October 2025 Update: Is the TACO trade back?
I actually had this all set for you last week, and just as I was about to hit “send” we got the Trump announcement that they were going to impose 100% tariffs on China. That put the kibosh on a lot of what I had to say. Until that point, the market was in excellent shape, and things were progressing smoothly. This was evident with the fund's performance, and we had our best month ever. We were up over 6% in the fund in September, and October had started really well. I was really looking forward to a strong final quarter of the year (it’s human nature to look ahead when things are going well!). But it wasn’t to be.
We had the announcement from Trump and saw a decline on Friday with the tariff announcement, but it rebounded to some extent early this week. Now we’re really into more instability, and as I write this, the market has been choppy, with prices fluctuating up and down. In this kind of market, you experience some ups and downs, and on some days, you finish up a little or down a little. This doesn’t concern me, and it’s just the kind of market we have at this point.
At this point, the market faces several challenges. Obviously, we have the tariff and trade issue, and no one can say with certainty how that will play out. At this point, there is a general feeling that the tariffs won’t be implemented and the TACO trade is back (Trump Always Chickens Out). Those tariffs are slated to take effect on November 1, but there appears to be a consensus that they might never come into force.
Some credit issues are circulating. A couple of companies have defaulted in the last week, and today, a company that held a significant portion of the loans was also affected. To be clear, we don’t own any of those companies or have any attachments there. However, in times like these, the concern is contagion, and how many other companies are overextended or have overleveraged themselves. I’m keeping a close eye on this, but we are currently unaffected, aside from general market weakness or similar factors.
There are some concerns about valuations. Because the markets have been steadily gaining since April, concerns have started to emerge that the market may have gotten ahead of itself and that some companies are overvalued. I don’t see any major problems, and I don’t see a major bubble. Some companies are overvalued, while others have lofty valuations; however, overall, companies are priced reasonably.
One of the metrics that is often considered is the Price-to-Earnings ratio. This ratio is higher than it would have been, say, 10 to 15 years ago. The Price-to-Earnings ratio is the ratio between a company's stock price and its earnings per share. If you’re buying a business, whether that is in the stock market or anywhere else, you want to make sure that you will earn enough money from that business to justify the price you pay. That is the point of the Price-to-Earnings ratio.
Today, the P/E ratio of the stock market is about 24. Historically, that figure is closer to 18, and approximately 15-20 years ago, it would likely have been closer to 15. Because of that, some people suggest that the market is due to come down and return to a more historical figure. I don’t believe that. I think that businesses today are just better than they were. They have smaller inventories, if they carry inventory. They have earnings that justify the prices, and overall, because those are better businesses, people are willing to pay more for them. These are essentially service businesses today, as opposed to industrial or similar companies.
There are some questions to be answered regarding AI. The issue there is the circular financing arrangements that we’re seeing. This is a scenario where one company buys from another, which in turn buys from another, and that company then buys from the first one. I do have some concerns over that, however, at this point, things look OK in the market.
What we see today is a general instability of a kind. I’ll remind you that the S&P 500 generally experiences a drawdown of about 13% per year. While it is true that we saw a decline like that in April, this doesn’t mean that we can’t have one now. This general weakness is merely a brief respite for the market, and certainly no reason to panic. In fact, if you have invested with me for a while, you know that I am currently seeking opportunities during these times. I’ve got a list of companies that I follow, and if the price presents a good opportunity for us to capitalize, I will get us invested.
Until next month,
Vic
