AI Freakout
February 19, 2026
Dow: 49,395
This is certainly what has been happening at an accelerating pace over the last few months. Many are assuming that AI is not only coming for our white-collar jobs, but for some of our largest enterprise software companies as well. Let’s try and take a few steps back and look at how the landscape might evolve over the next few years.
Every technological innovation increases productivity. But we don’t work less, or have fewer people employed, for the same amount of output or production; we produce more – at a lower marginal cost! This is the definition of progress for the human race. It raises living standards. Don’t think of AI as replacing thinking jobs, think of it as enabling you to focus and think better. AI lowers the ”cost” of cognition. It will allow you to concentrate on the most important aspects of the task.
On a simplistic basis, an increase in productivity levels will increase the value and utility of capital. This is an economist’s fancy schmancy way of saying it will allow for a greater increase in stock prices. Hooray for us investors! AI should set GDP growth on an upward trajectory.
Another benefit is lowering the price of a service increases demand for that service. Software, data, and formulated output still needs to be managed, stored, categorized, redeployed, interpreted, etc. Additionally, lower costs lead to an increase in the effective and expected uses of that service, and this may very well demand another layer, or layers, of software. Humans will still be in the loop, and each one of them will have equal or greater value and productivity than they did before AI. Some of us are old enough to remember fax machines, typewriters, white out, and carbon paper. Look at how far we have come in a generation — imagine how far we will progress in the next.
The danger, and opportunity, lies in the speed of the transition. Structural unemployment may spike in specific white-collar hubs, and we may need private-public partnerships for retraining. There will be far greater demands on our educational system, which unfortunately has not risen to the task in the past. There will be an increasing gap between the AI-literate and the AI-illiterate workforce, and this may push greater wage inequality. This wage gap between the skilled and unskilled has already been expanding for a few decades and is responsible for a squeezed middle class in the United States.
So far in the market, the winners have been companies directly involved in supplying the AI buildout, mainly semiconductor companies. The tech big boys, like Amazon, Google, NVIDIA, and Amazon, have had fair-to-poor stock performance so far this year. Companies related to data center infrastructure have done well. Our equity strategies strive to diversify by having exposure to different aspects of AI development and build out.
Efficiency is coming along with disruption. Imagine a property and casualty insurance company that could use AI to evaluate claims, assess risk, and feed this data back into pricing in real time. All of these non-tech companies are secondary or tertiary beneficiaries of AI development. Virtually every public company will be affected to a material degree.
There will be potholes and concerns as AI is utilized more widely. The first concern being faced now is: will revenue and profits follow the current multi-trillion dollar buildout undertaken by the largest companies in the United States? They are the only companies in the world that have the financial strength to make these huge investments over such a short period of time. We should be thankful that they are companies here in the U.S.
Regulation is another concern. How should AI be regulated? Will regulation be structured to stifle or encourage future development? Will non-U.S. regulators take a vastly different approach to the U.S. regulators? Will regulators have the competence and understanding to evaluate and make the proper decisions?
Property law is also an unknown. Will intellectual property rights stifle development? Will they limit access to useful data sets? Will effort be put into proprietary development if the rights cannot be sufficiently protected?
All of these issues are exciting, stressful, and a bit scary at the same time. We suspect the emotions are not different than at times in the past when society was on the cusp of great advancements.
As an individual, the most important action you can take is to begin to experiment with AI tools. Expose yourself to the possibilities. Be curious. Look for potential uses. It is early. A little effort will put you ahead of the vast majority of the population in understanding the possibilities and the issues with AI. An educated citizen is the best asset a country can have.
Random Thought: “Could you tell that this Viewpoint was created with the assistance of the Google Gemini AI tool?”
Do you notice that your inbox is stuffed with market and economic predictions at the beginning of each year, but never a recap at year end? We aren’t afraid to walk the high wire, so here is a review of our 2025 predictions.
GLP-1 drugs will come under greater scrutiny
Correct – Thyroid and pancreatic risks continue to be investigated. The biggest news for the drugs last year was that you may not be able to quit them once you lose the weight, meaning any cumulative negative effects will continue to build in your system.
Growth Pothole
Correct – GDP was negative 0.6% in the first quarter of 2025.
