Footnotes is a monthly publication which summaries our “First Friday” webinar presentations each month. The goal of the Footnotes publication is to capture our “First Friday” presentation’s most important data points, which will make it easier for The Abernathy Group Family Office members to make intelligent decisions based on facts and data – as opposed to potentially conflicted opinions from the mainstream media.
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As a short reminder to each Family Office member, The Abernathy Group Family Office has now sponsored 20+ “First Friday” webinars. All of them are available on our website and “YouTube” Channel if you would like to go back and see how we have interpreted the economic signals, while doing our best to cancel the noise over the last year plus. Our goal: to help you spend less time making intelligent financial decisions, by focusing on causal, predictive data (signals); and ignoring the clamor of biased, irrelevant data (noise).
Commentary from the May 2025 “First-Friday” meeting:
Today’s presentation discusses “The All-Weather Portfolio.” When should an investor implement an All-Weather portfolio allocation? Why does a more stable, higher-quality, dividend-generating investment stance offer a beneficial shelter during most economic storms? Along with the benefit of safe money, earning a reasonable return while waiting for use after the markets return to a more welcoming valuation?
Good afternoon, everyone. My name is Steven Abernathy, and I, along with my co-host Matthew Daley, will be your host today.
Welcome to the Abernathy Group Family Office’s May 2025 “First Friday” meeting.
This meeting will focus on “The All-Weather Portfolio.” The All-Weather Portfolio is an intelligent tactical allocation strategy employed during periods of high volatility, when the likelihood of the U.S. markets simply churning for 5-10 years or more is significant, and when the risk is elevated.
As we have mentioned previously, most public markets continue to be priced for near perfection, speculation is abundant, and policy is changing rapidly. Historically, these characteristics have been a recipe for trouble, which is why each of us has such a large position in 4%—5% U.S. Treasury bills, bonds, and notes.
Our comments will be recorded today, as other families who cannot attend have requested the recording.
Our comments today will be approximately 40 minutes long, leaving us plenty of time to answer questions from everyone on the call.
*If questions arise from the content of today’s presentation, please send your inquiries by typing them into the “Chat” box at the bottom of your screen or write them down and raise your hand at the end of the prepared remarks by clicking on the icon at the bottom of the screen.
We always intended to turn this monthly presentation into a Town Hall-style meeting because we recognize that our comments may generate related, and sometimes unrelated, questions. The primary purpose of this meeting each month is to ensure our questions are answered with sufficient data while avoiding bias.
We want to encourage you to send us your questions, as it is likely that others may have the same or related questions… in short, it makes the discussion more interesting, so please feel free to ask away!
One final NOTE:
Please remember to “Mute” your device’s microphone and stay on “Mute” unless you have a question, as background noise is audible and is distracting.
And by the way, if you haven’t been to our website lately, please consider visiting. There is a wealth of information available. Content is added each month, and some research reports and summaries of each “First Friday” meeting going back years are available.
Let me turn it over to Matt Daley, who will oversee today’s presentation.
Slide 2
Matt: We’re excited to have you with us as we navigate the current market landscape and outlook, and discuss how our investment strategies are designed to respond to various economic scenarios.
In today’s session, we’ll begin by sharing our “base-case” outlook for the stock and bond markets and what we expect for their foreseeable future based on current data and trends. We’ll then explore how our investments are positioned to react under various economic conditions, including downturns, periods of stability, and upturns.
We’ll also discuss how our portfolios are expected to respond to changes in interest rates, inflation, and major geopolitical events, whether those are periods of conflict or peace. We’ll touch on the crucial question of political leadership: specifically, whether the current administration has the conviction and ability to maintain its agenda during times of economic stress, such as a recession or a significant market downturn.
We will give an update on tariffs, building on the sizeable portion of last month’s meeting we spent discussing them. Finally, we will address two industries we anticipate will see massive growth in the future, regardless of the market’s valuation and direction.
Our goal today is to offer clear and actionable insights while addressing your questions about investing in a constantly evolving world. Let’s begin with our outlook for the stock market.
Slide 3
Thanks, Matt – that is a full agenda of topics to cover, so let’s get started with the first topic –
What is an All-Weather Portfolio, and why is this type of investment structure one of the most viable alternatives for navigating volatile and risky periods?
Slide 4
When investing, it is essential, from a mathematical perspective, to avoid losing money.
While this is true, there will always be times when money is lost because the future is unpredictable, and emotions cause price fluctuations unexpectedly. The world is constantly changing, sometimes in ways you anticipate, and other times in surprising twists and turns. Therefore, the main goal is to minimize losses when the future isn’t in your favor due to the mathematical effects of compounding.
