current reading suggests investors see very little risk in the markets. As detailed in the box at lower-right, when the VIX is at these levels, market returns tend to be quite weak. This suggests to us that much of the positive economic news may already be reflected in current stock prices.

In a sense, using a broad array of economic indicators as we discussed above is a form of economic diversification, and something that we believe can drive better forecasts. When it comes to client investments, we believe diversification to be similarly beneficial. In our view, while it certainly doesn’t guarantee against loss, diversification is a very important component of reaching longrange financial goals while minimizing risk. Over the last 18 months, a handful of stocks have dominated the markets, growing to unprecedented size and providing very strong returns. Our final chart (5*) shows that the five largest companies in the S&P 500, or 1% of the stocks, now make up more than 27% of the index’s value, the largest concentration in more than 50 years. This extreme outperformance by a very small group of stocks has led diversified portfolios to trail the index, but history would suggest this is unlikely to persist. The last time we saw concentration close to this degree was in the early 1970’s, when the so-called ‘Nifty Fifty’ stocks dominated the market. After this period of outperformance, the Nifty Fifty declined significantly.

As most of you know, Cornerstone Capital was founded in San Francisco and the partners remain loyal Giants fans and season ticket holders, so no baseball-themed letter could be complete without a mention of, in our view, the greatest baseball player who ever lived, Willie Mays. Willie passed away on June 18th of this year, ironically here in Palo Alto. His abilities on the field were legendary, leading to a hard-to-fathom 24 consecutive All-Star appearances. The key to his game was versatility – Willie had multiple seasons where he led the league in home runs, stolen bases or slugging percentage, while also winning 12 Gold Glove Awards, given to the best defensive player at each position. Willie Mays was known as the ultimate 5-tool player – meaning he was the rare position player who excelled at all five major physical tools of the game: hitting for average, hitting for power, speed, throwing, and fielding. You might even say Willie’s remarkable skills were a testament to the value of diversification.

— Brad Dinsmore

1. Source – Reuters Article

2. 3. 5. Charts sourced from Ned Davis Research, Inc.

4. The S&P 500 Index is a market-capitalization weighted index that includes the 500 most widely held companies chosen with respect to market size, liquidity, and industry. You cannot invest directly in an index.

April 2024 | Drama Is Not A Strategy

Dramatic headlines sell.

We have all seen the dire predictions of a deep recession and market collapse as a result of the Federal Reserve increasing the Federal Funds Rate from near zero to the current range of 5.25-5.50%. Our view remains that while the rate of increase has certainly been dramatic, interest rates are now roughly in line with long-term averages, and manageable for the economy.

The Covid Pandemic and the ensuing government responses created unprecedented swings in the economy and markets – this was true drama. Consequently, many past precedents didn’t seem to apply as measure after measure blew through historical norms. Two examples are illustrated in the accompanying charts. At left, employment tanked and then rebounded dramatically, as the economy was essentially shut down when the pandemic hit and then restarted when vaccines arrived. (1*,2*)

Similarly, consumer spending virtually stopped as people feared for their jobs and were quarantined in their homes, then stormed back thanks to government stimulus and the eventual return to work.

These charts and many more like them certainly paint a dramatic picture, but the more salient point to us is the current readings, as both have returned to median levels. We see this pattern repeated in chart after chart from the last four years. The economy has normalized and we see GDP doing the same, settling near its historical median of 2.6% annual growth. (3*)

While the economy reflects a return to normalcy, the S&P 500 Index suggests the stock market is a bit extended. (4*) Given the rise in the index over the last 15 months, this is not particularly surprising. The chart below shows the price of the index above and the median price/earnings ratio below. (5*) At current levels, the S&P appears a bit overvalued. Some caution related to equities is warranted.

Regarding interest rates, the current effective Fed Funds rate of 5.3% is slightly above its 50-year median of 4.8%, suggesting there is room for rates to decline a bit in the quarters to come. The Federal Reserve’s preferred measure of inflation, the Personal Consumption Expenditures Index (PCE) has declined from a high of 5.5% in March 2002, to its latest reading of 2.8%. This is down substantially, but still above the Fed’s 2% target. Given the underlying strength of the economy and the fact that interest rates across the board are close to their long-term medians, we would expect any rate cuts from the Fed to be small and gradual.