Growth Recovery
Correct – GDP rebounded to 3.8% annualized in the second quarter and 4.3% in the third quarter. We are starting to believe that we can see the future…
Stock market will rise by double digits
Correct – Bullseye! Here is what we said twelve months ago: “This market is very ripe for a correction after the run of the last two years. We would expect it to come early in the year, along with the growth slowdown scare. It is amazing how many strategists predict single digit up years for the stock market when they aren’t that common. We will call for another year of double-digit returns.”
China Fail
Wrong – Chinese GDP stayed sluggish, and there is still a load of bad debt to deal with, but the government has strings it can pull to delay a significant recession. Demographics are now working against them, with a very low birth rate, but a larger recession is still off in the future.
Home Price Correction
Correct – Although home prices nationally have shown a modest increase, cities we mentioned, like Orlando, Denver, and Austin, have seen price corrections, an increase in inventory, and a slowing in sales.
Private Debt Problems
Partially Correct – Defaults and restructurings are beginning to appear, but the pipeline for new debt issuance is still open. Inflows to this asset class will have to slow significantly in order for larger structural problems to manifest themselves.
Immigration Backlash
Correct – Nationalism is on the rise in many European countries as well as in the U.S. Disputes have reached the boiling point in many countries, and we hope tempers can cool. In January, we said this about the European countries: “The political upheaval currently experienced by these countries is mainly driven by immigration concerns, and multi-party countries are having difficulty forming governments. The natural result of immigration concerns will be the continued rise of Nationalist parties in many of these countries.”
Inflation, Fed Funds, and Interest Rates Lower
Correct – All moved lower, albeit inflation only from 2.9% in 2024 to 2.7% in 2025. The Fed cut rates three times in the second half of the year, and Treasury yields fell approximately 50 basis points across the curve.
Trump Agenda Slowed
Correct – 2025 witnessed an amount of new legislation passed by Congress that was far below average. Many of us free marketers would see that as a positive. Alas, like many modern Presidents that can’t move their priorities through Congress, Trump has become adept at legislating through executive orders.
The Most Important Call
A near perfect prediction record will be hard to repeat, but we think our most important call came in the first quarter of 2025, during the market correction, when we said that tariffs would not be inflationary. The lack of inflation or a recession in 2025 clearly were two of the factors that allowed the market to continue to climb. In February, we said, “Much has been said about tariffs being inflationary, but we actually worry about them for a different reason: because they are contractionary. They tend to create a combination of reduced trade, consumption, and output. In some cases they reduce all three,” and “Tariffs are a cost and a drag on the economy because they increase the cost of an item without increasing its value or utility. So why aren’t they inflationary? Because, if a household has a set amount of discretionary dollars to spend, they do not blindly accept the cost increase without making other changes to their behavior.”
In late March, less than two weeks from the bottom in the S&P 500, we said, “The market decline may have already discounted the potential negatives.”
We have no illusions that our prediction record will be as successful in 2026 as it was in 2025, but that is not necessarily our goal. This exercise helps us construct and evaluate a framework for analyzing the economy and the markets, and we adapt as new information becomes available. Every day brings new challenges, and we will face them with the best experience and analytical rigor we can muster.
Random Thought: “If you want to know what will happen in the markets this year, ask me next year”
– Anonymous Dana Employee
Time for Some Soothsaying
December 12, 2025
Dow: 48,458
Otherwise known as our predictions for 2026. We love to take credit for correct predictions and rationalize away the poor ones. This prediction exercise helps us develop a framework for thinking about the markets and the economy for the coming year. These calls don’t just go into the forgotten file at the end of the year; next month we will review our 2025 predictions.
No 10% S&P correction – We had a correction of almost 19% for the S&P 500 Index in early 2025, as worries swirled around tariffs. With strong capital investment and growth in AI use cases, markets should rebound before declining 10% in 2026. An accommodative Fed and lower inflation should also support the stock market.
The S&P 493 will perform – We are not calling for the non-Magnificent 7 portion of the S&P 500 Index to outperform the Big 7, but they should do a better job of keeping up, performance wise. There will be AI uses across the 493, and their valuation levels leave room for upside performance.
Private Debt Problems – We have called for a correction here for the last two years, and it hasn’t happened. It is still a case of far too much money being pumped into an area with little oversight and a high fee structure, along with low liquidity and low transparency on prices. This is usually a recipe for eventual disaster. Retail products are available that are backed by illiquid loans. Signs of repayment stress are emerging, but money flowing in still covers potential problems, until that positive flow reverses.
