Hall Capital “Market Views” Newsletter April 2025

This is the 60th edition of Market Views from HALL CAPITAL. Our aim is to provide concise views of where we see risk and opportunity for investors.

The Only Certainty
- is more uncertainty

The tariff announcements tomorrow on April 2 may remove some uncertainties, but they cannot remove all uncertainties. Whether the tariffs will stay in place, the effect on the economy and the response by other countries will still be unknown- not to mention the uncertainties around the Federal budget which is still pending.

Five weeks ago, for the first time in a long while, we reduced our stock exposure for Hall Capital clients.

As noted in last quarter’s letter, we felt that the President would quickly undo a policy if it became clear the policy was a mistake. There were several fits and starts on tariffs but now that we are in a full-blown trade war with our closest trading partners, I am beginning to have doubts that the retrench part of “threat and retrench” strategy will be meaningful enough to undo material damage to trade.

But those doubts are not the reason we cut stock exposure. The alarm resulted from new data showing a weakening of the mighty US economy. Namely, a drop in retail sales, a 13% decline in housing starts and prominent surveys showing plunging confidence from consumers and business leaders alike.  Employment remains healthy, but these nascent signs of a slowdown in face of all this policy uncertainty were concerning.

Trade wars reduce growth.  The fear of this and the uncertainty are reasons behind the slowing economy and our stock market correction. Another reason is foreign investors leaving the US for investments in their own countries. This surprising reaction has driven up stock prices in Europe, even China, Mexico, and Canada, while the US market has declined.

Tariff uncertainty and the impacts may be with us for some time, but there are scenarios with the US market bouncing back in the short term. Here are four I can imagine, two more likely than the other two.  First the more likely: (1) A resolution of the war in Ukraine. This could boost the market for a short period of time. (2) The Fed could cut short term interest rates. Lower interest rates would likely boost the market even in the face of signals of further weakening of the US economy, which is likely to be a pre-requisite for a Fed cut. Now for the less likely but even more important:(3) A resolution of the trade war. This would certainly boost the market and for a much longer time. And (4) The economy revs back up which turns around confidence. And, yes, the opportunity in the long run driven by continued low corporate taxes, greater efficiencies of deregulation and AI productivity is still there even if the economy suffers from a self-inflicted wound.

Notwithstanding several scenarios that could bolster the market, we prefer a defensive footing until there is more clarity – or lower prices. We should know over the next year the effect of tariffs and whether any will be reversed.  But at the moment, the uncertainty index is higher than it was even during the pandemic. Spending and investment are usually curtailed in such an environment.  A defensive footing can be achieved in three ways: (1) Increase reserves and short to intermediate term bonds. (2) Hold some alternatives, and (3) Hold a portfolio of quality stocks with strong balance sheets and enviable competitive positions selling at reasonable prices. The latter is what makes up our Focus List and it has served us well over the long term, and certainly in the quarter just ending when the list showed a positive return. See the Focus List segment below.

Alternatives
- can offer an attractive return while providing a hedge

Last quarter we discussed bitcoin. Though I stopped short of recommending it, I do think it is investable and could be considered.  Bitcoin may someday become “digital gold”, but bitcoin so far fails to be a productive hedge against stock market volatility and uncertainty generally. While theoretically crypto should not be correlated with the stock market, empirically it is. When stocks decline and you want a hedge, bitcoin declines even more.

Gold IS a store of value and has been one for millennia. When uncertainty is high, like it is now, and inflation is a potential threat, owning some gold makes sense. While many investors like to hold the physical bars, I prefer to use an ETF, like the one listed on the Focus List. The iShares Gold Trust charges a small annual fee (lower than GLD) to store and guard my gold.

While gold is a store of value, it is not an earning asset. There are other alternatives that we have discovered that are not correlated with the stock market and ARE earning assets that offer an expected return of 8% to 11%. We prefer partnerships that are small and exploit a niche with specialized expertise. We are happy to share our favorites if you are a qualified investor.

Focus List Gains 5.3% for Q1 2025
- vs -4.3% for the S&P 500

This was a better than average quarter for the FL in absolute returns and MUCH better in relative terms. While our tech holdings declined, over two thirds of the rest of the list were up for the period.

We are adding Allstate Preferred H which is sporting a 6% qualified dividend yield. Because of the favorable tax treatment, the after tax yield is around 5% for most tax payers. This is equivalent to 8% fully taxed income for high bracket payers. While the after tax return may be lower than what we think our FL can earn over the long term, the risk/reward looks attractive for this new addition at this time.

