Michael Missaghie A Comment -- General Comments From an Expert A Commentary N/A Mar 18, 2015

Definitely could get worse. We're seeing the early effects of a once in a thousand years president of the US and all its repercussions. 

If you look at Q1 numbers for US companies and what they were projecting for the second half of the year, auto companies all pulled guidance. Same thing with the airlines. Other companies, while not pulling guidance, have said it's really murky for the second half. 

We're slowly seeing the US walk back on all the extreme reciprocal tariffs that they announced on "liberation day". Now we're getting discussions with other countries such as the UK and China. That leaves about 193 countries to go. A long road, but going in the right direction.

From here we should, hopefully, see some stability in the markets.

Critical thing is going to be what the impact is for the consumer. There's going to be a pass-through of tariffs, and it depends on who bears the brunt -- manufacturer, importer, or consumer. Inflation's going to be coming through. Layoffs may tick up.

Then it's up to the Fed whether to tolerate the inflation as a one-off, or to focus on labour, when it decides whether to guide down or not. Jerome Powell really differentiates between his role and that of the government; he sees it as his job to ensure full employment with inflation around 2%. He's not anticipating, but is waiting for hard data, and it's difficult with tariffs in flux. To lower rates now would be putting fuel on the fire, exactly what you don't want.

People will change their stripes as they get affected by different things. Current US president is blowing everything up from defunding research to challenging universities. 

His firm hasn't changed its approach. They look at everything from a bottom-up perspective. They have target prices on all stocks in a concentrated portfolio of 32-33 names. They also have target position sizes; if a stock drops, the team debates whether to buy it up to a full position. The macro is changing; but their method remains consistent, and that's served them well through current and past crises.

Upcoming mid-term elections plus lawsuits challenging tariffs should work in investors' favour. We have to hope that rules will fall into place and we can all move forward. 

Headlines will have a minimal impact, because it takes YEARS to negotiate a trade deal. Trump will reduce tariffs on China to 80%--still high. And America dealing with 10% tariffs: that's still a big deal because our economy was still slowing. Don't buy false comfort ahead of the trade talks. Near term, we're okay, but he expects a recession ahead.

We don't have a trade deal, but a pause with talks to come. It's complex. Nobody know how this will play out, but he expects a base rate of tariffs everywhere no matter the outcome, around 10%. The markets are comfortable with that level, but it's still inflationary and a hindrance to growth. Animal spirits is driving today's rally; the market did not expect this news. But the news is not a green light to fully jump into the market. Keep an eye on CPI, PPI and retail sales later this week, to reflect April's consumer activity during tariffs that month. Watch Walmart earnings which is a huge trading partner with China. This year, he expects earnings to disappoint and fall short of the projected 8% earnings growth. 

He's looking at ETF charts of economically sensitive sectors during tariffs: transports, logistics and the retail consumer. Also is looking at charts of XPO and Walmart. All these ETFs are still lagging the wider market, despite some recovery during this tariff war. This underperformance tell him these sectors remain nervous. In contrast, Walmart has been a leader, no doubt, outperforming all these sectors. Looking at the VTI index (all US stocks): when this corrected last month, VTI returned to the Dec. 2021 peak. So, the market has had a very good reset and correction. However, it was a challenge to return to its 200-day moving average, though it happened with today's rally. We can close above this for a day or two. If we hold above this 200-day and the VIX returns to around 15, we don't need to worry about these economic headwinds. However, the sectors that have been impacted by tariffs tell a different story. The market has recovered through animal spirits, but we're not free and clear, not a green light. The market could grind higher, though.

We are in a relief rally because of the 90 day pause in tariffs announced today. However in the recent downturn and following rally, insider buying has been very quiet. Even when the market was down by 19%, insiders didn't think it was enough. Retail investors have been doing most of the buying, outnumbering sellers by 4 to 1. The question is how long can this last. He feels today's momentum could last another day or two before a pullback. As to the market in general, 90 days from now we'll know more.

Investing Opportunity: The Market Looks Forward

The average investor is very scared of recessions. The media highlight the bad news, such as declining house prices, job losses and weak corporate profits. Investors know that the stock market is driven by profits, so they tend to worry and sell their stocks when recession talks surface. Certainly, if you lose your job in a recession then of course there is a serious personal impact. While we certainly do not love recessions, they do certainly create stock market opportunities. As noted, when all the news is bad, stocks tend to become very attractive. If you can look beyond the pessimism in a recession, you can see opportunity. And this makes intuitive sense, if you put yourself in the shoes of a chief executive. In a recession, corporate executives get worried too. They fire staff, cut costs and hunker down for the bad times ahead. Then, when economic conditions improve, suddenly profit margins soar because costs are much lower. Yet stocks can be cheap because of all the previous recession concerns. Higher margins and low stock valuations can be a very profitable investor combination.
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By now, we know that Trump is an interesting character who manages by chaos, keeping people off balance. Investors must know that volatility will stay during his term, and tariffs weren't the volatility, but Trump himself. Tariffs are the trigger, and Trump the gun. Corporate America came into this Presidency strong and has remained strong, despite all that's been thrown at it. But there's been a drop in confidence among consumers and boardrooms, which hasn't effected earnings yet--and it may not, because Trump keeps swinging back and forth. As of last Friday, 78% of reporting S&P companies reported positive surprises. Valuation is on the mark for a 5-year average.