Inflation drifts lower – Both the dollar and commodity prices have stabilized in the second half of the year. The labor market is showing some softness. There does not seem to be a driver of inflation on the horizon, so over 2026 it should continue to drift down from around 3% to the mid to low 2% range.
Fed about done – The economy has demonstrated that it can withstand rates above 3%, so the Fed Funds rate should stay between 3% and 4% through the year. The two-year Treasury yield is near the Fed Funds rate, indicating that little change is expected from here in short-term rates. Rates moving either significantly higher (inflation) or significantly lower (recession) would mean there is a problem.
No recession – We probably should have put this call up in the #1 spot, since it is the main nemesis of capital markets. Over the last few decades, it seems as if large companies are more conservative in their production and investment considerations, avoiding some of the boom/bust cycles that have affected markets and employment in the past.
Little movement in rates – Mainly because of the previous three predictions, we would expect little movement in the Treasury yield curve in 2026. Contained inflation and no recession should anchor the long end of the yield curve, and limited Fed rate changes should anchor the short end of the yield curve.
GDP will strengthen – GDP growth will be about 2% in 2025, factoring in import gyrations due to tariffs. GDP was actually negative in the second quarter of 2025. We expect a reasonably strong economy in 2026. With decent productivity gains, partially due to new AI technology and investment, we expect GDP will be closer to 3% in 2026.
Job Growth Sluggish – It is difficult to read because of the lack of data and delays due to the government shutdown, but employment growth has slowed in the second half of 2025. We would expect some rebound in 2026, but not back to the 200K or higher job growth that is representative of a very strong economy. We would expect growth to average 100-150K per month. Enough to keep the economy growing without inflation and allow reasonably strong growth in productivity.
U.S. stock market outperforms Europe – We think the outperformance of the European stock markets was an anomaly this year. The weaker dollar boosted returns for Americans investing in Europe. Investors in European equities still face the problems of a bloated bureaucracy, high taxes, and poor demographics (an aged population). These problems have no easy solutions. Investors in U.S. equities should again be rewarded for operating in a more favorable investing climate.
Warren Buffet, likely the greatest investor of our time, retires at the end of 2025. Here are two of the many, many, insightful and pithy things he has said over the years:
“Risk comes from not knowing what you’re doing.”
“Price is what you pay, value is what you get.”
Thank you for the opportunity to work together and we wish you a healthy, happy, and prosperous New Year!
Cruisin’
September 30, 2025
Dow: 46,397
The stock market continues to power ever higher, with the S&P 500 Index recently reaching another new all—time high. The index is up over 14% in 2025 despite a spring correction and has now almost doubled over the trailing three-year period. It is natural for investors to fear losing their recent gains after such a large move, but that emotion is based on looking backward, not forward.
The move is again being driven by the largest companies in the index, some of which are up over 20%, 30%, or 40% in 2025. We can complain that the index is dominated by a smaller number of large companies, but these are the companies that are growing earnings or revenue, or both, at a rapid rate. Earnings growth drives a higher stock price and can also drive a higher valuation, which compounds returns at an even higher rate. QED; the Latin abbreviation for “that which has been demonstrated,” applies here. Current market prices are always a communal best estimate of future earnings power with a discounted valuation estimate — colloquially known as a guess. Most of our equity strategies remain fully invested at all times, so our portfolio managers don’t have to spend time “guessing” if the market is currently undervalued or overvalued. Instead, they can focus their time and effort on finding the best investments in the current market environment. Since the market low on April 8th, the S&P 500 Index is up over 35% in less than six months. It gained 9.5% just on April 9th! Again, QED, the benefits of being fully invested in your chosen equity strategy through all markets.
That does not mean there aren’t things to worry about; there always are. Although tariffs are bringing in significant revenue to the Treasury, their long-term effects on the economy are still a concern. It has been our contention that the tariffs would not cause a significant bump in inflation, but that the larger concern was that they could be an economic shock that could slow the economy and cause a recession. So far, that has not happened, but the Fed does seem to be paying more attention to slower job growth numbers this year.
