By John Goltermann, CFA, CGMA
“There is only one way to happiness and that is to cease worrying about things which are beyond the power of our will.”
— Epictetus
Markets are speaking.
Significant re-positioning has taken place in investment, commodity and currency markets since the inauguration in reaction to the return of Donald Trump and his subsequent policy pronouncements. In this piece, I will try to summarize what I see and potential outcomes of these policies and how they might impact investors.
Nothing lasts forever. So far this year for equity markets, what had worked well in the last two years (megacap tech), stopped working. Apart from their high valuations, there are many reasons for this. Tariff threats, inflation risks, persistently high interest rates, and slowing growth to name a few. As a result, capital has shifted out of positions that could be viewed as risky or expensive. The Magnificent 7, Apple, Amazon, Meta, Google, Nvidia, Tesla and Microsoft, are collectively down 13% year-to-date as of this writing.
But foreign stocks have worked well. So has gold, long maturity bonds, and major foreign currencies versus the US dollar. Small company stocks, which are tied to the strength of the US economy, have declined significantly, as has crypto, tech, and economically sensitive investments across the board.
Why?
In a word, de-risking. Myriad economic statistics support the case for a broad slowing in the US, but I won’t list them here. Economic slowing began in the late summer, it is continuing now and will likely continue.
To cut to the chase, in the wake of the threat of a trade war, global investors are re-allocating away from the United States and repatriating their capital back offshore. This process is just beginning and will likely continue if a full out trade war materializes. The dollar has weakened, defensive commodities such as gold have traded up, and foreign equities have outperformed. Why? Because tariffs boost inflation, inflation expectations, and impair growth. That is what has been being priced in.
For us, we believe the best approach is one embraced by Stoics, which is to ‘imagine all possibilities and therefore fear none’. Almost any policy proposal is possible, and we can’t rely on any one pronouncement, so we need to consider what is actually being done. The ability to ignore political theater may end up being our superpower as we focus on where values exist while our competitors busy themselves trying to parse signals out of the noise. Very often there are very few signals in the noise.
What we do know is that Trump is pushing for tariffs as a revenue source, and taking aggressive action with DOGE, all while trying to push interest rates lower (a further decline in the S&P 500 would help achieve that). This signals his seriousness about making room in the budget, likely for a tax cut to support growth. We expect a proposal for that later this year.
We also know that to reduce trade deficits necessarily means a reduction in the capital and financial accounts surplus because the math of the balance of payments is that the US current account (of which the trade account is a large component) has to equal the sum of the financial and capital accounts. If the current account deficit declines, then the sum of the capital and financial accounts (currently in surplus) will also decline dollar for dollar. This would mean an outflow of capital from the US because those surpluses are foreign investment in the United States, much of which is stocks and bonds (about half is invested in US Treasurys). And if that capital goes back home, it has investment implications
The reason we have a trade deficit is because we import more than we export. But it is also important to know that the US is a relatively closed economy as only 4% of our economy is net imports ($1.2 trn net imports vs. $27 trn US GDP), so trade is important, but not existential.
Therefore, because of the trade deficits, foreign capital, through the capital account surplus, has supported low interest rates, propped up economic growth and boosted asset prices in the United States, and in the process provided liquidity and enabled the explosion in debt, the expansion of government and fiscal spending. Some things good, and some things bad.
But a trade war risks a disorderly unwind of that paradigm, so the risk for US assets prices is heightened, especially the overpriced ones. And money flowing out of the US makes foreign securities more attractive than in the past. Especially because many are much cheaper. A trade war also increases risk for growth overall as economies must recalibrate to new trading relationships, more expensive capital, lower growth, etc.
That is where we are. We can’t handicap or predict how the future will unfold, but markets are adjusting to these risks and it could continue. We expect fiscal stimulus in Europe and China to boost their domestic economies and for them to ramp up investment in infrastructure and defense, but no comparable stimulus here apart from a possible tax cut down the road.
Many companies directly impacted by a prospective tariff war have already priced in that outcome so a reprieve would likely boost some of those stocks. I believe it’s a fairly safe bet to look for continuing dollar weakness over the longer run, which is an environment for which Townsend has been positioned for some time. And our value-oriented approach should help mitigate the high risk of permanent losses that exists in overhyped, overinflated tech darlings. AI is certainly an area where investment will continue, but its extraordinarily difficult to assess the impact of DeepSeek and other technological advances on that market, and calls into question the need to invest trillions in chipsets and data centers. There is a significant risk of overinvestment and poor returns in AI going forward. Overinvestment in tech and telecommunications certainly occurred in the hype of the late 1990s and those investors suffered greatly.
All of this was written in the middle of March, and much will have changed by the time you receive it. But our consistency of approach will not change. Nor will we react to what other people are doing or saying or make trades based on guesses of what other people will do. Good businesses are good businesses, and their stock prices should increase over time no matter what happens to the economy, to markets, or in the political realm. As long as those businesses make money, reinvest it wisely and compound their stockholder equity (and we own the shares at good prices), they should be worth more…later. And that is the goal – to own investments that have a strong case to be a lot worth more in the future. And that stoic focus makes a lot of the noise and media hype of today unimportant.