Over the years, I have learned to focus on earnings, interest rates and other market factors when assessing the outlook for stocks, and to avoid letting the Washington DC political scene impact investment decisions. While I believe this has served me well for decades, perhaps the first time in my career I may rethink that philosophy.
Wall Street prefers to know what the playing field looks like regarding, trade, taxes, policy, as well as the outlook for corporate earnings and interest rates. With so much uncertainty out of Washington DC these outlooks have become less visible. Even The Federal Reserve Board Chairman, Jerome Powell has said the policy uncertainty is putting The Fed in a ‘wait and see’ mode.
Re: Trade, the daily tariff threat is adding confusion to long term investment decisions. While employing more Americans in industries like autos is a noteworthy objective (along with reducing the flow of fentanyl which is another stated reason for the tariff threat), there also needs to be a realization that building a factory to make the cars takes years along with tens of millions of dollars. Companies just don’t decide to move production and jobs in a matter of weeks or months. Retaliatory tariffs are also going to be a reality and despite what we hear, tariffs are inflationary. My hope is that this becomes evident to the current administration, and we will have a reduction in the daily tariff threats and develop a less provocative foreign agenda.
Re: Taxes, Congress needs to pass a tax bill as the current law is set to expire. Companies need clarity upon which to make long-term investment decisions. With the House narrowly split, this is not a certainty especially with issues like the SALT deduction dividing Republicans.
Re: Policy, the reduction in government waste is welcome by many, and just about every President in my lifetime has spoken out about it. And when Bill Clinton cut about 300,000 government positions, he didn’t send shock waves through the economy. For many, and for Wall Street, the issue isn’t whether government needs to be more efficient, it’s about how to do it without dramatically impacting the labor market. Sizable layoffs in a slowing economy can add pressure to an already slowing economy.
These issues, as well as the continuation of wars and delicate discussions with friends and foes alike, are all casting a pall over stock prices. Despite the gloom, we believe that earnings and interest rates will resume their rightful place as the two biggest factors impacting stocks. Until then, we will likely see more unpredictability and stock market volatility.
Since politicians generally don’t like to be the cause of market downturns, we expect even this administration to tone things down a bit. If and hopefully when that happens, we may see a rebound in stock prices. The current decline in interest rates supports this optimism and the more favorable stock valuations as a result of this correction also support the notion that stocks are more attractively priced than they were a few months ago.
When things are rocky it can be beneficial to remember the words of Warren Buffett: “Be greedy when others are fearful and fearful when others are greedy.”
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