One large factor overlaying all economic performance this year is the reversal of net migration into the United States. Current estimates are that 1.5 to 2 million immigrants have self deported and left the country. If you would have told us at the beginning of the year that this number of individuals would voluntarily, albeit with some coercion, leave the country, we would have taken the under. These individuals are both producers and consumers, making the overall economy smaller than it otherwise would have been. Without these individuals leaving their jobs, would unemployment have been higher? We don’t know.
The Fed has said that they believe that current interest rates should have the effect of slowing the economy, all else being equal. They have said that rates have been held at these levels due to fear of tariff induced inflation. We have generally taken the dovish side on interest rates, believing that it is easier for Fed policy to restrain inflation than reverse a recession. It is not clear that tariffs will result in sustained upward pressure on inflation, and slowing job growth certainly increases the worry over a possible recession. The Fed seems to have come around to this view. We believe lower rates could be the catalyst that sustains and strengthens this expansion, and we would look forward to a couple more rate cuts in the near future.
GDP rebounded smartly in the second quarter, but payroll growth has slowed significantly in the last few months. We suspect that this caught the attention of the Federal Open Market Committee and resulted in the rate cut at the recent meeting, with more cuts expected. It is troubling that job growth has slowed significantly at a time of net migration out of the country. We would have suspected that fewer individuals employed would have resulted in a tighter job market and upward pressure on wage growth, but that has not happened to date.
It may seem like a cliché, but the present crosscurrents in the economy bear watching. We will focus on companies that have strong growth prospects and reasonable valuations relative to those prospects. We believe the rate cuts will have a positive effect on economic growth and could help unlock the housing market. Lower interest rates this year have also driven better fixed income returns, providing strong returns for balanced investors. Investment opportunities always exist, and we will seek the best of them.
Random Thought: “Protectionism will do little to create jobs and if foreigners retaliate, we will surely lose jobs.”
-Alan Greenspan
What if…
July 11, 2025
Dow: 44,650
Tariffs don’t cause inflation, a lasting peace comes to the Middle East, and interest rates fall?
The last six months have provided a strong example of why both individuals and larger organizations should not stray significantly from their baseline investment allocations aligned with their goals and risk tolerances. As we have said before, emotions tend to play a greater role in investment decision making at market extremes. However, an investment approach and allocation that is developed outside of the emotion of the moment allows for more consistent and better long-term investment decisions. As we wrote almost six years ago in ‘Lessons Learned’:
“Usually, the lessons that will help us most as investors are the hardest to learn and practice because most useful lessons pertaining to investments are counterintuitive. One is that ’group decisions’ are many times poor and late. Both individual securities and active investment strategies go through cycles where they outperform and underperform. It is difficult to step up and purchase a security after a period of underperformance, and it is easy to come up with many justifications to purchase a security after a period of outperformance. Buy high and sell low is the rule followed by most inexperienced, emotional investors, trend followers, and pure momentum investors. This is not a way to beat the market. Some degree of contrarianism is essential for significant success. After all, the market itself is a distillation of the groupthink of all the participants in the market.”
In April, it was a strongly contrarian view that tariffs would not cause significant inflation. Jerome Powell still seems to believe it will. Unannualized CPI has averaged one tenth of one percent for the last four months. That’s not inflation.
It is likely that the ability for the Administration to impose tariffs under their chosen statute will be curbed by the Supreme Court. Also, countries are coming to the table and unilaterally dropping some of their retaliatory tariffs. China has made a deal with the U.S. on rare earth metals, and Canada has dropped their plans for a digital tax on U.S. tech company revenues. We reiterate that we believe Trump’s goal is actually lower net tariff levels across the world; i.e., freer trade.
Through the first six months of the year, the U.S. has collected almost $100 billion in tariffs, double the pace of 2024. Treasury Secretary Scott Bessent has said that he believes the U.S. could collect $300 billion in tariffs this year. That would completely offset the tax incentives and other benefits of the Big Beautiful Bill. Many of the business provisions in the bill are very pro-growth, including accelerated expensing of capital investment. If this is true, the economic drag of the tariffs would be completely offset by the positive tax law changes. It is also accepted among economists that 100% of the burden of the tariff would not be passed on to U.S. companies and consumers; so the net benefit of the new tax law is even greater to the U.S. economy. This net stimulative growth policy is probably the only way the U.S. can move towards lower structural deficits.
