What to Expect Now...
March 15, 2025
On Thursday, the S&P 500 entered correction territory, defined as a decline of at least 10% from its peak. That peak was reached only in mid-February, less than a month ago. The other major averages have suffered similarly. A decline like that is not a shocking turn of events or even surprising…particularly after the last two years’ substantial gains. Valuations were stretched as we’ve commented before. Often that is accompanied by a rise in speculative investing – e.g. meme stocks, quantum computing companies, and marginal crypto tokens. The decline was/is a reminder to investors that, in the end, share prices have to have earnings underpinnings, legitimate growth prospects, and a clear path to ever growing profitability.
The abruptness of the decline, however, is sending a further message. Investors don’t understand how the brewing trade war will play out and that uncertainty drives more selling than buying, much more hesitancy than confidence. That message was underscored by Friday’s report of the University of Michigan’s consumer sentiment – a drop of more than 10% from the previous reading, 27% below a year ago, and the lowest in more than two years. It doesn’t help that policy pronouncements sometimes come abruptly and have also been subject to quick reversals.
The Trump administration message, delivered from a number of different sources, suggests a slight ‘disruption’, a ‘period of transition’, that there will need to be short-term pain for long-term gain. Reducing the size of the federal government, limiting the amount of regulation could have beneficial results. And it could also produce higher unemployment, reduced consumer spending leading to weaker corporate results, possibly further job losses. Maybe even a recession. Still, a recession might lead the Fed to cut rates which would lower Federal borrowing costs, currently at record highs, as well as stimulate the housing markets with lower mortgage rates, and reduce costs of car loans and credit card balances. What do you think?
Tariffs, even initially simply the threat of tariffs, already induced the Mexican government to turn over to the US 30 wanted drug lords including one wanted for murdering a DEA agent. Nice…fentanyl has been a scourge to the country and maybe it will lessen. Maybe following through on tariff threats could also lead to a strengthened manufacturing sector with more high-paid jobs. Or the tariffs could raise the prices of goods, causing a spike in inflation or at least a pause in its decline, and the Fed would not want to ease rates in that scenario. What do you think?
Retaliation for tariffs is widely expected. Maybe the Eurozone, with an economy similar in size to ours, will turn inward. Yes, they will spend more for their own defense…and maybe they will spend less on our weapons, goods, and visiting the United States. Those who are beginning to consider the latter as a more likely outcome are recommending that investors reduce exposure to the US equity markets and add to international equity positions. Of course, international stocks have been recommended repeatedly in the past and rarely has that proved to be a better option…will this time be different? Gold and commodities are the other flavors of the moment. Gold was a good idea a year ago…hard to think that that is still the case now that it has reached an all-time record high price. As for commodities, if the US decoupling from globalized trade causes a broad reduction in global economic activity, maybe commodity demand will diminish. What do you think?
Maybe the administration is correct – the country needed a reset, addicted to the public money spigot that could not go on forever. Maybe the only way to really have progress on that front was to take aggressive actions, make dramatic policy changes to shake the world out of a casual acceptance/expectation of endless American largesse. Maybe.
One thing is clear – there is no clarity. Obviously I do not feel I have any special insight. Outcomes are uncertain, there are no obvious milestones for measuring progress, and unintended, and even unconsidered, consequences are almost certain and as yet to be felt. Investors should, and will, necessarily be cautious. Keeping higher cash balances in money market funds yielding 4% looks attractive. Volatility will be the order of the day. Coupled with negative momentum and sentiment, there might be some excellent buying opportunities produced… just tread carefully. It is very uncertain what an increasingly nationalistic set of priorities, preceded and followed by similar attitudes in other countries, will yield.
The link below leadss to
a bit lighter fare…an interesting article about trying to teach dogs to communicate by expanding their vocabulary. OK, not a major development or a keen issue. Still, I am hoping that a little lighter fare will suit, a bit of a relief from the barrage of tense headlines and difficult news lately.
Have a nice weekend.