But perhaps not THIS much Chaos…?!

In the restructuring of any enterprise, the standard playbook is to cut staff until management can see the essential work functions. Then you hire back to fill those—quickly, and maybe with an upgrade.

• Elon Musk: “move fast and break things”.
• Goldman Sachs: resumes annual culling of their bottom 10% performers.

What you are seeing are business practices being applied to a government that nobody can defend as “lean”. Are there political scores being settled in the process? Of course there are—just like in business!

• Trump and Vance are directing foreign affairs. Presently, there appear to be 4 leaders engaged in restructuring the Federal Government: DJT, of course, Musk, Scott Bessent (Treasury), and Howard Lutnick (Commerce). Whatever you think of those, they did not get rich to then lose a significant part of their wealth by overseeing a stock market crash.
• 2026 mid-terms are now 20 months away. Campaigning will begin in 9 months if not before. With a 4-vote margin in the House, and 2 in the Senate + tiebreaker, you can be assured that the White House is well aware of this timeline.
• One of the Administration’s primary economic advisers, Kevin Hassett, expects to see the tariff picture become much clearer in April, tax relief in May and growth returning thereafter. Lutnick confirmed the same this week (“move fast”).
• Scott Bessent made two comments that should resonate with many in an interview on CNBC last week:

1. Cheap goods are not the American dream. Over the last 20 years, China has managed to export their economic system to the rest of the world. Example, rare earths essential to technological advancement: when found, 85% of the refining capacity is Chinese. Should you establish a foundry to compete, the Chinese simply lower prices until they bankrupt you.
2. USA must detoxify from fiscal stimulus. It is not the cure for every ill—though that is the way it has been deployed ever since the Great Financial Crisis of 2008-2009.

Interview can be found here: https://www.youtube.com/watch?v=CVa5MEnvShc

1. China: https://www.cnbc.com/video/2025/03/07/treasury-secretary-scott-bessent-we-have-let-china-export-their-economic-system-to-us.html
2. Detox: https://youtu.be/HeZShfd2G4o?si=zsvT5RuPzmZBGaIt

Bessent in particular is worth listening to: he understands macro-economics at a level no one in that same seat has likely ever. Trump won’t get it all right: but he doesn’t have to—just right enough to cause growth to return after shrinking the bloat – not sinking the boat. That’s a bet you should make, in our view. ¹

Be calm as there is method to the madness. Uncertainty is related to Chaos, and sometimes instigates. But in Chaos lie opportunities…

Trump Playbook, near term:

• Tariffs in place
• Tax Cuts made permanent
• Deregulation in motion
• Growth story by Summer 2025

So how did Advocacy Wealth adjust to this new landscape? We made some tweaks to the holdings, primarily in our S-GTAM models.

We considered killing the overweight to Consumer Discretionary. Airlines are already feeling the consumer pull back. But the top two holdings of the ETF we use (FDIS) are Amazon and Tesla. Don’t know as we want to bet against those guys. There’s not an airline in the top 10 holdings.

So that was a non-starter. We turned our attention to our Energy overweight. The price of oil is down about 15% since inauguration, Scott Bessent points out. Saudi Arabia has announced increasing supplies, while Lutnick is touting that deregulation will lower cost for U.S. production, and there’s the possibility of Russia coming out of the shadows, all in the aether. A good way possibly to pick up some alpha in the face of oil prices declining from growing supply stands in owning the “toll collectors”. The downstream relayers of supply from production. While this overweight is tiny, because the weighting in the benchmark itself for all Energy is only 3.69%, if we are right, the effect could be outsized because of the asymmetry of returns. If we are wrong, doesn’t hurt much. We sold XOP, the ETF based on the broad producers, and bought AMLP which is an assembly of “toll collectors” in the U.S.

Next up was the overweight to the Industrial sector. We owned XLI, which is truly a hodgepodge of companies, some of which are hard to identify as Industrial—guessing S&P has to put them somewhere (Uber, ADP are Industrial?). We think it makes sense to concentrate that exposure on what we know and what has a high probability to happen: the rearmament of Europe, Germany in particular. During the Angela Merkel era, the German constitution was amended to limit the country’s structural deficit to 0.35% of GDP. (by way of contrast, U.S. spent 2.9% of GDP on Defense in 2024 according to the Peterson Foundation.) ²  Removing this limitation would potentially unleash between $500 billion to $1 trillion in available funding. We found an ETF made up of roughly 2/3 U.S. Defense contractors and 1/3 European: symbol “NATO”. (We know…get over it.) We sold XLI and are holding those proceeds in cash waiting to see how Secretary of Defense Hegseth will cut 8% out of the Defense budget. And…we want to see the Germans take the action described while there is still a supermajority until March 24 in the legislature.

