March 2025 Quarterly Review

April 10, 2025

Dear Clients and Friends:
Re: Q1 Investment Review

Another banner year for the S&P 500… This was our opening phrase in our last letter written in January. But as Warren Buffet has said many times, “be fearful when others are greedy and greedy when others are fearful”. With all the benefit of hindsight, this was good advice in Q1. And, of course, just since Wednesday of last week, the market has become considerably more fearful. Obviously three months plus can seem like an eternity in the stock market, and once again we have learned that “the market will do whatever it has to do to fool as many people as possible”. The beginning of this quarter has been worse with the S&P now down an additional 9.5% since March 31 as we begin to write this letter. Fortunately and in line with our history, we have done better.

Benchmark Index Total Returns	Quarter Ending 3/31/2025
Lipper Balanced Fund Index	-0.2%
S&P Dividend Aristocrats	3.2%
S&P 500 Stock Index	-4.3%
Russell 1000 Value Index	2.1%
3-Month U.S. Treasury Bill Index	1.0%
S&P 7-10 Year U.S. Treasury Bond Index	3.9%
S&P U.S. Gov & Corporate 30-Year Bond Index	2.5%

Our response to the recent market activity has been muted. As you all know, we are long-term investors and are rarely shaken out of stocks because of short-term panic in the marketplace. The stock market in general has been, we believe, overvalued for some time heavily driven by stocks related to technology, the cloud and artificial intelligence. Perhaps this is the beginning of a return to sanity in terms of the stock market value of the whole economy, which is based on real numbers rather than expectations.

As has already been extensively reviewed over the past week, the catalyst for the recent acceleration to the downside has been the implementation of the tariffs that now apply to almost all imported goods.

Digesting recent tariff announcements

In our last letter we briefly discussed the impact of tariffs on the U.S. economy both short-term (bad) and longer term (mixed). This section will explore tariffs in greater depth, though not exhaustively. Compared to other nations, we have been relatively tariff-free. In that sense, we are mostly responding to the tariffs already imposed by other countries over the past fifty years or more.

The basic reasoning for tariffs is two-fold. First, there is an issue of “fairness”, as many countries levy a much higher tariff on US goods than the US levies on them. American made cars are almost never sold in Germany, because the tariffs are so high that it is nearly impossible to compete with domestic models. Yet US car owners are able to purchase cars from manufacturers based all over the world, because the penalty for buying foreign made goods, at least up until now, was minimal. The worst offenders include several Asian countries (China, Japan, Taiwan, India and South Korea) along with the European Union.

The concept of “reciprocal tariffs” means that the US will impose a tariff on other countries relative to what they impose on the US. In his recent announcement, Trump stated that he plans to impose tariffs that are half the rate that other countries impose on the U.S. We do note, however, that his calculation includes tariffs plus other protectionist measures like trade barriers (such as a prohibition to sell certain products) and currency manipulation. In many countries, it is impossible for a U.S. company to freely do business unless they team up with a domestic partner.

These measures made considerable sense after WW II as demolished economies worked to rebuild their domestic industries destroyed during the war and the U.S. was flush with cash. But they are difficult to justify in what has become an increasingly integrated global economy. Yet protectionism still thrives in many parts of the world.

The other reasoning for tariffs is to try to bring manufacturing and jobs back to the U.S. We have effectively been supporting manufacturing movement to low wage countries. Lower cost goods are then sold back to the U.S. at cheaper prices than would be the case if they were manufactured here. There are arguments pro and con on this but, without tariffs, are we supporting subsistence wages in other parts of the world that benefits us through lower priced goods while penalizing workers overseas and domestically through lower wages there and fewer jobs at home? What would the U.S. auto industry look like if we imposed tariffs similar to what foreign countries charge us? We may be about to find out.

A different example is found in healthcare. In the early days of Covid, China made the decision to hoard PPE (personal protective equipment) for its own use rather than sell it to the U.S. as it had been doing. Lacking manufacturing capability here, our hospitals and doctors’ offices had considerable difficulty attaining enough high quality N95 face masks for our own use, at least in the short term. Pharmaceuticals may be a better example for arguing against foreign-based drug

like a tax on the American people. If the tariffs hold for the long term, this is a reasonable criticism, although most American consumers are likely to view it more as inflation rather than a tax.

Our hope is that the impact of tariffs is enough to bring other countries to the table to renegotiate their trade deals with the U.S. Vietnam is a major producer of shoes for Nike and others. They have already volunteered to get rid of all of their tariffs in return for the elimination of ours. Meanwhile some countries are initially promising to fight the new tariff rates as China did in increasing tariffs on us by the same amount we placed on them, 34%.

A true tariff war disadvantages everyone. The U.S. is one of the largest markets, if not the largest market, for many goods across the world. Other countries cannot simply stop selling products to the U.S. long term without taking a huge hit themselves, and it will ultimately be to their benefit to come to the table and work something out. With this in mind, although we are not fans of tariffs, we remain cautiously optimistic that any trade wars will be relatively short-term in nature. On the upside, perhaps we can reduce our vulnerability to shortages of critical goods by bringing some manufacturing home.

Even before the tariffs were announced many companies, both high tech and low, pledged to spend billions on new factories in the U.S. Tariffs can work if properly applied. The big question is how long the U.S. public will tolerate whatever pain arises over the next year? It is already a political hot potato. At least the U.S. economy remains strong for the time being that will help us navigate any storms that do blow up.