As the markets have stayed resilient, the prospect for near-term rate cuts has been pushed back, and intermediate Treasury yields have stayed in the mid-4% range. A couple more muted inflation reports should allow the Fed to begin rate cuts, providing another boost to the markets and the economy. It would certainly benefit the housing sector, where activity has slowed. Over the last 25 years, we have become accustomed to the Fed cutting rates for dire reasons: market shocks, Covid, and recessions. Now we are in a position for the Fed to cut for a positive reason, creating another economic and market tailwind. Muted inflation and Fed cuts would provide for stronger total returns in bond portfolios for the remainder of the year.
Rising capital investment by businesses, lower rates, and continued decreasing inflation would certainly be good for the equity markets. Maybe the markets are telling us that already. Following the sharp bear market in March and April, the forward price earnings ratios on some of the mega caps, including Apple, Amazon, and NVIDIA, are at multi-year lows. That doesn’t sound like an overvalued market. We will be diligent and continue to look for opportunities to improve our portfolios.
‘We are excited to announce that we are launching three exchange traded funds later this year. Throughout our history we’ve been committed to finding ways to strengthen our offerings to investors and we feel this is the next step in our continued growth as a firm. Stay tuned for more details as we continue to work through the process of launching these funds later this year.’ *
Snapback
May 21, 2025
Dow: 41,860
Has this most recent market correction been that different than other recent corrections? We think not. In a typical correction, the market declines based on concerns about future prospects for the economy, for a time those fears feed on themselves, and subsequently new information or a change in expectations serves to partially or fully reverse those concerns. The concerns that initiate the correction are valid, but in time, they are resolved or turn out to be less onerous than expected. Often, market participants overestimate the potential damage that may be caused by the perceived risks. That certainly seems to have happened this time around.
Another way corrections are resolved is through adaptation to new information. President Trump may have expected China to roll over in response to the new tariffs, and they did not. Also, we have said before that there are curbs on Trump’s tactics; the market, Congressional Republicans, and the electorate as a whole each have the power to force Trump to change tactics. That isn’t necessarily the case with the China tariffs at this point, as both sides decided a cooling off period was warranted. Nevertheless, it appears that a path of de-escalation in the tariff wars has begun.
We have always believed that economic environments that are untenable or can’t persist, won’t for long. An economy with reciprocal tariffs of 100% or more between two global trading partners is one of those economic environments. It is also clear in hindsight that many economic participants realized that this tariff level could not remain on a longer-term basis. If importers expected the tariffs to remain longer term, they would have raised prices immediately to expand profits and cushion the shocks that were to come. This did not happen. Inflation, by many measures, has actually continued to decline over the past few months to new four-year lows.
As the stock market has moved back towards new highs and volatility has declined, the prospect of near-term rate cuts from the Federal Reserve Bank (Fed) has declined and short and long rates have drifted upwards. The Fed has continually warned about tariff-driven inflation, and as those fears subside, rate cuts in the back half of the year could add further support to both the equity and fixed income markets.
The rebound in the equity markets has roughly coincided with the majority of earnings announcements for the first quarter. There is no doubt that some of the rebound was due to an easing of tariff fears, but some must also be attributed to a strong first quarter earnings season. Many companies declined to give forward guidance due to potential tariff uncertainties, but first quarter results and lower stock prices were enough to bring in net buyers.
Intermediate maturity Treasuries maturing in two to seven years have moved lower in yield so far this year. This is a warning to us that many market participants still fear a recession, or fear that the Fed is holding short rates too high in the current environment. Inflation indicators have been moving lower over the past few months, and if that move is sustained, we expect the Fed to, perhaps grudgingly, cut rates this year. Expectations for second quarter GDP have moved back to the 2-3% range after the first quarter dip, again indicating resilience in the economy.
Focus now turns to Washington on tax policy. The market largely expects the income tax cuts to be sustained, but there may be other changes and gimmicks in the “big, beautiful bill.” Tax law changes and the tinkering and horse trading involved can only serve as a net drag on growth and risk taking, as elected officials try to reward certain constituencies and punish others. It’s not pretty, we can only hope for a minimum of distortions.
We are thankful that we have the opportunity to guide investments during a generation when the capital and investment markets in the United States are the most vibrant and resilient in the world.