Let me give you a quick example.
If you start investing with $100 and lose 25%, you will be left with $75. To grow the $75 investment back to $100, you will need a 37% gain to break even. In short, losing 25% of your assets will take a 37% increase to return to even.
If you lose 50% of your assets, your $100 investment decreases to $50. To return to your original $100, you need to achieve a 100% gain based on the $50 you have remaining.
Making 37% on your investment typically takes several years; making 100% of your asset base can take a decade. This is why avoiding investment losses is incredibly important.
I am sure you have seen these comparisons before, and I do not intend to bore you with repetition. Nevertheless, I want to remind you of the reasons we remain protective and sensitive to overpriced asset values. Investing when asset values are inflated is extremely risky because a downturn that brings values back to reasonable levels is more likely than most people realize. As knowledgeable investors, we should all remember that paying too much for any asset reduces your future returns, even if the investor sidesteps a significant downturn. This combination of a higher likelihood of a downturn along with lower future returns makes investing in overvalued markets a situation to avoid (and it also helps you sleep better at night).
I want to remind you that losing money is not only heartbreaking but also mathematically challenging and mentally disturbing.
If you are in a position like most of us on this call, you are not interested in returning to work for 60+ hours a week and remaking your wealth. We all must remember that there is less time available to recoup losses.
This is where an All-Weather portfolio comes into play.
By the way, we do not have any bias regarding this type of portfolio; we believe it represents a tactically astute investment allocation when the macroeconomic environment is, at worst, hostile, and at best, unfriendly.
We all know the value of patience in our lifetimes – well worded by Warren Buffett (who is hosting his annual meeting tomorrow, by the way). Buffett reminds us about the value of patience in the baseball analogy he likes to use. In short, as the batter, you can look at as many pitches as you like when investing. The world of investment does not call balls and strikes. This is important because you can wait to pull the investment trigger when you find an investment opportunity that offers an advantage to the investor. This is an incredibly important concept, which I am afraid most investors tend to forget, as they are affected by the daily narrative from the talking heads who describe momentary market movements as if they were at the Kentucky Derby, detailing each security’s price change, like a betting mechanism instead of a long-term investment offering. For any intelligent investor, this is showbiz, not helpful information about intelligent investing.
As we have said for over 2 years on almost every “First Friday” presentation, the public investment subset of opportunities and the vast majority of private opportunities we have access to are overvalued relative to their expected current earnings.
The current market valuation is akin to a bad pitch, and as savvy investors, you must learn not to swing at a bad pitch. It’s not that it is always a losing investment; sometimes, bad pitches can lead to a hit. It’s because the odds are against you. If you play the game long enough, and investing is indeed a very long-term game, you want to wait for an investment environment where the odds are in your favor.
Patience and discipline are often the qualities that distinguish a world-class, successful investor from an amateur who is destined to undergo some very, very expensive lessons on why patience and discipline are essential. It makes sense to wait for the appealing opportunity of an investment where the odds are in your favor, rather than pursuing a pitch where everything must align perfectly for the investment to succeed.
This slide describes our version of an All-Weather portfolio.
It is All-Weather because it is not dependent on appreciation to provide a reasonable return. However, if appreciation does occur, the portfolio will participate. It is All-Weather because, regardless of the market’s overall performance, this type of portfolio generates a return in the form of dividends and realizable cash flow, irrespective of the market’s performance.
If the economy continues to decline, the portfolio is less risky and of higher quality than the average public company. It is likely to decrease in value less during a recessionary environment and bounce back sooner when our economy emerges from a downturn.
On this slide, you will see the basic description of each asset class, the approximate allocation to that asset class, and the dividend or income yield from the asset (many of which are tax-advantaged).
The All-Weather portfolio aims to produce sufficient income to generate a predictable return while declining significantly less than the market if we enter a recession (our base case). *It also provides safe and ample liquidity to invest in reasonably priced assets after a downturn.
Slide 5
In short, this strategy aims to be a heads-you-win, tails-you-don’t-lose strategy.
We do not know what lies ahead, yet the investment choices are so costly that they make little sense compared to the risk of a decline, which is likely over the next year or two.
Most investors are investing for appreciation as their base case while overlooking the value of dividends and income. Those who rely solely on appreciation will likely be disappointed. After all, shouldn’t all investments generate current income?
The All-Weather portfolio focuses on operational quality and shifts towards value-based securities for downside protection. It is designed to generate at least 5% in dividend income (largely tax-advantaged) and is highly likely to be received even during a recession.
