After Recent Tariffs Uncertainty Sprouts
The concept of widespread tariffs and with three trading partners having announced retaliatory tariffs on US goods, worries about inflation and (slower) economic growth have sprouted. These concerns are legitimate. However, as we mentioned in a previous issue, we do not really know (and will not know for some time) what the end effects will be. It is this uncertainty that is fueling market volatility. In the first Trump Administration’s trade war with China, it was five months before Trump and Chinese President Xi got together and changed direction.
Amidst the policy turmoil and inflation uncertainty, it’s important not to lose sight of some key fundamentals. The consumer expansion since the Covid recession. While there has been some weakness, apparent in recent reports, there appears to be genuine mitigating factors.
Perhaps the best example is the January retail sales report (-.9%). In a vacuum, this number is discouraging. But keep in mind:
1.January California wildfires;
2. Freezing temperatures across much of the country;
3. Four previous positive months of growth, including a holiday shopping season that was unexpectedly 4% stronger than 2023.
These issues all add to uncertainty, but they are also now in the past.
After two years of relatively smooth sailing, we’ve hit some turbulence. Not surprising… it’s not fun. But in a way, investors are spoiled. A considerable pullback is probably overdue after two consecutive years of significant gains in the investment markets. We have been talking about potential volatility for quite a while.
And because we’ve been expecting this type of market, we have already done a couple of things to prepare. 1) Our models are not aggressively positioned (i.e. we already have fixed income and money market positions to provide some diversification and safety). And 2) domestically, we do have some value positions, not just growth.
If the markets give us a correction, it would be an opportunity to acquire additional shares of your investments at more attractive prices. There is lots of turmoil and uncertainty now, but government policy can be reversed if necessary. Eventually, in our view, the pro-business lean of the new Congress and administration and relatively low interest rates will boost corporate profits and stock prices.
The trick will be to weather the storm and watch for fundamentals: Growth (consumer behavior), interest rates, inflation, and jobs. So far, although we’ve seen pockets of softness, there is no significant decline in these metrics. Lower stock prices are being driven lower mostly by policy uncertainty.
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