To make room for this preferred stock and not to double up on one company, we are removing Allstate common stock. We are adding Chubb which is also a property and casualty insurer but more global with more commercial than personal lines. Unlike most property and casualty companies, Chubb has been steadily profitable with a 10% per annum growth in earnings over the last decade. Its combined ratio - the percent they pay out in claims versus premiums earned - typically in the 80s, whereas their peers are in the 90s. Chubb is exploiting growth opportunities internationally with demonstrated superior risk controls. The balance sheet is strong, yet CB sells at a sharply lower multiple than the market.

Long term holdings CVS and Verizon were up 34% on average in the quarter. We are removing them from the list due to price and increasing competitive challenges.

All of our selections go through the same screening process which is designed to tilt us toward opportunity and away from risk.

This is not a solicitation. The Focus List is provided to show that it is possible to perform at least as well as the S&P 500 while holding a list of stocks that have lower risk characteristics than the average stock in the index. We are sharing this list which is designed to tilt toward opportunity and away from risks. Hall Capital clients may have different portfolios for which they pay a fee. The Focus List performance above is a gross return, without a fee levied. For individual stocks as well as selection strategies, past performance is not necessarily indicative of the future.

Hall Capital Focus List

Allstate Pfd H - Strong brand. Strong balance sheet.  6% yield with tax advantages as a qualified dividend.
Crocs - Fashion risk to be sure, but with 60% gross margins, if growth continues, volatile stock should outperform. Strong B/S. P/E of 7x.
Shell - Lowest multiple of the global energy giants. Strong cash flow. Leader in LNG. Forward P/E: 11x
Heidrick and Struggles - A leading global recruiting firm with large cash position and no debt. P/E Fwd:14x.
Alphabet - Google is the "oxygen of the internet". Competes in cloud computing, AI and other forward technologies. Controls 92% of Search. Most Googled word is YouTube. Fortress B/S. 18x
Chubb - Superior underwriter with strong balance sheet and steady historical growth expanding internationally. P/E: 14x
Apple - Most recognized brand in the world, with 1.4 billion users providing new growth opportunities in service revenue and wearables, moving into AI enabled iPhones. PE Fwd: 30x
Everest Group - Leading reinsurer with good record of risk control. Concerns over impact of climate change overdone as pricing is adjusted regularly. P/E Fwd: 7x.
JP Morgan - Well managed leader in commercial and consumer banking, investment banking and wealth management. Fortress balance sheet. P/E:13x.
Medtronic - Global medical device giant serving 130 countries. Holds over 49,000 patents on life science devices. P/E Fwd: 16x
Unum - Largest disability insurance provider in US. Benefits if interest rates stay higher for longer. P/E: 9x.
Meta Platforms - Controversial dominant social platform which 60% of US use daily via either Facebook, Instagram or Whatsapp. Successfully exploiting treasure trove of data with AI. PE: 24x
State Street Bank - Being a custodian of scale for $37 trillion provides durable competitive position, but stock is valued like a commercial bank at 9x Fwd P/E.
Energy Select SPDR - Hedge against energy driven inflation. 40% invested in Exxon and Chevron.
Toll Brothers - A leading high end home builder less exposed to the impact of higher mortgage rates. Tough environment now, but housing shortage to last for many more years. P/E: 7x
Raymond James Financial - Steady expansion in wealth management/private banking helped grow EPS 15% per year over the last decade. 13x Fwd P/E. Strong balance sheet.
Amgen - A leading biotech company with a strong pipeline including a potentially superior obesity treatment drug according to phase I results. 15x Fwd P/E
Cigna - A leader in value based healthcare (payments to providers based on outcomes rather than fee for service). Solid position among large employers and government. 11x Fwd P/E.
IShares Gold Trust - Hedge against weak dollar, long term inflation, mid-east turmoil and other uncertainties.
Microsoft - Dominate in Windows operating systems, and leader in higher growth segments such as cloud computing and AI. Fortress B/S. Household name with vast moat. Fwd P/E 29x.

Follow Up – from our letter one year ago

"Challenges for the US are Growing - but they can be met."
- You could say the same now.

"Inflation is not fully tamed, and the Fed is likely to err on the side of hawkish policy"
- Inflation has stayed stubbornly above the Fed targets. The Fed cut interest rates by 1% in the three steps last fall but has held firm since.

"You can govern either by leadership or crisis. Let's hope we develop some leadership."
- Still hoping.

NOTE: Now in addition to ALL our quarterly letters, on our website is a tab with just the Follow Ups.

About HALL CAPITAL

HALL CAPITAL, LLC is a registered investment advisor and was formed by Principals from Arcturus Capital in 2010.
For more information, contact Donald Hall 626 578 5700 x101 dhall@hallcapitalmanagement.com

HALL CAPITAL | 199 S. Los Robles Ave | Suite 535 | Pasadena | CA | 91101