I’m a big fan of economist Paul Krugman. I’d been thinking about this topic for a while but was spurred into typing by his Substack column today.
When I entered the stock market a generation ago, the conventional wisdom (and correctly so) was that the most important leading economic indicator for the US economy was the US stock market.
My personal explanation for why this was so was that, at the first signs the economy was developing a pulse again, the personnel guy would say at lunch something like, “It looks like business is starting to pick up. We’re hiring again, so if you have any friends you’d like to recommend…” So individuals, who in the aggregate have always been more successful investors than professionals, would excuse themselves and call (this is pre-internet) Fidelity.
No longer.
The dynamic still happens. But in today’s world, at best half of the earnings of the S&P 500–and a smaller portion for NASDAQ–come from the domestic economy. And the administration’s negative stance on immigration and education seem to me to guarantee that the shrinkage in the domestic portion of publicly-treaded company earnings will continue to shrink.
In addition, the dollar has been dropping sharply since inauguration day–by almost 12% against the euro, for example. As I see it, this is the first expression by foreign holders of Treasuries of worries that the US will be, essentially, unwilling to pay its government borrowings in full. It’s not simply that the president is the mind behind Trump University and Trump Entertainment Resorts. It’s that the American public elected him and his platform, and that he has the full-throated support of Congress.
As far as the stock market is concerned, the key variable so far has not been the destruction of a big chunk of the national wealth. It’s been the inverse of that–that the large stream of non-US earnings from US-based multinationals has been on sale at a steep discount, thanks to the dollar’s devaluation.
Mr. Krugman’s analysis is that tariffs will clip about 0.4% from US GDP, leaving it above zero, but not by much.
Two things I take from this:
–multinationals will continue to be Wall Street stars. The companies in the worst position will be importers of foreign goods for domestic sale. Here, again, my guess is that the currency devaluation will be a bigger negative than tariffs
–the real daggers to the heart of the US economy will be, in the near term, the ICE attempts to shrink the domestic workforce, and, longer term, the devaluation of scientific research and general education.
So the big picture (concept) is pretty clear–look for US costs and foreign revenues. This leaves valuation, I think, as an increasingly important variable. I find myself looking more and more for value stocks (broken things waiting to be fixed) to counterbalance the growth names I hold.