It seems appropriate to remember a famous Warren Buffet quote as he nears the end of his career:
“Be fearful when others are greedy and greedy when others are fearful.” -Warren Buffet
Uncertainty
March 28, 2025
Dow: 41,583
This word has become a cliché in the last two months, but it aptly describes what many investors view as the driver in the current environment. Trump entered office and immediately pushed forward aggressively on many fronts – immigration, government waste and deficits (DOGE), Ukraine, tariffs and all were areas of major policy change. He seems happy to let the courts ultimately decide if he has overstepped executive authority in some of these areas, but that will take time. It is certainly fair to call this the Trump correction.
Nevertheless, we all knew a correction was due; the only thing we didn’t know was the proximate cause. In October of 2023, the S&P 500 Index barely touched down 10% before rallying. The same has been the case so far in March. Prior to these two limited downdrafts, the market has been on a fairly steady track upwards since the bottom of the bear market in October of 2022. The gain in the S&P 500 since October 2022 has been over 70%. Growth stocks have generally declined more than value stocks, narrowing some of the large valuation discrepancies that have existed for years. Because many of the largest companies in the capitalization weighted S&P 500 Index are growth companies, they have had a large impact on index returns. Indeed 60% of the stocks in the index are actually outperforming the index itself. Periodically, we need corrections to keep valuations closer to the ultimate future prospects for the companies involved. It shouldn’t be as easy as buying NVIDIA and holding it forever.
Keep in mind that Trump wants to operate under unpredictable and uncertain circumstances. He doesn’t want those that he is negotiating with to be able to predict his next move. He is actually most comfortable operating in an environment of uncertainty. It was his modus operandi as a businessperson for decades. He used unpredictability to negotiate permits, the size and scope of his projects, and many bankruptcies and restructurings (and there is the possibility that it will lead to beneficial outcomes in our government and economy as well). We should not expect this core Trumpian strategic and tactical approach to go away. It seems as if this realization, consciously or unconsciously, is being built into market expectations in the form of an uncertainty premium.
The major initiatives that Trump has taken on create other risks as well. Consumer confidence and investor bullishness have declined as economic uncertainty has risen with Trump policies. Auto loan and mortgage delinquencies have crept higher, and stubborn inflation around 3% has held down real income growth. A slowly softening job market will also be a brake on real income growth. The tariff uncertainty will put a damper on capital spending, at least in the short term, for businesses that may be affected by these policies. It may even reduce capital spending in the tech sector, as customers of these companies may limit expansion in their capital spending.
So, we are left at a crossroads where there are potentially both significant positive and significant negative outcomes from current policy. The risks being undertaken may be reasonable when measured against the possible success that can be achieved, but we still have to make it through this period of risk. The market decline may have already discounted the potential negatives. The erosion of confidence that is currently taking place both in the economy and the markets can feed on itself over time. These factors are interrelated, so we will monitor these developments closely. The goals of lower tariffs in the long run and a more efficient, less costly federal government are worthy and lofty goals. The voting public believed these goals were worth the risks last November, we hope that communal wisdom proves correct.
Random Thought: “A government big enough to give you everything you want is a government big enough to take away everything that you have.” -Thomas Jefferson
Tariffs
February 18, 2025
Dow: 44,556
Much has been said about tariffs being inflationary, but we actually worry about them for a different reason: because they are contractionary. They tend to create a combination of reduced trade, consumption, and output. In some cases they reduce all three. Take the example of BYD, a Chinese electric car manufacturer. Think of a BYD as a cheaper version of a Tesla, more utilitarian, with lower performance, but with a greater range and efficiency. In 2024, the tariff on Chinese electric cars was raised to 100%, effectively delaying or preventing the entrance of BYD into the American car market. This reduced trade, as the cars were not imported to the U.S. It also decreased consumption, because if you had been able to buy a BYD instead of a less efficient and more costly form of transportation, you would have had thousands of dollars left over for other consumption. It also reduced output, because the cars that would have been sold in the U.S. were never built.