Then we looked at our exposure to Small Caps, which was weighted in line with the ACWI benchmark. We had been using a broad index (VB), but believe the client will be better served by more active management in this choice. We found symbol FSMD, a Fidelity offering that stands on the shoulders of legend Peter Lynch, using quantitative analysis to screen for profitability – 40% of U.S. Small Caps ³  lost money in 2024 according to Kiplinger.

With a price tag of 16 bps expense ratio , this choice was easy. We sold VB and bought FSMD across all the models.

 We remind you that roughly 90% of investment returns can be attributed to the allocation of the large asset classes: Stocks, Bonds, Cash, and to a lesser extent, Commodities and Real Estate. ⁴  We re-examined the debt holdings in our models. We decided to sell TFLO and buy CLOA:

• TFLO is a ladder of 2-year Treasury Floating rate notes, effective duration of 0.01 years, 30-Day SEC yield 4.22%.
• CLOA has 264 issues, effective duration of 0.17 years, 30-Day SEC yield 5.60%.
• TFLO is considered risk free (until the debt ceiling does not get raised). CLOA holds only AAA-rated tranches.

For an arguable small downstep in credit and ever so tiny extension of duration, client picks up 138 bps.

We note that the equal weighted version of the S&P 500® has outperformed the standard index by +226 bps (-2.37% vs -4.63%) through March 12 of this year, and we own that version (RSP) in the S-GTAM model instead of the standard version. Why not in the other two series of models we offer? Because they are designed by mandate to do different things:

• The “B” series mandate is GROWTH.
• The “N” series mandate is NEUTRAL to benchmark for equities, with bonds positioned to provide ballast and stability.
• The “S” series mandate is to generate alpha over the ACWI benchmark through tactical equity allocations. Bonds are positioned identically to the “N” series with further ballast offered by liquid alternatives that do not correlate more than 0.7 with either stocks or bonds, largely sourced from the bond allocation.

To summarize, we take comfort from the way in which our models are constructed and positioned. 90% of return comes from the big allocation buckets. We believe the current selloff is a correction in the equity markets which is being offset to the degree you own bonds and/or liquid alternatives. We have therefore rebalanced your allocations in the big buckets back to model where warranted.

Chaos requires active management to seize opportunities. We believe that we have acted in your best interests to try to do just that.

Notes from our colleagues at Montag & Caldwell from the beginning of last week:

• A tariff-fueled “Growth Scare” and fears of “Peak AI” are weighing on the market, reversing the initial post-election euphoria centered on lower taxes and less regulation.
  
  
• Investors coming to grips with the near-term reality of a “stagflationary shock” from tariffs, immigration enforcement, govt layoffs/spending cuts before the benefits from lower taxes and regulatory relief arrive—sequencing matters.
  
  
• Even the Trump administration is beginning to acknowledge the possibility of some near-term pain: during address to the joint session of Congress, Trump alluded to “a little disturbance”, in a CNBC interview this a.m., Bessent said “the economy may be starting to roll over a bit”, that “the markets and the economy have become addicted to government spending, and there’s gonna be a detox period”, and lastly “investors should NOT expect a ‘Trump Put’”.
  
  
• Daily whipsaw of tariff announcements and retreats is eroding consumer and business confidence, which could lead to a freeze on spending, hiring and investment until we get better clarity.
  
  
• Investors on high alert for confirming evidence; weaker Jan consumer spending and preliminary signs of labor market weakness contributed to slowdown fears over the past two weeks.
  AWM comment: Chaos!
  
  
• However, initial jobless claims and credit spreads, perhaps two of the best real-time indicators of economic health, suggest so far, so good.
  
  
• Inflation remains firmer than desired + concerns that tariffs and less immigration could lead to increased inflationary pressures = Fed on hold.
  
  
• Housing remains weak, but sharp drop in bond yields may provide a near-term boost.
  
  
• With economic growth slowing, inflation heating up, trade and fiscal policies uncertain, and the Fed on hold, market susceptible to continued volatility, especially with valuations still elevated; positively, sentiment has turned bearish.
  
  
• 4Q earnings season stronger than exp (SP500 EPS +18% y/y); ‘25 ests have trended lower, but still point to +10% earnings growth.
  
  
• 2025 profit growth likely to be more balanced than prior two years; doubts about AI capital spending have emerged, weighing on hyperscalers and AI infrastructure plays.
  AWM comment: Opportunity!
  
