Renewal
This holiday weekend, it is a good time to think about what can go right and less on what can go wrong
There is so much sturm und drang these days. Even among those who voted for this Administration. This is completely understandable given the level of uncertainty that the country, and the world, may not be facing.
As I have said before, this is a ball that has been in motion for quite some time. I have shown the post I had about the end of American exceptionalism, which arguably happened post the Iraq War, but certainly seemed to end after the Great Financial Crisis.
Sure, US stocks have materially outperformed for the past 10+ years, leading many to think that American Exceptionalism was still a thing. However, geopolitically, we have been moving to a multi-polar world for quite some time.
The same is true about the extensive use of Executive Orders. The current environment seems chock full of them, however, every President the last 40 years has used them extensively. Here is a table of those:
The big takeaway to me is twofold:
Congress has largely abdicated its responsibility, choosing instead to be more divisive, get little accomplished, and focus instead on stirring up the base to get re-elected. Maybe that is changing though.
We are testing the limits of checks and balances, but the good news is we have checks and balances and those who feel the Executive Orders are illegal are in fact suing. This is a positive in my mind because there will be precedent on what can be done going forward.
In the face of this bad news, investors tend to focus on what could continue to go wrong. From a risk management perspective, this makes sense.
Investors are very bleak right now:
Because of downbeat views of the US economy:
Which is lowering their views of the global economy as well:
When investors get this downbeat, it is precisely the time when we should start thinking about what can go right. Sure, it may take 6 months for things to go right. It may actually come about as things not going wrong (climbing the wall of worry if you will). As I say, sometimes it is about the absence of darkness than the presence of light.
So, quickly, what could go right? Well, for one, as investors thought immediately post-election, tax cuts are still on the agenda. If nothing is done, taxes are going higher. This would be a further drag on the economy. According to research, this would be the negative impact:
We already know that cutting the pro-cyclical fiscal stimulus (which was negligent in my opinion) is a hit to GDP of 4-7%. If tax cuts expire, it is another 1.4-3%. That’s quite a bit. Where is the impact the largest:
As investors, we want to root for the extension of tax cuts. The problem is, how do we pay for those? Tariffs via Executive Order don’t help offset. Congress needs to step up and do something.
What is Congress working on under the radar? They are moving rapidly to pass a budget reconciliation bill by August recess. This is another big potential positive. What are they working on? According to Don Schneider at Piper, this is the list:
Full expensing of manufacturing structures - which can be geared to incentivize more repatriation of manufacturing
Stock buyback excise tax - raising the tax to raise revenue. Seems negative on the surface but does raise money to cut taxes. As an investor, creates more incentive for companies to pay dividends instead
Corporate SALT - another populist policy that raises revenue and, let’s face it, hurts companies on the coast more than middle America
Cracking down on pharma’s tax planning - they are the most aggressive in moving profits offshore. I am looking at you Ireland
Curbing provider taxes - states have devised schemes where taxes are levied on Medicaid providers and then re-imbursed via Medicaid. This causes federal funding on Medicaid to be higher as the federal government matches state spending. Reducing this inflation is more efficient but also pays for tax cuts for individuals.
So, under the radar, there are some things that can go right, even by the end of the summer. Investors need to start thinking about this, because while we may not have seen the lows yet, before long, we will start thinking about upside. In fact, if you are trying to determine where to enter the market, you need to consider risk AND reward. Last year we only thought about reward. This year it is only about risk. We need to balance those.
In many ways, what we need to focus on is the renewal of investor optimism which is in short supply. This time of the year is a natural time of renewal in my opinion. As a Christian, renewal is central to our belief system. I came across a great comment from Patrick Lynch, a successful investor and a LinkedIn connection:
“Easter reminds us that renewal is always possible—and that from sacrifice comes new life. This season is a powerful reminder that even in times of challenge, transformation is possible when we stay rooted in our mission.”
He says it well. Think about the challenges we face now but focus on the transformation that is possible - in global trade, in tax policy, in the reduction of inefficient government programs.
This Easter weekend, take some time to think about what can go right - in the economy, in the market, in your portfolio, in your career. Focus on the positives and not the negatives that the news flow draws us to. Spend some time on renewal.
Stay Vigilant and … Happy Easter
