April 2025 Update

April, 2025

Sell the Rumour, Buy the News?!

Yes, we know we've got that backwards. Or have we? Things have changed almost 180 degrees compared with the last 20, 30 years. So maybe 'sell the rumour buy the news', is the right way round and we should be investing post the Trump Tariff schemozzle and not running away, BUT what to buy? Probably not momentum style or just the narrow set of stocks that have driven the US market ever upwards to become both historically expensive and very narrowly based.

In other words, momentum, concept stocks, infinite growth rate projections, cost reduction through outsourcing of capital and insourcing of labour, and "dividends don't matter", is 'game over'? The focus of this USA administration is on Main Street and not Wall Street so why fight these Feds and this policy? If this policy of re-industrialisation is successful then look to other stocks to pick up the running.

As a gratuitous aside, please note that any remaining ESG proponent should be indifferent to this carnage of the equity markets. A 2024 Pew Research Center report pointed out that a booming Wall Street boosts advantaged groups disproportionately. About time Main Street got a boost?

https://www.pewresearch.org/short-reads/2024/03/06/a-booming-us-stock-market-doesnt-benefit-all-racial-and-ethnic-groups-equally/

Risk appetite actually started to deteriorate at the end of February and March saw a correction across Global Equity Markets, focussed on the US, which is where almost 70% of the Global market capitalisation based index weight resides. That of course was the problem, and we tried to point that out in February's commentary, Equity market volatility has been very subdued at below c.15% and, more importantly for active managers, cross sectional volatility has been subdued too. This has manifested itself in the extraordinary returns to the momentum risk factor. However, if a few large companies' share prices rise and rise, then their correlations do too, and the diversification offered to investors falls. We pointed out that $ billions was being invested globally on a single company's eco-system, representing or chewing up over 10% of a passive strategy risk budget. That's more like gambling. You can avoid this by diversification.

A lot of market mechanics are being mis-diagnosed as economics. We don't really yet know what the tariffs will do to long term price trends nor supply chains, nor hiring intentions, nor capital investment intentions. We do know that the typical killers of bull markets (inflation, regulation, taxation) are not (yet?) unified as a threat. In fact, the intention appears to be to reduce all three. Even tariffs, which we think are an invitation to talk bi-lateral trade deals, may find their way to cause increased capital investment? A favourite report of ours, the American Society of Civil Engineers' quadrennial, on the state of USA Infrastructure, was released in late March. If that doesn't present an opportunity for investors and productivity growth through the revival of capital investment into the USA, then we might as well all become Social Media Influencers instead?

https://infrastructurereportcard.org/

Market favourites Meta and Nvidia were both off double digit in March, while Tesla was at one point down by over 25%. Mag 7 investors (all passive index funds essentially) are blaming Trump and Tariffs for the end to their winning streak. Overall, the Magnificent 7 are down around 14% ytd and a lot of bull market investors are looking for a reason why. "Tariffs are a tax and inflationary too" is the cry but even if companies don't cut prices for consumers and demand patterns don't shift then one-off increase in prices will be the same as a consumption tax increase - temporary or transitory.

This is NOT money supply excesses or printing. The real inflation problem we had recently came from the money printing during Covid - something that has since subsided; (although the EU is threatening to turn on the printers again, this time based around an alarmingly ill thought-out rearmament/industrial policy plan). There are however only limited implications for US interest rates. Note how the Fed has also slowed its pace of balance sheet shrinkage, so while rates may not be coming down, the pace of tightening via deposit shrinkage has slackened. Monetary policy is stable and not inflationary. Meanwhile producers such as BMW acknowledge that they would find increased tariffs very hard to pass on in a competitive market. Some companies may even cut prices to gain market share? We do not know yet.

Tariffs may thus be worse for corporate profit margins than for US consumers - Main Street winning over Wall Street, as long as lay-offs don't now ensue? We do not know what CEOs plan to do yet.

Of course, if the response from the Globalist 'leaders' in the RoW and the EU is to put additional tariffs on finished goods from the US, or on goods where there is no alternative supply, then they do risk their own version of 'cost push' rather than 'demand pull' inflation. Coming against a background of other imposed and increasing costs - employment taxes and green tariffs - this is deflationary for end demand (or worse stagflationary) rather than inflationary and so would be a problem. The apocalyptic troika of regulation, inflation, and taxation are much closer to hand in Europe than the US. Actually, as we go to press, we note German politicians are beginning to think and vocalise that they need Russian gas taps turned on again! In the US, Trump is cutting other sources of cost push, notably government regulation and green tariffs.

Pondering further a structural shift in markets and mind sets, (The World Turned Upside Down as per the March commentary https://www.delftpartners.com/news/views/march-2025-the-world-turned-upside-down.html) China, and some other economies, have grown rapidly, but their stock markets did less well, leading to a false conclusion that one should lead to the other. Perhaps now time for the USA economy to do better but for the market to acknowledge lower returns on capital, fewer buy-backs, and more cash diverted to capital investment? In acknowledging that the US needs to compete, especially with China, Team Trump is shifting the policy priorities and while that may be good for some, on balance it is unlikely to perpetuate the high ratings for the equity market winners under the prior system now being changed.

By contrast, we see that China is now looking to develop a more efficient set of capital markets for both long term savings and investment. Just as the US took over from Japan as the world's largest stock market in the early 1990s, so we see it entirely possible that Asia, and China in particular, can take over the next phase in capital markets, especially if the US $ begins to weaken (deliberately or otherwise), and the likelihood they get their act together and create am Asian trading bloc (or Co-Prosperity Sphere?!)

The flip side is that perhaps, the US responds to the current situation by becoming more like Asia. A better economy for all but a stock market less stellar?

That's quite enough conjecture for one month!

As ever, be diversified by stocks, by asset class and by styles or factors. Timing exposures to these is hard and often painful to wealth.

Delft Partners April 2025