Matt, do you have any comments or questions from the attendees, or what those comments bring up?
Slide 6
So, let’s review a summarized stress test for the All-Weather portfolio. This slide reminds investors to make a few decisions before allocating an investment portfolio.
First, are the investment values attractive enough for you to be an offensive investor looking for typical or higher-than-typical returns? Or is the investment universe overvalued, offering a sub-par risk-to-reward ratio? (As Warren Buffett would ask, is it a good or bad pitch?)
We believe the current market continues to be overvalued, and earnings expectations supporting this inflated stock market are too optimistic. In other words, we think earnings, which are the basis for valuing a financial asset, will fall short of current expectations. The combination of declining earnings and an overvalued market reinforces our defensive position.
This brings us to our next decision—do we have enough confidence in our macroeconomic view to take a clear directional position in the market? The answer is almost always no, as we can’t foresee the future; therefore, diversification remains the most intelligent stance to adopt today.
Finally, when the future is too hard to call, we (just like Mr. Buffett) have a “too-hard-to-figure-out” box that reminds us to remain safe with ample liquid assets and broad diversification. This gives us the ability to exhibit patience. At the same time, we collect our current income and more information and wait for a marketplace that offers us an advantage.
Matt, does this bring up any thoughts or push back?
Matt: No, I think that was well said. Let’s move forward.
Slide 7
Here, we summarize the investment stance that makes the most sense to us.
Firstly, we should have a view on our U.S. and global economies.
The U.S. government says they are cutting back on deficit spending, amounting to 6-7% of GDP in 2024. Without 6%+ of deficit spending increasing our GDP, this categorically puts a 2.5% GDP into a recession.
As we have repeatedly pointed out in our monthly presentations, a country that spends 6% more than it earns because it can print money, in an economy growing at 2.5%, would experience a recession without the government’s additional deficit spending.
The current administration claims it will cut this spending, yet nearly all new administrations entering the White House make similar assertions. Unfortunately, few follow through on their promises to reduce spending. While the new administration should be given the benefit of the doubt, history suggests we should expect few (if any) spending reductions, as such cuts are generally viewed as politically unfavorable.
However, we hope this assertion holds more truth than others.
Will the current administration reduce our deficit spending? It is too early to tell, yet we hope this administration defies the odds and balances our budget… if not, we will likely avoid a recession in 2025. However, we will continue to build a catastrophic future, resulting in the U.S. losing both the world’s trust and its global hegemony in the coming years.
Either way, the U.S. economy is slowing, and we believe the chances of recession have increased since January 1, 2025.
If we enter a recession, earnings will decline more than most expect. Stock prices will follow as earnings support the basis for a company’s valuation.
If we avoid a recession and the economy enters a period of stability or growth, earnings will likely meet expectations, and our stock market will likely dodge a downturn. However, the potential upside is already factored into the market’s current valuation, so we expect limited appreciation in stock prices in most realistic scenarios.
So, as we’ve stated for months, the strong economy is already priced into the market.
Interest rates are currently difficult to predict, as they rely on the trajectory of the U.S. economy. If we enter an economic downturn, we believe the U.S. Federal Reserve will lower rates and revert to its old playbook, ensuring there is adequate liquidity in the market. However, the administration’s goals of creating a more equitable playing field in terms of “trade” and “tariffs” add complexity in forecasting the future, posing significant challenges in assessing the risks ahead.
Either way, our most well-researched guess is that mercantilism is likelier. The global alliances will bifurcate, and there will be more manufacturing at home, increasing prices as our labor in the U.S. is among the most expensive in the world.
So, what is our “Base-Case”?
Slide 8
As investors, the recency bias and speculative activity indicate that current expectations are higher than we should expect them to be. Therefore, we should anticipate one of two outcomes from our overvalued markets.
Outcome A) is a span of 5-10 years during which our stock market experiences violent fluctuations, each accompanied by its narrative of “the world is ending” one month and “there is nowhere to go but up” the next month.
As illustrated in the slide on your screen, these periods of stagnation in market prices occur more frequently and last longer than most expect. Moreover, it is tough to recognize when you are in a period of stagnation until you review market values from the past 10 to 20 years.
Outcome B) would entail a significant drop in market prices, falling well below fair value, providing savvy investors with an opportunity to invest the cash we have saved over the past couple of years. However, investing during a downturn is always incredibly challenging and deeply concerning, particularly in the situation we are describing, as our U.S. debt continues to accrue interest rates around the $1 trillion mark each year. In this scenario, the interest rate set by the U.S. would be lowered, giving us some capacity to keep up with our debt obligations.
