“You make most of your money in bear markets, you just don’t realize it at the time.”
-Unknown
The March 31st issue of Barrons certainly was in no mood to celebrate Spring. “How to Prep for a Slumping Economy.” “The Market’s Past Is Closer Than We Think.” “The Economy Is Slowing Fast. Inflation or Not, Rate Cuts Might Be the Answer” were a few of that publications headlines. Possibly the stock market’s role has been transformed from a leading to a lagging indicator. Of the thirty indices that S&P Dow Jones use to track monthly US stock performance, only three were positive: Energy, Utility and Low Volatility Stocks. In a market with the S&P declining 5.6% “the Mag 7” stocks declined a collective 8.8%. The Growth share of the S&P 500 fell 8.2% and is -8.5% year to date providing a stark contrast to Value’s -3.00% and +0.3% respective returns. With the S&P 500 -4.3% for the year US stocks continue to notably under perform foreign markets with Foreign Developed markets +1.6% for the month and +7.8% year to date.
Foes as well as friends of the current administration agree that it is its economic policies, particularly those relating to foreign trade, that are responsible for the current financial market volatility. The source of the divergence between the two rests primarily on whether the administration is correct in viewing it as a short-term price worth paying for the longer term good or is a foolish exercise likely to harm both this nation and those we should view as our allies. It may be though that the assumption that decision makers, both foreign and domestic, are no longer rational actors but are irrationally willing to inflict harm on the one that they view as their opponent that is also a source of harm to themselves is not the correct one. Perhaps this is more in the realm of theatre, a great deal of noise obscuring the reality that there is a possible outcome that could be positive for all parties and one that, at a point not too far distant in time, may create a reaction in the financial markets of a much different hue than that currently being experienced.
When looking into the future it is often a good idea to start with those parts of the present that can’t be changed without leading to an unacceptable level of economic, financial market and political risk and therefore won’t be. A perfectly good example of this is US federal spending. For all the noise about Elon Musk and DOGE the simple truth is that our federal budget deficit is not declining but actually the opposite. Through the first five months of the current fiscal year, it has risen from $828,135 billion to $1,146,602 trillion, an increase of 38.6%. Headlines are replete with stories of the imminence of a US – China trade war. Really? Why, when both countries want the same thing? Both countries need significantly higher levels of demand from their populations. What is perhaps being missed is that the verbal hand grenades Xi and Trump are currently lobbing at each other actually cost very little put pay very handsome political dividends to the people that matter most to each of the two; the populations of their respective countries.
While tariffs increase the attractiveness of US produced goods and therefore the demand for the labor of those that produce them its supply is under significant and extended downward pressure. “The boomer generation”, the children of the men who fought The Second World War, are exiting the work force and their numbers are very large as they are the result of a birth rate of near 25 per thousand of population in the 1950’s. Their successors are the products of a generation with a birth rate of under 15. With this country now significantly reducing the number of immigrants labor is likely destined to be in shorter supply and thus able to command a higher price. The greater the reward for working the more prosperous the people who do the work. Demography is often viewed as a long-term phenomenon, but it is important to understand this is something that is happening now.
Christmas may come early this year for investors. While the stock market is increasingly viewed as the primary contributor to our national wealth the problem with the stock market is how large a share is held by a relatively modest number of households. The wealth of the great American middle class resides in the equity in their homes. How to get them to spend it? Put a US Government guarantee on it. The cost of that guarantee, absent a collapse in US home values, is relatively modest but it comes with the possibility of transforming the $13 trillion of the equity in our homes into a federally insured ATM machine; 50% of the current value of the US economy.
The stock market certainly looks a great deal more like Halloween than Christmas and may have further to decline. Commentators though who believe the US Treasury doesn’t care about the stock market are very likely incorrect. The US pension system is our 401k’s. An increasing share of the taxes we pay our government are a result of the realization of capital gains. Lower stock prices lead to even larger deficits and increased challenges related to the funding of our government. It may be a game but it’s a great one and it won’t end until it has to, but that time is not now and for investors it is the present that is our likely gift.
The 4.2% decline in equities in March reduced that asset classes contribution to portfolio returns for the quarter to -2.00%. Diversification was the key to keeping those losses modest as the growth shares of US large and small cap were close to -10%. 50/50 portfolio returns were +2.3% for the quarter as equity market hedges, gold and foreign equity markets near 10% returns all contributed.
Mark H Tekamp