Three weeks ago, investors held a very positive outlook for further gains in the stock market this year following two years of robust returns. In three short weeks, the mood has changed from one of optimism to one of panic. One headline in the Wall Street Journal two days ago aptly summed up current investor thinking, ’Market Plunges, Recession Worries Spread’. Another writer concluded that “it’s a dangerous time to be overexposed to US assets, and almost everything else”. In other words, sell all your financial assets.
The world is awash in bad investment advice. Market timing has been around since the 1970’s and has never worked according to a multitude of studies that have been published. Selling assets in a panicky environment is akin to having a two-edged sword slicing your financial wealth. First, studies show that investors often sell near the market bottom only to witness a reversal in the market, which results in lost opportunity costs. Proof of this lies in the early 2020 five-week bear market which found that only 47% of investors who sold stocks were fully invested when the stock market recovered to new record highs by August.
Second, the other edge of the sword is related to capital forfeiture incurred by capital gains taxes. Taxes paid have a profound impact on future returns because such capital can no longer be deployed to make money. The impact becomes greater and greater over each year because the magical power of compounding can no longer be used to generate wealth on lost capital. Investors rarely factor this consideration into their thinking.
I continue to stand by my recent LinkedIn Post titled “No Recession Anytime Soon”. My stand is bolstered by recently released economic reports. February witnessed the addition of 155,000 new jobs to the workforce. New job openings in January increased by 232,000, bringing the number of job openings up to 7.7 million. During this month, corporate layoffs fell by 34,000 from the month before.
Every discussion on inflation tends to revolve around growing federal budget deficits, but there is a second essential factor which can stoke high inflation that is ignored in the media. And it’s the money supply which flies below Wall Street’s radar. The monetary aggregate named M2 more than doubled during World War II driving inflation up to 14.4% in 1947— the worst yearly showing on record.
M2 tabulates the total dollar amount of checking and savings accounts in the US. During the pandemic in 2020, the Federal Reserve expanded M2 from a base of $1.6 trillion to $2.1 trillion over a two-year period before being held in check until recently. For the first time since 2022, M2 showed a year over year gain of 3.9% last month. This has positive implications for continuing economic growth.
The stock market reacted adversely this week following announcement of another 25% increase in the tariff on Canadian imports bringing the overall rate up to 50%, then restored back to the original 25% rate one day later. What investors need to understand is that the current tariff rate on imports is zero now because the planned implementation of tariffs on Canada and Mexico goes into effect next month. Canada and the US are simply posturing themselves in the tariffs fight knowing that tariffs, once installed, will reign in economic growth.
We think that there is little chance that higher tariffs will lead to a recession. Investors should keep in mind that the tariff fight started over US demands on both counties to make a serious effort to reduce illegal immigration and to reduce the flow of fentanyl over their borders into the US. If levied, it is not given that the tariffs will be permanent as they always can be readjusted or eliminated through further negotiations.
In this writer’s opinion, the Administration has made a tactical mistake in pushing back the date by one month to when tariffs will be implemented. The hope of bringing more manufacturing production into the US for companies wanting to ward off the impact of tariffs will be forestalled given the on-again, off-again changes in tariff rates which have created great business uncertainty.
The US has evolved into a service economy; the service sector holds a 90% share of economic activity. Thus, tariffs are likely to play a minor role in elevating in pushing prices higher given that goods provide about 10% of GDP. The greatest impact from tariffs will fall on durable goods such as cars and trucks, appliances, computers, televisions, and furniture. Tariffs will have a disparate impact on certain industries. One source estimates that car prices could rise by $8,000-$9,000 if enacted. In looking at consumer staples, Coca-Cola pays 4 cents for each aluminum can. The imposition of tariffs will raise their costs per can to 5 cents.
There will be carveouts, which means exemptions from tariffs on some products. Food seems to be the most likely category to be exempted given that it has a daily buying pattern and is a highly visible, politically sensitive subject. On the other hand, durables have discretionary buying patterns, so tariffs on these products may not be felt for some time.
We have previously published that economic expansions have become longer since 1982 driven by the twin forces of technology and globalization. At their last peak several weeks ago, the US stock market was valued at $61 trillion and residential housing stock at $50 trillion. The Leuthold group just issued a report stating, “we doubt that the economic expansion can survive a market correction of more than 12 to 15%”. History contradicts the foregoing viewpoint.
On October 19th, 1987, the Dow Jones Industrial Average plummeted 23% in one day, shocking the entire investment world. Alan Greenspan, then chairman of the Fed, said that a recession was imminent owing to the stock market debacle. This writer on the day after the crash penned a letter to all of his institutional clients imploring them to add to their stockholdings based on his view that no recession was in the cards and that the stock market would recover in due course. No recession took hold, and the stock market recovered in 1988 before going on to new highs.
My take on the “wealth effect” today is the same as back then. It’s been published that 10% of households own 89% of stock market wealth. The vast majority of these assets will never find their way into the consumption stream. This was true in 1987 and it’s also true today.
Let’s examine how market declines of more than 15% have impacted the economy in past years. The stock market declined more than 15% from its peak in 2010, 2011, 2018, and 2022. There was no recession in any of these years which reinforces our case for “No Recession Anytime Soon”. Instead of throwing the baby out with the bathwater, which is a common Wall Street saying, we believe investors should be buying on the dip.
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Robert Zuccaro, CFA is the Founder & CIO of Golden Eagle Strategies. Over the course of his 40 year investment management career, Robert has managed market leading institutional portfolios and four mutual funds. He is one of the most successful investment managers having been named a top 10 manager in numerous years by the Wall Street Journal and Lipper Fund Survey. He’s also been cited for outstanding performance by Financial World, Investor’s Business Daily, and Business Week.
Email: [email protected]/phone: (561) 510-6606