Tariffs are a cost and a drag on the economy because they increase the cost of an item without increasing its value or utility. So why aren’t they inflationary? Because if a household has a set amount of discretionary dollars to spend, they do not blindly accept the cost increase without making other changes to their behavior. There are three ways consumers and businesses react to tariffs. You can substitute if you can replace one good with another. If you cannot substitute, you buy less of the good. If you can’t substitute or buy less of a good, you buy less of something else to offset the higher cost. The last time we had widespread tariffs in the United States was in the 1930’s, and we did not get inflation, but we did get deflation and an economic contraction. This should be the main worry with tariffs.
Trump says he can use widespread tariffs to raise funds. Trump says a lot of things; we hope this one is not true. If increased tariff revenues were used to cut other taxes, that would help, but we know that’s not how government works. Depending on the elasticity of supply and demand, the producer may bear part of the tax to maintain sales by not raising prices to cover the tax. But, enough with economic theory. So far, it appears as if Trump wants to use the threat of U.S. tariffs to get other countries to reduce their tariffs and increase free trade. That would be a positive accomplishment, but we will have to see how the game of chicken, or the game of who has more economic leverage, plays out.
There are many positives to mention. The economy and the markets continue to show resilience in the face of the current policy uncertainty. The stock market is higher than when tariffs became a real concern at the end of January, and the ten year Treasury yield is slightly lower. Positive earnings surprises in the S&P 500 are the highest in three quarters. Corporate bond spreads are at multi-year lows. Bank stock prices are at multi-year highs. All of this is good news.
What gives us concern? Job openings in the economy are at a two-year low, although still far higher than they were pre-COVID. A larger amount of job openings drives higher real wages, a positive for employees. It also counteracts the effects of inflation. A lower number of job openings, like we are currently experiencing, could start to slow employment and wage growth. Inflation has become sticky around 3%. If we had to choose between 3% inflation and a healthy economy, or 2% inflation and a weaker economy, we would take the former. We hope Jerome Powell will keep this in mind. Existing home sales were at a multi-year low last year. Low housing turnover could lead to lower home prices, a benefit for those looking to buy their first home, but a negative wealth effect on those who already own a home.
We will watch closely both the positive tailwinds and potential negative headwinds in the market and the economy. For better or worse, Trump may bring real and permanent change at the Federal government level; it is still too early to tell. We will react to that change with the goal of both preserving and growing the portfolios we manage.
Random Thought: “Under our scheme of government, the waste of public money is a crime against the citizen.” – Grover Cleveland
A Review of Our 2024 Predictions
January 27, 2025
Dow: 44,713
Many strategists enjoy making predictions, but a review of past predictions is like a trip to the dentist for a root canal — something to be avoided at all costs. This is a shame because growth and improvement can come from self-examination.
Here goes…
The labor market will remain strong.
-Correct. Although the unemployment rate ended the year at 4.1%, up from 3.8% at the end of 2023, sometimes unemployment increases early in a recovery as more individuals reenter the labor force to look for jobs. Total employment in the U.S. increased by 2.2 million persons in 2024.
Real wage growth will accelerate.
-Correct. Due to the increase in inflation, real wage growth was negative from early 2021 until early 2023. In the second half of 2024 real wage growth accelerated to a rate of over 1% per year.
Household wealth continues to grow at a healthy clip.
-Correct. Household wealth continued to grow due to real wage growth, single digit increases in home values, and strong stock market returns.
Interest rates continue to fall.
-Wrong. Short interest rates fell about 1% in 2024, but longer rates ended the year up about half of a percent. Unfortunately, most consumer and corporate borrowing costs, including home mortgages, are tied to longer rates.
Inflation will be below 2% in 2024.
-Wrong. We were too aggressive here. Consumer inflation did fall from 3.4% in 2023 to 2.9% in 2024. The trend still seems to be for lower inflation going forward, and that is good news for both consumers and investors.
Private credit will be a problem.
-Wrong. There is still a huge appetite for private credit and other alternative investments. More of these types of investments are being packaged and pushed downstream to smaller investors. Those in the food chain that are creating these investment products are making a great deal of money. Let’s hope there are some crumbs left for the end investors, and that they can get out of these investments when they wish.
FOMO (Fear of Missing Out)
-Correct. We said, “There is more room for cash to flow into the market in 2024” and that people will not be satisfied with a 5% return from cash.
You will hear less about Artificial Intelligence.
-Wrong. It is still early in the evolution of AI, and it is impossible to gauge the ultimate effect on society. We are also still in the optimist phase of the investing cycle for AI.