  
• The consensus bottom-up S&P 500 EPS estimate for 2024 has remained relatively unchanged at $241, +9% year-over-year, an improvement from flattish growth last year. Our preliminary estimate for 2025 is $270, +12%. For the past two years, the “Magnificent Seven” (Alphabet, Amazon, Apple, Meta, Microsoft, NVIDIA, and Tesla) have supplied the bulk of S&P profit growth, thanks in large part to heavy spending on AI infrastructure and large language model development. For 2024, we estimate the “Mag 7” to show earnings growth of 34%, which compares to just 3% growth for the rest of the S&P 500 excluding the “Mag 7”. This differentiated earnings performance has been the primary contributor to the differentiated stock returns between the “Mag 7” and everything else over this period.
  AWM comment: Still growing nonetheless. Period of adjustment natural.
  
  
• For 2024, the “Mag 7” delivered a total return of 48.3%, which compared quite favorably to the 12.5% total return for the rest of the S&P 500 excluding the “Mag 7”. As such, the “Mag 7” had another outsized contribution to the market’s overall performance in 2024, accounting for 55% of the S&P 500’s total returns in 2024, only slightly less than the 63% contribution in 2023. Such concentrated returns are unlikely to continue in 2025 in our view. EPS growth for the “Mag 7” is expected to moderate at the same time the rest of the market begins to show improving EPS growth. We expect this convergence in profit growth to lead to more balanced market returns.
  AWM comment: Opportunity.
  
  
• Term interest rates moved lower in February as equity markets began to correct and investors weighed the possibility of softer economic activity. The 10-year Treasury yield ended the month 33 basis points (bps) lower at 4.21% and the 2-year Treasury was 21 bps lower at 3.99%. The yield curve (2’s to 10’s) was flatter by 12 bps at +22bps. Investment grade corporate spreads widened by 8 bps to 87 bps (0.87%) and high-yield spreads widened by 19 bps to 280 basis points (2.80%). Mortgage-backed security spreads tightened slightly during the month. The ICE BofA 20 Year + Treasury Index gained 5.62% in February. The ICE BofA AA US Corporate Index gained 2.03%. The ICE BofA US Corporate/Government index advanced 2.14% for the month while the ICE BofA 1-10 Year Corporate/Government Index gained 1.39%.
  AWM comment: The significant rally in prices in U.S. Treasuries leading to lower yields together with a relatively modest widening in riskier parts of the debt markets points to two things being true at the same time: softer economic growth not leading to recession.

In our view, this period of adjustment all points to a correction and not a panic. Yes, stocks have declined 10% from their February heights with stretched P/Es of 23 times forward earnings. The consumer appears cautious rather than dead. The American consumer drives around 2/3 of our domestic economy which is 2/3 grounded in services instead of manufacturing. Services are generally renewable contracts, not susceptible to short-term chaos. Example: how many people do you know who have cancelled cell or streaming services? None, we suspect to be the answer.

Are we shopping those services—of course, and when not suffering from inertia which is what your service providers count on, we always do so.

The point here is twofold: stocks may not yet be “cheap” after the recent pullback, but they are cheaper than they were and have historically rewarded the patient over the longer term who can think in decades rather than weeks. And bonds have returned to producing positive returns when stock returns go negative.

The other point to make here about stocks is that while peak to trough is -10%, year to date the damage is -4%, as measured by the standard S&P 500 ^®   index. The damage in 2008 was -37%, in 2022 was -18%.

And each time, stocks made it all back.

Why? As Warren Buffett supposedly once said, and his mentor Ben Graham wrote in paraphrase: “in the short term, stocks [prices] are a voting machine, in the long term, stocks are a weighing machine”. Future value of earnings and enterprise are discounted to the present. Going, profitable concerns have an intrinsic value.

Montag & Caldwell’s methodology is all about producing superior risk adjusted returns. What that means is that when 7 or so stocks provide all the return of a primary benchmark index like the S&P 500® over the last two years, the returns they produce will trail that benchmark—you the investor will still have positive outcomes, just not enough to brag about – unless you’re talking to actuaries. But when entering a period such as present, risk matters. Your pain should be measurably less than others, if our methodology works.

Long way of getting to the final point, like “Love Story”, diversification means “always having to say you’re sorry”. To use another movie metaphor, unless you have chosen to ride the bull like Slim Pickens, your portfolio should be balanced rationally between your risk tolerance and your needs. In balanced portfolios in 2025 to date, stocks went down and bonds went up, so we rebalanced to capture the opportunity of that dispersion.

