Uh oh. Monarch is writing a blog post…things must have really gone south in the stock market. Hopefully this isn’t new information for folks, that the stock market has been…mmm…volatile. So where is the market headed next?
This is a good time to haul out the predictions made by the “best and brightest” strategists and economists on Wall Street, if only for the sake of schadenfreude. At the end of 2023, as a group, they predicted that the S&P 500 would gain a whopping 2% in 2024. Instead, the S&P gained +23%. Cue the “juuuust a bit outside” line. So at the end of 2024, apparently in order to make up for their overbearishness, they predicted a gain of +12% for 2025, which is one of the most bullish gains ever predicted by this group. Oops. Of course, the year is far from over, but you get the point: when everyone else is bearish, start to get bullish, when everyone else is bullish, be wary. This has long been an effective tool to add to your long-term performance, and Warren Buffett agrees!
We’ve been wary on the stock market since even before the election, given high valuations, a creaking economic expansion, simmering “supercore” services inflation, sunsetting tax cuts at the end of 2025, a top-heavy S&P 500 dominated by tech, and a little too much Kool-Aid being drunk on AI. Throw in our new president’s vows to overturn the economy and that should explain why we’ve been in the wary camp. We have held out hope (with equal parts skepticism) that Trump was all hat and not that many cattle when it came to his threats to use tariffs to “fix” our trade deficit. Suffice it to say the cattle are stampeding across the range. Trump’s willingness to “shoot the hostage” in his efforts to bring trading partners to the negotiating table show his willingness to see his Tariff Man project through. Through to what? That is the all-imporant question.
There is no shortage of ink spilled on tariffs, and whether they’re good or bad; indulge us as we add our own ink to the collection. All of your investment team at Monarch have degrees in finance and/or economics, and/or are CFA certificate holders. Economics is a science, though it is a soft science. That means there is room for differing opinions, but there is also a lot of hard historical data that can be used as evidence. From our vantage point, there is ample evidence to suggest, or even conclude, that tariffs are unequivocally bad for the economies of all parties involved, at least in the short-term. And do we need to invoke Ferris Bueller’s Day Off? While this movie was educational on many fronts, above all was the econ teacher (Ben Stein) teaching us that tariffs led to and perpetuated the Great Depression (“Anyone? Anyone?”). Go to YouTube to find the clip, even if you have seen it; you’ll thank us later.
A primer on tariffs: a tariff is a “tax” collected by the government when an exporter from outside its jurisdiction wants to sell a product to the government’s constituents. There are almost no tariffs within the United States, i.e. between the states, even as states compete with each other for people, jobs, and economic growth. The simple fact behind that is we all understand that we can’t do everything ourselves. I’d love to grow avocados and oranges in my back yard, but that just isn’t going to happen. True, states will compete on economic incentives, but generally we all realize that we compete for the USA.
Tariffs serve to protect industries that are deemed to be vital to the economy and labor force of a country. We as a country have deemed agriculture, autos, and steel to be a few very important industries. Why do industries need to be protected? Normally it’s because they are not competitive with global competitors, and the jobs in those industries would be difficult to replace. Herein lies the rub: tariffs are an interruption to free trade and thus capitalism. Capitalism is a system that allows consumers to be free to make choices as to what they buy, allows workers to choose the job of their choice, allows businesses to sell whatever products they want to whomever they want. Modern capitalism arguably requires some guardrails. We expect businesses to sell us goods and services that won’t poison us, maime us, or kill us, which is why there are licensing requirements and inspectors.
Tariffs get in the way of consumers and businesses being able to effectively allocate capital. Someone might want to buy a Chinese car because he can get one for under $15,000, if there was free trade here. Before you think we’re being anti-American, understand that tariffs are in place everywhere in the world, and the effect is the same. Google would love to tap into China’s 1.2 billion consumers and business owners, but is banned by the government. China has long blocked and tariffed American companies in order to build up their own economy. The world has “mostly” free trade but it’s often slanted against the U.S. It is understandable that someone would want to put an end to the unfair trade.
But know this: American businesses willingly source and produce around the world, because it makes the most business sense for them. American consumers willingly buy products exported from around the world, because it makes the most economic sense to them. That’s the global free market at work. No foreign government is strong-arming you into buying bananas from Costa Rica, blueberries from Peru, or electronics from Asia. But now your government wants to encourage all production back into the U.S. So the multi-trillion dollar question is: can it come back?
Obviously, economic incentives alone won’t bring banana and mango production to the States. Then there are the elaborate supply chains that have been set up by companies around the world, to take advantage of lower-cost labor and specific skill sets. If we combine those latter two facets, we can also layer on the propensity for American workers to not want to perform jobs they deem beneath them. There is already enough evidence, that not enough American workers will work certain jobs that already exist in the U.S., to firmly conclude that bringing even more tedious, dangerous, or physically taxing jobs into our country won’t be met with a lot of job applications. Recently-arrived immigrants have long been the one cohort that could be tapped to do the dirty work…do we want to bring in more of them to assemble toys, sew clothes and shoes, make bricks, mine the copper, etc.?
We have heard the expression “we need to give the tariffs time to work” a lot lately. It is true that it will probably take awhile to see the benefits of tariffs, because the primary objective is to re-shore production into the U.S. That takes time, potentially a lot of it, if a supply chain is firmly entrenched overseas. In the meantime, the fear is recession. We obviously can’t know for sure that we’ll have a recession, but the effect of permanent tariffs at these rates and retaliatory tariffs at similar rates would effectively cripple the tethered global economy. We acknowledge that Trump says he is willing to cast aside the rest of the world and close the borders, but we believe he is more rational than that. He needs people to think he’ll pull the proverbial trigger in order to get them to the negotiating table, because he knows they would be hurt even worse than the U.S. would. We also believe he is not blind to the financial markets, nor the opinions of those who have some skin in the game (2/3 of Americans). In other words, we still believe these are tactics. He is surely well aware that the higher the tariffs, the worse the stock market performs, and the lower his approval rating and odds of sustaining a majority in Congress. He knows there is no better leading indicator to the economy than the stock market. Suffice it to say, we believe, at some level, the Trump Put exists…he would stop the bleeding at some point if too much blood is lost.
We do believe we are at or close to Peak Tariff at least as far as announcements go, even as we expect to hear more rumblings from trading partners on retaliatory tariffs. If true, the correlation would eventually swing the other way, and we have seen this effect play out repeatedly this year—that when tariffs get reduced or seem like they might not go into effect, the market does well. Don’t misunderstand, we are still wary. We are not about to throw caution to the wind or swing for the fences. But we are starting to see some serious bargains suddenly that should entice any long-term investor.