GLP-1 (Obesity drugs) will be the AI of 2024.
-Correct. Like AI, these weight-loss drugs are going to permanently change society in ways we may still be unable to fully comprehend.
The stock market will broaden in 2024.
-Wrong. The largest stocks were again the place to be in 2024. It would be healthier if this trend would begin to reverse itself. Maybe 2025 is the year.
The S&P 500 will gain more than 10% in 2024.
-Correct. This one was an important one to get right. Maybe it should count double.
Either Biden or Trump will not make it to the general election.
-Correct. Wow. For a time last year, there was a chance neither would make the general election. What a roller coaster ride it was.
So, overall, seven right, five wrong. We like to think we got the important ones right. As Yogi Berra said, “It’s tough to make predictions, especially about the future.”
Random Thought: “The best way to predict the future is to create it.” – Abraham Lincoln
Through the Looking Glass
December 30, 2024
Dow: 42,573
This year was an exceptional year for most markets and while every year has surprises, several events played out very close to our predictions. We’ll reflect on our 2024 predictions in early January, but here are some thoughts to consider for 2025:
GLP-1’s – GLP-1 drugs have been a significant breakthrough for those struggling with obesity, offering substantial long-term health benefits to society. However, as the hype settles, we would expect the risks of these drugs to get more scrutiny. Some of the long-term risks may include pancreatitis, gastroparesis, thyroid cancer, bowel obstruction, vision loss, and depression.
Growth Pothole – There are already signs of slowing in the new home market, stemming from both high prices and high mortgage rates. If this flows through to other areas of the economy, we would expect to see GDP dip below 2% sometime in the first half of the year.
Growth Recovery – Following a downshift, we would expect GDP to recover smartly later next year. Real income growth should increase as inflation continues to slow, supporting consumer confidence. Tax and regulatory policy should swing more pro-business. We would expect GDP growth for the year to be above the high 2% range expected for 2024.
Stock Market – This market is very ripe for a correction after the run of the last two years. We would expect it to come early in the year, along with the growth slowdown scare. It is amazing how many strategists predict single digit up years for the stock market when they aren’t that common. We will call for another year of double digit returns. This is the money pick, as it has happened 60% of the time over the last 30 years.
China Fail – China is burdened with a great deal of nonperforming debt. The country may already be in a recession. Foreign investment in China has pulled back, and it will take time to work off the bad debt overhang. Avoid investment in China.
Home Price Correction – Softness is already beginning to appear in housing turnover. New home sales have slowed and inventory is building. Home mortgages near 7% are a drag, and those should drift down during the year. National home prices may still increase in the low to mid-single digits in 2025, as the housing market is very localized. Cities that have had booms, like Denver, Austin, and Orlando, may see double digit corrections.
Private Debt Problems – We called for a correction here last year, and it did not happen. It is still a case of far too much money being pumped into an area with little oversight and a high fee structure, along with low liquidity and low transparency on prices. This is usually a recipe for eventual disaster. Retail products are available that are backed by illiquid loans. Distribution to retail usually means the end may be near.
Immigration Backlash – This is happening in the United States, and it will continue to play out in other major countries, including Canada, France, U.K., and Germany. The political upheaval currently experienced by these countries is mainly driven by immigration concerns, and multi-party countries are having difficulty forming governments. The natural result of immigration concerns will be the continued rise of Nationalist parties in many of these countries.
Inflation – Inflation should continue to drift lower, along with the Fed Funds rate and rates across the yield curve. This will also be supportive to the equity markets and smaller capitalization companies. We have seen in 2024 that the economy and markets can survive 3% inflation. Lower inflation should be a bonus.
Trump Agenda Slowed – Perhaps Congress’ greatest skill is blowing a lot of hot air while accomplishing nothing. Trump does enter with some momentum, so it will be interesting to see what he prioritizes in terms of legislation in the first six months of his administration. The margins are tight, so he will have to give ground in some places to push through his major initiatives. Congress is always focused on the next election, and since the party margins are slim, we may see coalitions developing between the most conservative Democrats and the most liberal Republicans.
Thank you for the opportunity to work with you and we wish you a healthy, happy and prosperous New Year!
Random Thought: “The music of your youth stays with you throughout your life.” – Dick Clark