ABBV	AbbVie Inc.	G	Genpact Ltd.
ABT	Abbott Laboratories	ITW	Illinois Tool Works Inc
AMGN	Amgen Inc	JPM	JPMorgan Chase & Co
AMP	Ameriprise Financial Inc	LNC	Lincoln National Corp
AMT	American Tower Corp	LOW	Lowes Companies Inc
CAT	Caterpillar Inc	MSFT	Microsoft Corporation
CSCO	Cisco Systems Inc	QCOM	Qualcomm Inc.
DLR	Digital Realty Trust Inc	SWK	Stanley Black & Decker
EPD	Enterprise Products Partners LP	TFC	Truist Financial Corp
FAST	Fastenal Company	XLK	SPDR Technology Sector ETF

Over the last quarter two stocks fell off the list due to both market action and active selling, Target and Comcast. These were replaced by American Tower and Abbott Laboratories, both relatively new purchases.

As we watched the earnings estimates decline for Target and started to think about the impact of new tariffs, we decided it could be a long slog back to previous highs. As allowed by the tax consequences of selling in personal accounts, we decided not to wait. For the very long run we

continue to like the company, and it wouldn’t be surprising to see us buy it back at some point in the future.

Comcast is a company that we have held for some time. Although the earnings have continued to progress much as we anticipated, the stock has been a major laggard. This is attributed to the lack of areas for profitable future cable buildout but also to their customer “churn”, the turnover of customers for many of their services in favor of other providers. So far this has been offset with higher prices but this has become a much more competitive business than it used to be. So, this is a company that looks very cheap now, but we anticipate little interest in the market price of the stock going forward.

Abbott Labs is a terrific company with a very long record of earnings and dividend growth, but it has always been too high priced to meet our purchase standards. It was the company that spun off AbbVie, its proprietary pharmaceutical unit, about ten years ago while holding on to its historic strength in medical devices and nutrition. After the spinoff, we decided to sell most of our then high-priced Abbott in favor of holding and buying AbbVie. Last year we began reducing our AbbVie holding as it has performed so well that it became too large a position in many portfolios. Meanwhile over the same time frame and particularly over the past five years, Abbott’s stock price substantially lagged both AbbVie and the market. However, a lagging stock price while earnings and dividends continue to grow eventually leads to undervaluation, which is the situation today. Given the traditionally defensive nature of healthcare stocks plus Abbot’s consistent growth, we have begun purchasing it in a number of portfolios.

American Tower is a global provider of cell towers for that industry. Once a tower has been built it can accept a large number of providers looking for space to relay data and voice. This is currently a very good business as maintenance costs are low once the tower has been built. The only question about the future relates to satellite competition coming on the scene, such as Elon Musk’s Starlink which provides many of the same services. But, of course, competition is always strong in the technology sector and this is something we are closely monitoring. Structured as a real estate investment trust, it also has some tax advantages over corporate competition, wireless or not.

So what comes next?

We always wish we had the answer to this question but today in particular, we are moving into very unfamiliar territory. Given the current linkage of the various foreign economies with us, we have never really been here before.

Some are looking back to the Smoot Hawley Tariff Act that was enacted by Congress in the Great Depression of the early 1930s. We know what happened then as they reduced world trade which deepened a recession into a global depression. But today it is so different in so many ways that the comparison may be meaningless. We do know that everything moves at electronic speeds today so whatever is going to happen in the stock market will likely be over in relatively short order.

There is also at least one case in which tariffs worked out for the better. In the 1970s Richard Nixon imposed across the board 10% tariffs due to a weakening dollar and what was believed to be currency manipulation. In that case, tariffs worked because foreign countries backed down and the tariff was removed.

The Bears and many “Globalists” are calling for disaster in the form of both recession and higher inflation (stagflation), the worst of both worlds. If that were to occur, it would also make life very difficult for the Federal Reserve as it may not be able to operate in both worlds at once. If it helps the economy to lower interest rates, they may not be able to do so as that also increases the odds of higher inflation.

The Bulls, however, are saying this has been a long time coming and that the U.S. has been a chump for not doing this sooner. They believe it will level the playing field and eventually bring many high-quality jobs back to the U.S. in order for foreign manufacturers to avoid the tariffs. Given the huge sums already committed to new high-tech plants foreigners plan to build here, this may be already happening. The negative side of this is that new plants cannot be built overnight so the benefits may be a long time coming. Patience has never been a strong point for the U.S. public.

Most of the companies owned in your portfolios are relatively stable and of high quality but many of them do have considerable foreign exposure either because they manufacture overseas or because they sell to foreign countries. Though none of us want to see stock prices go down, stock market cycles are part of the normal environment of free markets.

In the short run, markets move mostly on sentiment and anticipation rather than facts. Some major and well-respected pundits, banks and brokerage houses are already saying that the die is cast and that there will be a recession this year. If there is, has the stock market decline already discounted the problems and impatience it will bring?

For our part, we continue to hold a steady course, focusing on the long run and high quality, dividend paying stocks selling at reasonable prices. In most portfolios, we maintain a cash position sufficient to weather most market storms without forced selling at lower prices. Over time this has served our clients well, and we intend to continue on this course.

As always, we welcome any questions this letter may raise.

ELS/DML/JJS/LRO