Exactly four years ago, this newsletter decried the January 6 Capitol riot in which a mob attempted to overthrow the election of President Joe Biden. The backdrop to this constitutional crisis was an ongoing pandemic that would kill one million Americans. Uncertain times, indeed.
Now, going back to New Year’s 2020, what would have happened if you ignored all the troubling events on the horizon and had stayed invested? Since then, the S&P 500 Index has risen more than 100%.
With the re-election of President Donald J. Trump and, with it, brass knuckle governance, I must cite an industry colleague:
“In my 25 years in the mutual fund business, I have never known a good time to invest. There are always a dozen reasons why it makes sense to wait. We have a new president, strife in the Middle East, excessive government regulation, oppressive tax rates, and a Congress that is more part of the problem than the solution.”
Sounds like the current environment, but Graham Holloway of Capital Group had said this in 1981.
There are always reasons not to invest, and that’s no different today than it was in 2020 or 1981. But markets have been resilient over time. Investors have typically been rewarded for overlooking near-term uncertainty and keeping focus on their long-term investment goals.
Because we are San Francisco-based firm, you would correctly assume many clients are distressed about the election, some feeling uncertainty in the extreme. As we’ve been doing since 1984, however, we endeavor to separate one’s politics from investment decisions, cautioning against holding your breath until your party next takes the White House.
2024 was a very good year, and now?
Last year was generous to investors as the S&P 500 posted an uptick of 20 percent-plus for a second consecutive year. The new administration inherits the world’s strongest economy, one that suggests a good 2025 for investors:
- corporate profits are predicted to rise 11.5%;
- unemployment is at 4.1% (deemed to be “full employment”); and
- inflation at 2.9%.
Stocks have additional room to move upward, subject to a few “ifs”:
- corporate profits continue to grow;
- trade wars don’t materialize and bring on renewed inflation;
- long-term interest rates remain unchanged or decline; and
- geopolitical events do not intercede, e.g., the flare-up of existing wars or outbreak of new conflict
With so many market highs reached since the 2022 downturn, we might see modest pullbacks from lofty valuations, but not so great as to spur recession. Regardless of who’s in the White House, corrections are a normal part of the course though they arrive without notice.
With the election of President Trump, the investor class (that includes us) expects favorable treatment. Wall Street has thrilled to promises of reduced taxes and decreased regulation, expectations already priced into the markets.
Other elements have yet to be ascertained: potential harm of massive tariffs and mass deportations, policies that candidate Trump clearly had promised from the stump and is now implementing.
Massive Tariffs
Targeted tariffs can advance a national industrial policy, such as preserving domestic steel production, or align with national security priorities, such as restoring our ship-building capacity. To build and protect America’s clean energy infrastructure, Biden had increased tariffs on Chinese solar panels to 50%.
The new administration claims sweeping tariffs along with reduced federal spending will pay for major tax cuts. But taken too far, the hidden tax of tariffs could spark trade wars, reignite inflation, invite recession, reduce government revenues – perhaps all at the same time. Before even taking office, Trump’s tariff proposals contributed to a decline in foreign stocks last quarter.
Tariffs on Mexico, Canada, and China, if finally implemented, will cost the typical middle-income household $1,200 per year (source: the nonpartisan Peterson Institute for International Economics). Tariffs initiated during Trump’s first term -- and expanded under Biden – now cost the American household $625 per year. Planned tariffs on goods from Europe and elsewhere will decrease household purchasing power that much more.
What may be harder and much slower in coming is any ascertainable job creation that results from upping the price of imports. If de-globalization can lead to America’s re-industrialization – can’t happen in a few years - we must prepare to end our love affair with cheap electronics. According to the administration, the prospect of higher prices is the personal sacrifice necessary to resurrect our manufacturing base and to bolster national defense.
This week the administration imposed and quickly paused a 25% tariff on all goods from Canada and Mexico, what was characterized as “The Dumbest Trade War in History” by the Wall Street Journal (WSJ) editorial page.
American receives 43% of all agricultural imports from Mexico and Canada. The Trump tariffs risk “cross-border mayhem,” warns the turbo-conservative publication. “Many top U.S. growers have moved to Mexico because limits on legal immigration have made it hard to find workers in the U.S. Mexico now supplies 90% of avocados sold in the U.S. Is Mr. Trump now an avocado nationalist?”
Mass Deportations
One potential threat to client portfolios is Trump’s unfolding plan for massive deportations. It risks inflation-inducing labor shortages in key sectors like agriculture, construction, health care, hospitality, and food services. The U.S. Labor Department, for example, estimates 44% of the nation’s farmworkers are undocumented. (This is to say nothing about the legality and humanitarian dimensions of the various actions now underway.)
Inflation’s Friend - Unchecked Deficit Spending
Our national debt is like the weather. Everyone talks about it, but nobody does anything about it. If not properly managed, it will stoke inflation, which, in turn, can clobber portfolio returns.
With mortgage rates ticking upwards, homebuyers are feeling the long reach of the deficit. The yield on ten-year Treasuries (an indicator of long-term borrowing costs) moved upwards at the same time the Fed reduced short-term rates. Bottom line: investors sense inflation on the horizon.
National debt now stands at $36.4 trillion. The interest paid on that debt is much larger than the defense budget and it is a growing percentage of our GDP.
Current Trump proposals would reduce federal revenues between $6 trillion to $10 trillion over the next decade, depending on which cuts are implemented. These proposals include:
- extending the 2017 tax cuts (costing the Treasury $3.4 trillion over 10 years);
- lowering the corporate tax rate from 21% to 15% ($879 billion); and
- exempting Social Security payments from taxes ($1.8 trillion); and
- increasing the child tax credit from $2,000 to $5,000 per child ($3 trillion).
With your own eyes, you can watch the national debt grow millions of dollars each minute: nationaldebtclock.org.
An economically prosperous, deeply divided nation
Eighty percent of Republicans believe Trump will be a great or good second-term president, while only 7 percent of Democrats feel the same (source: Associated Press). Such is our nation’s division and confusion.
These conditions will likely continue into the foreseeable future as populist movements play out here and abroad (Brexit is one highly controversial example). However, as your advisors, we will not lose sight of the long game that has brought you this far.
As we look at our shared enterprise as Americans, our going to work each day, we drop differences long enough to better ourselves, families, and communities. Vaguely measured by financial markets, the sum total of our cooperation provides the wherewithal to become a more perfect union in ways the S&P 500 will never show.
Our ongoing client discussions give voice to current uncertainty and fears while we can also refresh long-term investment plans. More than incidentally, uncertainty includes the personal matters such as an ailing parent, a promotion, new home, the arrival of a newborn, etc., in other words, when life gets “life-y.” Our listening as your “thought partners” is a role we have found that naturally aligns with the investment advice and financial planning. If you’re carrying the weight of the world, is there any way we can be of help?
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