Last week, we wrote about misplaced confidence among investors in the face of high uncertainty. With that info, we rebalanced portfolios away from US stocks towards other assets.
Within days, the uncertainty created by ever-changing tariff policies, and unclear goals of implementing them in the first place, caused us to believe that business and consumer confidence would suffer. We worried about a "wait and see" mentality among consumers and business owners. And now, we can see that has come to pass. And markets are weakening again -- throwing a "tariff tantrum", if you will.
We again reduced US equity allocations in this environment.
The economy is stumbling as a result of tariff uncertainties and haphazard policies to make the government more efficient. These actions have caused many citizens to wonder "who is next". The ripple effects of the uncertainty around these actions is reinforcing negative sentiment.
As I mentioned in my prior email, this is self-inflicted and largely unnecessary. The economy was on solid footing just one month ago. But the bond market is telling us a recession is far more likely now. Interest rates have fallen, reflecting that a weaker economy will need less capital.
I am hopeful that the Administration to step back from the abyss and adopt a more gradual approach to managing a multi trillion economy and Federal government. Value is being destroyed, and the hard (and expensive) work of saving companies and jobs from the COVID downturn is being squandered.
Several years ago, inflation spiked when global supply chains became disrupted during the pandemic. It took those ensuing years to put the inflation Genie back in the bottle. In just a few weeks, we have reignited inflation expectations as consumers and businesses do some very simple calculations about the impact of tariffs on the cost of goods they buy each day.
At the same time, immigration enforcement has impeded the housing industry, and possibly others. One need not be an undocumented resident to decide to keep a low profile rather than submit to searches.
In the end, all of these new operating modes add uncertainty and stress across the board. And that is about to cause a recession.
Everyone understands that there is waste in government spending -- with the least scrutinized budget being at the Pentagon, the home of $2000 toilets. Yes, that all needs attention. And surely there are unfair trading relationships where the government needs to intervene with tariffs to offset unfair competition. But a thoughtful approach to this all breeds confidence. A haphazard approach breeds uncertainty.
So, until we see a better alignment of market valuations with the investment outlook, we are likely to maintain this higher than average cash position.