Summary, Last Quarter:
After initially responding to President Trump’s reelection with a rally, the stock market reversed direction with the concern that tariffs may be more than a temporary negotiating tool. The Federal Reserve, which accomplished the elusive “soft landing” by getting inflation and unemployment in check, did not change interest rates at its most recent meeting, deciding to take a “wait-and-see” approach. Corporate earnings were very strong in Q4, but forward earnings are being cautiously reduced. Volatility has returned.
Our Commentary:
Tariffs are just one of the tools used to accomplish the objectives laid out by President Trump’s economic team, i.e., the Council of Economic Advisers (CEA). The overall goal is to restructure the global trading system. In the global trade dynamic, the U.S. has opened its markets to competition, is the world’s reserve currency, and is the world’s safe haven for invesments. The U.S also provides defense for its allies, a position that has become increasingly difficult to maintain. To make the situation more favorable for the U.S., the Trump administration would like to decrease the value of the U.S. dollar (somewhat), remove tariffs erected by trade partners, get full access to foreign markets, and encourage manufacturing in the U.S.
Tariffs are nothing new. The U.S. has very few tariffs on trade partners but is tariffed relatively heavily by allies and foes alike. This is contrary to treaties of the WTO and NATO, which call for open and full market access. Being the world’s reserve currency results in an “inelastic” demand for the U.S. dollar as countries convert their currencies into U.S. dollars, trade in U.S. dollars, and stockpile dollars for future imports. This results in relatively expensive U.S. goods. Additionally, countries who have tariffs against the U.S. potentially create a two-fold trade imbalance.
Since China entered the World Trade Organization (WTO) in 2001, the U.S. has lost approximately five million manufacturing jobs. The U.S. would like to get those manufacturing jobs back and/or make the U.S. a more attractive place to manufacture goods in general.
National and global security concerns continue to grow, and the U.S. provides more funding for NATO defense than any other country, by far. Some member countries have skirted their commitment to provide at least 2% of their GDP to defense, and the U.S. wants members to uphold their end of the agreement. As global tensions rise, trade partners who aren’t “playing nice” are being asked to fulfill their commitments.
We mentioned in our last commentary that market volatility may return, and it has. Companies are finding it difficult to plan ahead and may reduce their earnings forecasts, as some already have. Uncertainty is something the stock market doesn’t like. However, there are silver linings. Deregulation is underway, and the U.S. is expected to decrease tax rates around the end of 2025. Both should help the economy. If the U.S. is successful and the global trading system is restructured as envisioned by the CEA—i.e., lowering the value of the U.S. dollar, removing tariffs, opening markets, and growing U.S. manufacturing—the U.S. economy may be on the cusp of a new stage of long-term growth.
Until next quarter,
Leelyn Smith Investment Committee
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