It’s been a turbulent few weeks in the market. People are asking questions about what’s going on, and rightly so.
Before providing our thoughts, it’s worth noting that in the context of history, this market “sell off” – as many are labeling it – is barely even a blip.
Perhaps talking heads on TV are too quick to use words like meltdown, plummeting, and plunging, thereby convincing viewers that these things are actually happening (does anyone remember 2022?). Perhaps, after nearly two and a half fantastic years in a row, we’ve been lolled into believing that stocks only go up, so people are shocked to see anything otherwise. Either way, there is a perception out there that stocks are falling precipitously. While it is not in Howland Capital’s nature to focus on short-term market moves, we feel compelled to weigh in here. Recognize that we are just a couple weeks away from the end of the first quarter of 2025, at which time we will distribute our in-depth views via our Economic and Market Commentary.
Our conclusion upfront:
While this could be the beginning of a bigger sell-off, we believe it is more likely just understandable turbulence in the face of an unprecedented flurry of executive actions, retractions, and subsequent reinstatements.
What’s going on?
The stock market does not like uncertainty at any period of time, and it definitely doesn’t like it when stock valuations are significantly higher than their long-term average, as they are presently. Right after Trump took office, investors were not sure what to make of the new administration’s actions, but the risks now seem more obvious.
Inflation is a chief risk. The U.S. learned this in the 1970’s, and we re-learned it over the last few years. Many people point to inflation as a key contributor to the loss of the election by the Democrats because inflation affects everyone in a concrete way. The current administration’s statements notwithstanding, tariffs are inflationary. So is reducing the labor force by millions of people via mass deportations. The public seems to know this, or at least it seems to be the pervasive thinking across most media that cover Wall Street and Main Street.
So why is he doing it?
Many perceive Trump to be a master negotiator. The problem is, in order to effectively negotiate, you must convince the opposing side that your threats are serious. Trump is convincing Canada, Mexico, China, and Europe (not to mention Ukraine and the entire Middle East) that he is serious, which is leading to retaliatory tariffs from some trading partners. However, he frequently backtracks or changes the terms of the tariffs he proposes, further fueling uncertainty and market volatility. More recently, his statements indicating his willingness to cause near-term pain and even risk a U.S. recession in order to achieve his geopolitical aspirations are adding to investor upset. Hence the recent market weakness and widespread fears of worse to come.
Looking beyond executive actions, tariff threats, and mass deportations, things don’t look too bad.
Prospects for deregulation and lower-for-longer taxes (via the 2017 Tax Cuts and Jobs Act extension or permanence) are bullish for corporate profits and therefore stocks. These campaign promises, along with no taxes on tips, low unemployment, and cheaper U.S. energy are all bullish for the consumer as well. Finally, who can forget about AI? AI’s potential to boost business productivity offers a long-term advantage for corporate profits and stocks. Near-term, the unquenchable thirst for capital spending by technology companies (and IT departments within most other companies) is a clear, near-term positive for the economy – even if a negative for free cash flow generation. Based on the data we are seeing, forward earnings for the S&P 500 Index look healthy and most likely achievable, barring any major, unforeseen issues… of which any number are possible.
How long will it last?
That’s tough to say, but our best guess is a lot less than one presidential term, given our new president’s tendency to measure his performance in part based on the stock market. To be more specific, we believe that Trump’s time to make things happen is quite limited. The worse things appear, and the more investors and consumers panic, the less time he has. We also believe that Trump and his team understand that tariffs and wage pressures are inflationary and bad for everyone – rich and poor. We further believe it likely that Trump is willing to cause chaos to prove his point to his opponents, but that he will not or cannot afford to go too far. Right now, it feels like we are in the midst of the chaos process, which certainly does not feel good.
During periods of market turmoil, many investors shoot first (i.e. sell) and ask questions later. At Howland Capital, disciplined capital allocation and proper cash flow planning are two key tenets of our long-term strategy. Both have withstood the test of time and are of the utmost importance right now, so that we can avoid needing to raise cash for our clients in a weaker stock market.