The combination of a strong selloff to reasonable investment levels or to depressed levels offering a strong risk-reward ratio for the investing public would work well for the All-Weather portfolio. We have a significant allocation to securities that will suffer less in a downturn. We refer to U.S. Treasury bills as cash surrogates since they are liquid every day and will likely appreciate if interest rates decrease to counteract an economic downturn.
If outcome A) imposes itself on us, those investing for appreciation should expect little or no returns for 5 to 20 years, as the slide clearly shows. The All-Weather portfolio is likely to deliver 5 to 7% returns in dividends and income, as dividends tend to remain stable with regular increases over time, while the underlying equity valuations will mostly follow overall market movements.
Matt, what would you add to this topic, or do you have questions?
Matt: No, questions so far.
My only comment would be that while the All-Weather portfolio allocation we have put together has a reasonable current return, as you said, every investor should expect the underlying securities to fluctuate with the market’s ups and downs. This should be expected. However, a well-diversified portfolio with a strong tilt toward value-based securities in high-quality companies with strong balance sheets should also be expected to depreciate less than the overall market and is likely to bounce back sooner than the overall market.
Matt, I will turn over some of this slide’s topics to you. Please share your insights on the current administrative policy and the rest of the topics on this slide.
Slide 9
Matt: I don’t have much to say about the tariff controversy that hasn’t already been discussed. Tariffs are often used as a negotiating tool and introduce confusion into the conversation and decision-making process. The imposition of tariffs also effectively highlights the reality that the U.S. faces a significant trade deficit with many sovereign nations worldwide. This situation is justified if our products are inferior or more expensive than those produced elsewhere.
However, trade deficits and tariff deficits represent different economic realities. The U.S. faces a substantial tariff deficit, paying more than ten times the tariffs it collects, despite being a global superpower that provides political and defense support for many of our democratic allies. This appears to be an injustice, and it must change if my calculations are accurate. I am quite certain that if the U.S. could establish a world where 0% tariffs were the norm rather than the exception, it would be a favorable outcome welcomed by the current U.S. administration.
Of course, we don’t know what the outcome of the tariff negotiations will be, and we can’t be certain whether what is being said or threatened (depending on your political alliance) is genuine or just a negotiating tactic.
The one piece of helpful advice we can offer is that no intelligent investment decisions should be made without the luxury of allowing the statements being made at the administrative level to simmer… have some time to sink in and allow the negotiation to take place. Patience is a virtue in this case, as the tariff negotiations will continue and will evolve. Avoid making decisions based on instant headlines, as that information will likely change.
Steven: Administrative policy from the current administration has increased the likelihood of a recession.
While the administrative policy could change rather quickly the policy will likely continue to support lower economic growth over the short-term to a) decrease trade imbalances, b) increase tariff reciprocity, c) increase self-reliance on the U.S. (mercantilism) and its close neighbors to restructure our internal economic initiatives to ensure the U.S. can manufacture critical goods and services which are necessary for the stability and the defense of the US economy.
Tariffs: Increased costs for all goods and services contribute to inflation. Can the U.S. consumer handle the higher costs associated with tariffs? Or will the U.S. consumer turn to cheaper alternatives, enabling the U.S. manufacturing sector to recover our capabilities for the essential goods and services that support our national security and interests?
To avoid attempting to create a political stance, which we want to avoid at all costs, we would remind everyone on this call that tariffs are good and evil.
Tariffs are imposed to create a negotiation advantage or to correct a disadvantage. As we stated in our last “First Friday” meeting in April, the U.S. is clearly the strongest country in the world with the largest number of consumers.
Despite these basic facts and the fact that the U.S. has been responsible for the security of the Western world for over 50 years, in 2024, we collected $80 billion in tariffs while we paid well over $600 billion in tariffs or penalties.
We are not being political when we say this makes no sense to us, and I believe the rest of the world will agree.
We believe that tariffs are a negotiation tactic, and tariff threats will reverse as our trading partners come to their senses and play more fairly.
Remember that tariffs are generally negative; however, the height and duration of these tariffs are variables that will determine how positive or negative their effects on the U.S. economy will be. As our trading partners and political allies come to their senses, they will realize that the ideal competitive structure is NO TARIFFS.
Matt, do you believe that tariff imposition or feigned imposition is a negotiating technique and that a reciprocal tariff structure or, hopefully, a no-tariff trading structure would be ideal?
