Noah's Arc 2025 Q1 Newsletter
Assestification
I figured since the first quarter is set to end choppy, what better time to publish than right before the market opens?
This is a longer newsletter than normal. But for those of you (like me) who are trying to understand what the Trump administration is doing with tariffs, this is my best guess.
Executive Summary
Markets Are Choppy to Start 2025: As expected, the S&P 500 is off to a weak start, down 6.17% year-to-date. Despite hopes for post-election stability, volatility has returned as new trade headwinds emerge.
Trump's Trade Wars and the Rise of Assetification: Trade policy is shifting rapidly, but the bigger issue is how an "assetified" US economy is affected by increasing tariffs and a reversal of decades of global trade policies.
My Take: Investors need to stay nimble in 2025. I’m focused on policy-induced volatility and thinking more about high quality names to own.
Personal Note: Excited to see our research featured across major outlets and to be part of a broader movement of investors taking control of their finances.
Markets Are Choppy to Start 2025
Markets have kicked off 2025 on a rollercoaster. As I mentioned in my Q4 letter, the odds the markets would perform as well as they did in 2023 and 2024 was unlikely. The S&P 500 has already dropped 6.17%, making it the worst start since 2022. Again, this was somewhat expected, given the improbability of a third consecutive year of double-digit returns. But I personally didn't think we’d see a straight line down basically since Mid-February.
What we have to understand is why we’re seeing this volatility. I’ll say this multiple times but this is not a political newsletter. But I am here to talk about what the Trump administration’s plans are.
Trump’s second term is already characterized by a crystal clear push to overturn 45 years of global trade practices. The outcome of this aggressive change in policy will likely hurt the US markets at least in the short run (unless the administration reverts back to previous policy). But this ‘damage’ is bigger than investors selling shares of companies in an attempt to price in tariffs on their bottom line.
It actually represents a fundamental shift in the way the US markets work.
Trump’s Trade Wars & the Rise of Assetification
I’m sure I am not the first person to come up with the term “Assetification” but I want to make sure I define it:
Assetification means the increasing sensitivity of the US economy to shocks in asset prices. Historically, a roughly 10% +/- move in the S&P 500 resulted in 1% +/- variation in US GDP growth.
Now, I think this is even more exaggerated. This is driven by those who own equities in the US and how this affects their spending.
In the US, the top 10% of income earners (over $250,000 in household income) control 50% of all consumer spending annually. This same 10% group owns 93% of US equities as well.
On its own, groups of Americans doing well is the foundation of what makes capitalism great. In fact, for all the political talk about the American middle class shrinking, the answer is that the middle class is shrinking because more Americans are becoming upper middle class, or wealthy. On the whole, the sum of the middle income + what the Pew Research Center defines as “upper income” has actually stayed flat since 1970. Rising asset prices have helped with this.
Interestingly, incomes above $250,000/year also tend to be performance based. So incomes at higher levels depend on business success, sales quotes and, yes, personal asset portfolio performance.
As millions of high net worth Americans retire, this group’s spending is increasingly fueled by how their retirement accounts are doing (and how much income they draw off these portfolios through distributions).
So at the core of it, what has powered our stock market higher (and the increasing “assetification”)? The US stock market has well outpaced both European and Asian stock markets over the last 25 years. Sure, we have high quality companies, but also our forward P/E multiples are higher.
Why? The answer is actually a little counterintuitive: foreigners are buying (investing) heavily into the US stock market helping drive up prices. This has a lot to do with trade.
First, let's go back to Econ class and think about trade.
When a country (like the United States) runs a trade deficit with its partner countries, these countries run a trade surplus (inherently). The US has seen an accelerating trade deficit since the 1980s as part of our core free trade experiment: the US shed its low end manufacturing activities to countries that can focus on making these goods for less.
We then aimed to specialize in high tech trades, high tech manufacturing, and high-end technology (like software and AI companies). One can debate if this was the best move for all US citizens, but that's not the point of this article.
Once a country runs a trade surplus, countries are incentivized to invest surplus trade proceeds both to keep their current in line but also to get a return.
For many foreign trading partners, their citizens (who trade with the US through where they work) have invested their excess savings in the US stock market. This has been a huge driver of returns as foreign dollars have poured into US equities.
Foreign ownership of US stocks has jumped over the last decade. In fact foreigners now own $16.5 trillion (or 18%) of the overall $93 trillion US stock market. This is a huge jump (especially since 2008).
This system works well for Americans who own US equities, and foreign countries that wish to invest in our assets. This overall circulation of money is called a country's balance of payments.
