2nd Quarter Update: Tariff and Inflation risks remain, Summertime doldrums arrive at high market valuations.

The economy continues to soften but does not yet appear to be reaching a tipping point. Employment remains durable if not robust and consumer confidence together with consumer spending continues unabated. Housing however is beginning to show signs of weakness as more homes come on the market and prices have dropped modestly for the first time in many years. The technology sector has experienced some volatility as it navigates a path forward with expected trade deals and tariffs still in a state of flux. The AI and robotics sectors show no signs of slowing down.

The markets however seem to have entered a period of the summertime doldrums and appear to be drifting upward perhaps due in part to the exhaustion of getting whipsawed from the on again off again tariffs and trade deals. And it is true that several important trade agreements have been finalized with some of our important trading partners.

1st Quarter Update: Do Politics Really Affect the Economy?

We last wrote that the economy seems to be on a stable and moderate growth path. This remains the case despite the recent volatility in the markets caused by political pronouncements of fairly extreme upcoming policies. In the past I have repeatedly said that “politics” generally have little effect on the economy because the economy is vast and relatively immovable in the short term. Policy changes have a greater impact on the markets which tend to be very excitable. But, ill advised political policies tend to be self correcting over time as they morph into beneficial actions that positively affect the economy based on economics and real time feedback as the economy responds.

Having said that, the markets have been very volatile in reacting to the President’s policy announcements regarding trade and his envisaged role of government. His relatively extreme initial views have been modified and normalized due in part to reactions and feedback from the markets, his constituency and when the Courts curtailed some of his plans based on various legalities. It is not always bad to shake things up as long as one can gravitate towards positive reforms.

Year End Summary 2024 – Ongoing Modest Growth

Last quarter we wrote that the economy was sound on a solid growth path. Now despite recent volatility, we believe the markets too will continue to grow, that volatility will subside and growth will be modest. The sector rotation out of the high P/E growth tech stocks and into the smaller stocks in the broad market is ongoing, however, tech is, and always will provide higher growth ‘over time’. Inflation is slowly approaching the two percent target and interest rates are slowly falling, but as described below may remain at these levels for some time. Absent a credit crunch on the horizon, we no longer see a return to the historically low levels of the past decade.

3rd Quarter Update: More of the Same – Strong Economy

2nd Quarter Update: Interest Rates Turning Down

The markets have entered a new period of high volatility and economists and market analysts are having a hard time coming up with a reason for it. We began the month of July with the markets racing ahead with 6% to 7% gains reaching an all time high, only to fall back drastically erasing most of the gains of both June and July. Our accounts all still have sizeable gains on average near 40% so far this year. We believe the markets will stabilize barring any major disruptive economic developments. We expect relatively modest market growth through the remainder of this year. There is evidence of market sector rotation happening whereby institutional investors are rotating out of the high P/E, high growth tech giants and back into smaller stocks in consumer, financial and utility sectors. The current market is probably not like the vulnerable tech boom of the late 90’s (yet) as this market, despite the recent high valuations has much more support from higher and growing revenues and earnings.

1st Quarter Update Summary – Still Waiting for Landing

Last quarter, our technology stocks performed very well due in large part to our emphasis on AI. Nvidia, the dominant supplier of GPU chips used in AI was the driver of those gains and eventually became overvalued and becoming destined to return to reality as is now happening. This recent retreat was instigated in part by two factors. The first is, because of ongoing economic strength and stubborn inflation the Fed began overtly tamping down expectations for any interest rate reductions this year. The effect on the markets was instantaneous. The second is that strong demand in the AI sector that had caused backlogs in order for chips and equipment, has abated along with unrealistic expectations for growth and earnings. Even though the backlogs have diminished, and prices are retreating, the sector remains very strong. AI has the capability to greatly enhance efficiencies in manufacturing, productivity, earnings, and to also increase jobs in nearly every facet of the economy.

Year End Summary 2023- Goldilocks Economy, Not too Hot, Not too Cold

In recent days, the stock markets have surpassed the previous all-time highs achieved in December of 2021. As the Fed increased short-term interest rates during 2022, the stock market likewise went straight south. It took all of 2023 to regain that lost ground. Now in 2024, the economy appears to be in a Goldilocks condition, not too hot and not too cold. Inflation has subsided to levels that will make the Fed’s target of 2% achievable within coming months. The labor market is as strong as can be with wages rising and unemployment less than 4% for two years running. The economy has not been this productive for 50 years. Help wanted signs are still everywhere. It is becoming apparent that even without new fiscal or monetary stimulus from either Congress or the Fed, as is likely, the previous trillion dollar covid stimulus money is still circulating and accommodating consumer demand that is more than enough to keep powering the economy forward for some time to come.

2nd Quarter Update Summary

The economy at present is finally emerging from our pandemic constraints. During March, employment was remarkably strong as unemployment continued to fall. The lowest interest rates in a century together with massive pent-up demand backed up by stimulus liquidity is creating a perfect storm for rapid short-term recovery and growth. There is little uncertainty that the pandemic will retreat. Our scientific knowledge base of mRNA techniques will grow and our producers will quickly refine and distribute vaccines for emerging covid variants as necessary. We may be looking at upcoming annual booster vaccine shots for these variants along with the seasonal flu.

Many people have expressed concern that the huge deficits will cause inflation and a subsequent collapse of the dollar. However, these massive deficit spending policies have successfully been deployed in our past but under very different circumstances, so let’s briefly review them.

Massive deficits (or money printing) in the past were of necessity liberally deployed in the service Continue reading 2nd Quarter Update Summary