Matt: There is a non-zero chance that the world will move to a free-trading structure. I don’t know if that is the game plan or if that is a complex negotiation. We must realize that the U.S. will probably always import more than it exports, and the U.S. will almost always have a trading deficit, because we are a larger and more prosperous country. We have become the most well-endowed consumers in the world, and because of this, most of the capitalistic math would favor paying a price to have access to selling products to these well-heeled consumers. A tariff deficit is another topic. There is no reason the U.S. should have a tariff deficit with the rest of the world, especially since we are largely responsible for the democratic world’s security and independence. As we have said, 0% tariffs create efficiencies and allow the most access to the best products at the lowest costs.
Thanks Matt.
Steven: OK, this subject will undoubtedly continue to be a topical discussion destination over the next few months, and it is likely to change rapidly, so let’s move on to the following subject, which may be able to help the families we serve make intelligent decisions with a view into the future.
The first important topic is that AI is evolving faster than many understood a year ago, and these advancements are having an outsized impact on several categories of business, or what some call industries.
The first one we will mention is healthcare. Artificial intelligence is truly revelational when it helps someone make decisions involving one known variable relevant to many other variables. For instance, often a pharmaceutical company finds a molecule with absolute and unarguable physiological activity. Yet, the pharma company does not know which receptor site offers the best connection or which genetic framework will be most accepting of this molecule, which is defined by the most positive outcome with the least toxicity. AI can speed this process up from months or years to days or hours. The point of this explanation is only to tell everyone on this call that AI is incredibly likely to offer a massive advantage to the biotechnology and pharmaceutical industry, along with many other industries with similar questions needing answers, and the energy industry comes to mind.
The next point is that the energy industry is likely to experience demand that is two to three times the amount typically needed each year (energy growth over the last 50+ years has grown at 1%-2% per year; recent conversations in the utility industry indicate increased demand to 9% or more per year). This outsized demand arises from various sources, including the need for data centers, EVs, and the general increase in daily use due to our interconnected society in the U.S. This suggests that the utility industry may evolve into a growth sector. Increased energy demand represents a significant shift, as over the last 50 years or so, the utility industry has grown in line with the demographic profile of the U.S. (around 1-2% per year) and has typically attracted investors seeking income rather than appreciation. This may change over the years as the energy demand rises far higher than we have been accustomed to over the past 50 years.
This change in power demand has several secondary and tertiary effects. For instance, where will the electrons come from to create this power? Coal? Natural gas? Nuclear generation? Renewable resources? While the correct answer to this series of questions is “Yes,” there is a challenge with most immediately available sources, and the energy demand can’t wait; it must be addressed. Without a solution, our country will likely start to experience rolling blackouts. Additionally, the grid is unlikely to handle 2-3 times the energy transmission needed to meet this growing demand. So, what is the solution?
The secondary effect—our transmission system or “grid”—must be updated and impervious. Why? If our grid fails, our water supply fails, and everything that relies on energy fails. It will take only hours or days for mass chaos to ensue in cities. In short, making the grid impervious and updating it to minimize energy loss in transmission from point (a) to point (b) is essential.
We believe coal and natural gas are the primary beneficiaries of this increased demand. Coal is used because it is readily available and easy to transport and store. However, it is the dirtiest of the widely available fuels, and thoughtful decision-making will continue to seek equally available, less polluting energy sources. Natural gas is likely the most suitable candidate as it is among the cleanest hydrocarbons available. The U.S. has more natural gas than any other country, and natural gas provides the quickest solution to our energy deficit and demand. Over the next 5-10 years, natural gas may be supplanted by nuclear power, while renewable energy could emerge as the long-term winner as lower costs align with improved battery effectiveness to deliver clean, cost-effective, always-available energy, though this may take 20-40 years.
Matt, have there been any other topics or questions?
Matt: We must remember that increasing our energy capacity is also pivotal in maintaining our global military dominance and authority. If geopolitical disputes, which are now cool, become hot, the energy demand will double or triple in a very short amount of time. Our ability to generate energy will become a first-order demand. In the meantime, our ability to source and sell our coal, natural gas, oil, and petroleum-based products is a source of tax revenue that should not be overlooked.
Steven: We will return next month with one of the most welcomed topics. We call it the “Wish List.” This is especially topical during an overvalued market, where an abundance of well-managed companies, offering goods and services for reasonable prices, are experiencing solid growth that is expected to continue for years. Unfortunately, each of these great companies is so expensive that investing at current valuations would not be an intelligent investment. The “Wish List” is a brilliant exercise as it allows you to put together a list of the best companies, while establishing valuations that, when realized, make investing an easy exercise.