The issue now is US debt. We have too much of it. This is making the US government crowd out the rest of the investment market as more investors opt for higher interest rate treasuries vs. US equities (which carry more risk). I wrote about this risk and the pressure it would put on interest rates in the Q3 2023 letter. This is a big reason why interest rates have stayed high even after inflation fell (and the Fed started to cut interest rates last fall).
This is increasing the cost of capital compared to most of the last 45 years of falling interest rates.Part of the reason interest rates fell was because foreigners bought our US debt and agreed to receive a lower interest rate. This made our cost of capital really cheap for a long time.
Like it or not, this was part of the deal. We bought cheap goods from foreign countries that specialized in them. Foreigners invested back in the US via treasuries, stocks, bonds or real estate.
So, fast forward to January 20th and a new administration wants to take a different approach. A very aggressive approach.
Two things again to remind you as you read this: this newsletter is not meant to be political. But I am going to do my best to characterize this administration's aggressive overhaul of our economy in a neutral light.
Earlier this month, Trump’s Treasury Secretary, former hedge fund manager Scott Bessent noted that the American dream is not based on ‘access to cheap goods.’ He is working to reframe the American definition of trade away from 45 years of free trade, cheap goods and foreign investment in our markets.
Bessent noted that this administration’s explicit goal is to reverse this policy, reduce the trade deficit, and theoretically net out our balance of payments. The administration assumes that if we make more goods at home, and charge higher taxes (tariffs) on goods being imported, then we can net out the balance of payments.
In essence, less money going out of the US, so we need less foreign investment coming in to balance out the payments.
A big part of this is because this administration is trying to cut the deficit (and our massive debt pile). That’s why Bessent also said the administration is focused on the 10yr yield this time around (vs. the stock market as it was in his first term).
These policies (because they will affect how much foreign investment will flow into our stock market) will almost certainly hurt stock prices in (at least) the short run.
So, the multi-trillion-dollar question: will it work?
I have no idea. What I do know is that we are reversing the order of 45 years of trade. We will be bound to have upset trading partners, and foreign citizens who will dump their US equities.
In essence, this whole plan is a huge gamble. This really has never been done before.
What’s My Take?
While the US economy is about to enter a period of experimentation (to say the least)—rewriting decades of economic, trade, and fiscal policy—I believe the overall system is still strong. This research is not meant to be a political take. I believe it's important to understand the risks of trade policy whichever direction this administration (or future administrations) take it.
I believe the US stock market will likely see increased volatility in response to shifting trade balances and policy uncertainty, especially given how globally exposed many large-cap names have become. But underneath the noise, I still believe (as I did in Q4) there will be great places for investors to earn strong returns.
I continue to believe individual US equities still present compelling opportunities. As I mentioned in my Q4 letter, I’m still focused on companies that meet GARP criteria—growth at a reasonable price. There’s a class of high-quality companies in the US that have an incredible ability to grow their business and an exceptional moat around their operations. These are the kinds of businesses that I believe can continue to scale.
There are only a handful of companies that really meet this bar, but I still think their returns will be incredible. Of course, none of this is investment advice.
Personal Note
On a personal note, Q1 has been a solid start to the year—not just because the fund has outperformed the market by a solid margin, but more importantly, because I’ve been incredibly proud of the research we’ve put out. While our ranking slipped slightly from the top 2 percent to the top 8 percent of publicly available equity research globally, I still feel good about where we’re positioned and the direction we’re heading.
I’m also grateful that our work has now been featured in places like Business Insider, TipRanks, and the NASDAQ news site. Writing research has become more than just analysis for me—it’s a way to track my thinking, and an opportunity to push my own view-points to be better.
One theme that keeps coming up in my research is this broader shift happening in personal finance. More people are stepping away from traditional financial advisors and choosing to take direct control over their money. This started gaining steam during COVID with platforms like Robinhood, but the momentum hasn’t slowed. If anything, it’s picking up—especially now, with market volatility making investors more mindful of where their fees are going.
Now, some financial advisors are still very much part of the picture, and they serve a key purpose.
But I believe the direction is clear: more people—especially young professionals—want to do their own homework. They’re hungry for tools, insights, and community, not just advisory services. I’m proud that our research is playing an infinitesimally small role in supporting that trend, helping readers on Seeking Alpha and elsewhere take a different viewpoint.
This movement has been building for a long time—really, since the early days of online brokerages—but it feels like we’re getting closer to a tipping point. I’m excited to see what comes next.
With this, I’m working on a new project that I can’t wait to share more about soon.
Till next time, thanks for being part of the journey.
-Noah