The U.S. economy is a remarkable machine. Following unprecedented upheaval and equally novel responses, the diversity and dynamism of the world’s largest economy has allowed for a return to a reasonable equilibrium. This is not to say we won’t have further periods of high drama, but it does suggest that maintaining a balanced, diversified portfolio is the appropriate approach for long-term investors. Drama makes headlines, but patience brings returns.

— Brad Dinsmore

1. 2. 3. Charts sourced from Intrinsic

4. The S&P 500 Index is a market-capitalization weighted index that includes the 500 most widely held companies chosen with respect to market size, liquidity, and industry. You cannot invest directly in an index. Indices and other financial benchmarks shown are provided for illustrative purposes only, are unmanaged, reflect reinvestment of income and dividends and do not reflect the impact of advisory fees.

5. Chart sourced from Ned Davis Research

January 2024 | The Sun Also Rises

Ernest Hemingway has long been one of my favorite writers, and The Sun Also Rises my favorite of his books. The book focuses on the experience of weary young men returning from World War I, but I’ve always viewed the subtext of the book, and its title, as an allegory for renewal. While the past may be shrouded in darkness, a new dawn brings the potential for light.

Over the last several years the world has faced challenges not seen in generations – war in Europe, surging interest rates, a global pandemic – and markets have reacted as you might expect, with volatility. Just in the last two years we have seen stock markets fall and then rise more than 20% per year, and witnessed the largest Bear Market in long-term bonds since 1980, with the 30-Year Treasury Bond down 29% in 2022 before stabilizing with a 3% gain in 2023.

So what’s next?

While the crystal ball is always a bit hazy, current economic conditions suggest the skies may be clearing and the sun peeking over the horizon. To be sure, war in Ukraine and the conflict in Israel/Gaza are obviously ongoing, and bouts of Covid continue to appear. At the same time, markets seem to have adjusted to the unpredictability these issues often cause, with economically sensitive sectors like oil prices and commodities (the CRB below) returning to their 5-year medians. (1*)

We talked last quarter about the fact that interest rates have returned to pre-Financial Crisis levels. The Federal Reserve is now signaling that they intend to leave rates unchanged in the near-term, with an expectation of easing later in the year. We expect this steady hand will lead to gradual economic expansion in 2024.

One obvious wildcard is that 2024 is an election year. The inevitable political acrimony would seem likely to cloud our impending sunrise. Somewhat surprisingly, history suggests otherwise. The following chart follows the trend in the Dow Jones Industrial Average (Dow) over a four-year presidential cycle going back to 1900. In this graph, the trend is more important than the actual level of the Dow. (2*) The chart shows that there has historically been a significant upward trend in the second half of an election year. (3*)

With equity valuations just slightly elevated and bond yields well-above their 10-year median, we expect stock and bond market returns in 2024 to be near their historical averages.

Our constructive view going into the year should not be confused with Hemingway’s description of the Running of the Bulls at the Festival of San Fermin. Significant progress has been made in weaning the markets from government intervention and we view this as a long-term positive for the economy – fundamentals should drive business decisions, not artificially low interest rates or government programs. But the business cycle has not been repealed and periods of contraction are normal and expected. We will continue to build diversified portfolios with the intention of participating in rising markets while endeavoring to outperform during periods of decline. If successful, this strategy should allow us to build client wealth with reduced volatility. A sunny prospect indeed.

— Brad Dinsmore

1. Chart sourced from Intrinsic.

2. Indices and other financial benchmarks shown are provided for illustrative purposes only. Investors cannot invest directly in an index. Comparisons to indexes have limitations because indexes have volatility and other material characteristics that may differ from a particular hedge fund. For example, a hedge fund may typically hold substantially fewer securities than are contained in an index.

3. Chart sourced from Ned Davis Research, Inc.