There are times when the US economy has a clear direction, from which we can draw conclusions with a relatively high degree of confidence about what effect likely macro developments will have on stock prices.
There are other periods–and the here and now is one of this latter kind–where waters are particularly muddy. The 1970s come to my mind, even though I was in the Army and then in graduate school for most of that period. The Vietnam war, Watergate, the rise of OPEC, deep worldwide recession and the collapse of the Nifty Fifty stock market, the IMF being called in for a financial rescue of the UK, runaway inflation, Carter appointing Paul Volcker and the consequent sharp rise in interest rates…
What a mess. But that was also the decade of the migration to the suburbs, the rise of specialty retail and the demise of the department store, an oil and gas drilling boom and the sharp shift in investor interest from large to medium- and small-cap stocks.
The key to investment success in the Seventies, to my mind, was not to get caught up in the general craziness but instead to find at least a few things to have a high degree of confidence in.
I think it will be the same kind of thing today. In fact, my sense is that the next few years will turn out to have a close affinity with the Seventies, with a major difference being that the people in charge now appear to be much less technically and economically competent than those back then. Not something I’m going to bet on, though.
–tariffs. Tariffs are taxes on imports. It’s possible, in the sense that I can type out a sentence and understand its meaning, that the entire tax will be absorbed by the seller who is exporting. So the price to the buyer will remain unchanged. But that’s highly unlikely. A more reasonable guess would be that the tariff will be split 50/50. If so, that would mean Canadian and Mexican good imported to the US will cost 10%-15% more. Put a different way, tariffs would reduce US consumers’ spending power. They’ll also cause inflation.
–deportations. In simple terms, GDP grows either by having adding more people to the workforce or having existing workers become more productive. The US workforce is growing by about 0.5% yearly from residents. Roughly 20% of the total workforce is immigrants. If the country began to deport, say, 5% of the immigrant workforce yearly, that would be enough to cause the overall workforce to begin to shrink, making it very difficult to have any real GDP growth
So it seems to me that Trump’s MAGA program is a recipe for slowing growth (nominal as well as real) and rising inflation. The latter implies that interest rates will remain higher for longer; the former suggests the consumer isn’t going to be a powerful growth driver.
My guess is that this means high-end retail won’t be a driving force this year, and that durable goods–like cars and appliances–won’t be, either. Probably good for Walmart (I own shares) and maybe for the dollar stores (I haven’t tried to sort these out yet).
more tomorrow