The Sum of All Fears

Markets started the week in fairly benign trading fashion until word began to leak of the President's new Fed Chair selection. Now, all of a sudden, investors have to digest this

new information along with a potential government shutdown. Sometimes investors seem to trade like the world is ending based solely only a headline or two. The inspiration for this week's musings is the 2002 movie, "The Sum of All Fears." Here’s some trivia about the movie:

• This movie was a highly-anticipated hit in the Summer of 2002, as it had a star-studded cast for the reboot of Jack Ryan. While the film had a stout budget of $68 million, it grossed more than $193 million.

• In additional to Ben Affleck and Morgan Freeman, the cast is littered with up-and-comers and stalwart Hollywood veterans. Actress Bridget Moynahan had just appeared in "Coyote Ugly" (2000) a couple of years prior to this film, on her way to garnering more film roles. Liev Schreiber plays John Clark in this film, which serves as his "breakout" moment, afterwards landing roles in The "Manchurian Candidate" (2004) and "X-Men Origins: Wolverine" (2009). The rest is a list of Hollywood veterans, including James Cromwell, Bruce McGill, John Beasley, and Philip Baker Hall.

• The title of the film, also the title of the Tom Clancey novel, is taken from a quote by Sir Winston Churchill: "Why, you can take the most gallant sailor, the most intrepid airman, or the most audacious soldier, put them at a table together, what do you get? The sum of their fears."

• Harrison Ford dropped out of reprising his role as Jack Ryan because he and director Phillip Noyce could not agree on the script. Noyce would eventually drop out, as well.

• In this film, Freeman plays a high-ranking member of Cromwell's Presidential administration. In "Deep Impact" (1998), the roles were reversed as Freeman played the President.

Here's what we've seen so far this week...

Appearances Can Be Deceiving. A great moment of dialogue in "The Sum of All Fears" takes place during a closed-door committee meeting in which Morgan Freeman's

character responds to a Senate committee chairman that the new Russian president may not be as hardline as perceived. That's likely the case with market action this week. First, it seems like we were just working through a government shutdown a few weeks ago - which, indeed we were. Just last October the government shut down for 43 days. During that time the market was up 2.4%. Historically, the average return of the S&P 500 during government shutdowns has been positive. This morning, though we were assured a deal was done late Thursday, the vote to fund the government was held up yet again in the 11th hour (which always seems to be the case when anyone from either isle wants to get something they want and they hold the vote hostage). Markets hate uncertainty, but this is not a reason to switch one's investment strategy based on a headline.

Next up on the cloud of worry was the leaking of the President's pick to replace Jerome Powell as the next Chairman of the Federal Reserve. Sometime on Thursday, news

"leaked" that President Trump was going to appoint Kevin Warsh as the new Fed Chair. Markets did not like this news and subsequently sold off yesterday morning. It's important to note that the sudden drop was not a structural collapse of markets. It was a liquidation by major institutional hedge funds and algorithmic trading that pushed markets around. Why? Well, while there are some varying opinions on the new appointment, it is generally considered a "hawkish" pick. Based on his comments and actions while on the Federal Reserve Board of Governors (2006-2011), he has been a proponent of Fed Balance Sheet reduction. In other words, the market is perceiving that the "easy money" market trade may be over. It is important to note that this is a nomination which must be approved by the Senate and that, if approved, he would not begin his duties until May. Again, nothing structurally has changed in the market, so shifting investment strategies at this junction would be speculation.

If those two events were not enough to cause disruption in the markets, the movement in the US Dollar has allowed more uncertainty to enter the fray. However, if we look at

the historical context, it's easy to see we've been here before. In the mid-1980s the US dollar dropped due to international efforts and overvaluation. The U.S. government, in coordination with the Federal Reserve, sought to combat inflation during a period of expansionary U.S. fiscal policy. The best way to accomplish that is to assist a decline in the currency. In 1985, the Plaza Accord, signed by the G5 nations, coordinated selling dollars in favor of other world currencies along with supportive policy adjustments to achieve a lower dollar. In September of 2022, the dollar reached a 20-year high and has since retreated. If there is another effort to tamp down inflation as the U.S. seeks expansion, we could see a repeat of the late 1980s, which saw lower levels of inflation accompanied by solid economic growth.

Sometimes the Truth is Simplest Explanation.  In another classic scene from "The Sum of All Fears," Freeman tells his new understudy Jack to be honest and tell his

girlfriend he works for the CIA - which doesn't go over well. Investors need reminding of this from time-to-time. When the truth is staring us in the face, sometimes the best action is no action. Investors continue to get confused by misleading "soft" data, like consumer surveys, and "hard" data from actual consumer behavior. Over the past 5 years, that has been the case between the University of Michigan Consumer Sentiment (soft) data and Redbook Sales (hard) data. Redbook Sales continue to trend well above average, which indicates a strong consumer. Meanwhile, the UoM Consumer Sentiment survey indicates a consumer who is slowing down.

Despite the short-term volatility this week, we haven't seen a breakout yet that would warrant concern at this stage. Unlike April of last year or even November, the VIX Index

has remained below its historical average, except for one day on January 20th. The March-April event last year turned out to be a 17% decline in the S&P 500 from peak to trough. In November, and again in December, of last year when the VIX went above its historical average, the event turned out to be a 5% or less decline. Markets recovered within a matter of 1-2 weeks. Currently, the S&P 500 just made a new all-time high on January 28th and is down only 1%. We need to see more evidence of sustained downside before changing our investment thesis for 2026.

Finally, the Fed met earlier this week, which seemed to garner very little attention - as opposed literally every meeting in 2025. While it was largely uneventful, as there was

action on interest rates as expected, the Fed did remove some language from their prepared statement. The Fed removed the line from December's statement which read, "and judges that downside risks to employment rose in recent months." The reality is, a Fed doing nothing means that the economic situation is stable. Both the Chicago Fed's National Financial Conditions Index and the St. Louis Fed's Financial Stress Index remain at low or loose levels, indicating economic stability. Household assets have grown much faster than liabilities, meaning that we're not seeing the debt levels that preceded the 2008 financial crisis. For now, investors should wait and see what, if anything, develops from recent short-term volatility. Making "knee-jerk" investment decisions at this point is not constructive.

Jack tells his girlfriend he works for the CIA...

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