1. A follow on interview on NBC’s “Meet the Press” over this last weekend: https://www.nbcnews.com/meet-the-press/video/treasury-sec-bessent-says-he-s-not-worried-as-stock-markets-plunge-full-interview-234536517647
2. https://www.bloomberg.com/news/articles/2025-03-10/germany-s-debt-brake-how-merz-plans-to-amend-fiscal-rules
3. Small Caps as represented in the Russell 2000. https://www.kiplinger.com/retirement/retirees-beware-small-caps-are-cheap-for-a-reason
4. Determinants of Portfolio Performance, Brinson, Hood, and Beebower, 1985-1994.
   See also The Asset Allocation Debate: Provocative Questions, Enduring Realities, Davis, Kinniry, and Sheay, 2006.
   See also https://www.morningstar.ca/ca/news/221210/is-the-asset-allocation-approach-still-valid.aspx
5. https://www.fidelity.com/learning-center/trading-investing/corrections

The model portfolio performance returns shown are hypothetical, for illustration only, and do not represent the performance of a specific actual client account. Performance does not reflect actual trading, nor does it include variable transaction expenses which would further reduce returns. Each AWM model series portfolio invests in securities which have weighted allocations that drive the performance results. The underlying constituent performance results reflect actual historical performance. Returns on the investment in the model portfolio assumes reinvestment of dividends and capital gains. The models performance reflects rebalance those allocations in response to market conditions, as well as at the initial point in time a change was made to an individual allocation within the model.

The S&P 500 Index, and sub-indices reflective of the S&P 500’s various sector components, are unmanaged indices commonly used as benchmarks to measure broad U.S. stock market performance and characteristics and sector-specific performance and characteristics respectively. The Magnificent 7 is an unmanaged sub-set of stocks in the S&P 500 Index used to illustrate the impact of certain sector and stock constituencies on the S&P 500 Index as a whole. The reinvestment of dividends, interest, and other distributions is assumed. These are free-float weighted/capitalization-weighted indices. An additional reference is made to the S&P 500 Equal Weight Index (EWI) which is the equal-weight version of the widely used S&P 500. The equal-weight index includes the same constituents as the capitalization weighted S&P 500, but each company in the S&P 500 EWI is allocated a fixed weight - or 0.2% of the index total at each quarterly rebalance. The MSCI ACWI Index is an indicator of global markets, capturing approximately 85% of the global investable equity opportunity set, including stocks predominantly across the large and mid market cap spectrum and across a number of countries, both developed and emerging. Bond data provided by ICE BofA sourced from an independent provider of corporate bond indices. Indexes used as benchmarks cannot be directly invested in by you. Index performance is also for illustration only, to provide a relative comparison for the model portfolio. Index performance does not reflect any management fees, transaction costs or expenses.

The views expressed represent our assessment of our strategies and the market environment as of the dates represented in the publication and should not be considered investment advice or a recommendation to purchase or sell any specific security or invest in a specific strategy nor used as the sole basis for an investment decision. Views and holdings are subject to change.

There are no guarantees that a strategy will achieve its investment objective. All investments involve risks that you will lose value including the amount of your initial investment. Investments that offer the potential for higher rates of return generally involve greater risk of loss. Clients should review carefully reports or statements produced by us, such as for performance and cash flows, and compare the official custodial records to any such that we provide. Information we provide could vary from custodial statements based on accounting procedures, reporting dates, or valuation methodologies of certain securities.

References to specific securities/ETFs are not intended as recommendations of said securities and carry no implications about past or future performance. Holdings and weights are subject to change. Information about all recommendations made within the past year is available upon request.

Reinvestment transactions that involve selling existing investments may involve transaction and taxation costs associated with the sale of those assets as well as transaction costs associated with the purchase of new investments.

International investing: There are special risks associated with international investing, such as political changes and currency fluctuations. These risks are heightened in emerging markets.

Small/Mid-Capitalization investing: Investments in companies with small or mid-market capitalization ("small/mid-caps") may be subject to special risks given their characteristic narrow markets, limited financial resources, and less liquid stocks, all of which may cause price volatility.

Growth Stock Risk: Growth stock investments, whether directly or through ETFs and mutual funds, may be more sensitive to market movements because their prices tend to reflect investors’ future expectations for earnings growth rather than just current profits.

Sector Risk: To the extent a strategy series has substantial holdings within a particular sector, the risks associated with that sector increase.

Liquidity / Market Risk: The strategy series may not be able to purchase or dispose of investments at favorable times or prices or may have to sell investments at a loss. Additionally, market prices of investments held by strategy series may fall rapidly or unpredictably due to a variety of factors, including changing economic, political, or market conditions, or other factors including war, natural disasters, or public health issues, or in response to events that affect particular industries or companies.

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Inflation Protected Bond investing: Interest rate increases can cause the price of a debt security to decrease. Increases in real interest rates can cause the price of inflation-protected debt securities to decrease. Interest payments on inflation-protected debt securities can be unpredictable.

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