The Trump honeymoon appears to be over, at least on Wall Street. Over the past several weeks since inauguration, we have seen reports of mass firings, the closings of several agencies, and steps identified to reduce regulations. The honeymoon was built on a foundation of lower taxes, less regulation, and a small Federal government. The headlines are clearly steering us all in that direction. But now, seven weeks in, the data doesn’t support the hype, at least not initially.
GDP growth is slowing. According the Atlanta Fed, Q1 GDP is now on course to decline 2.4% in the first quarter. Trump, yesterday, even acknowledged the possibility of a recession. At the same time, inflation remains stubbornly close to 3%, nowhere near the Fed’s 2.0% target. All of a sudden, the word stagflation, the curse word of the 1970s, has reappeared in Wall Street’s lexicon. Some of the slowdown in growth may relate to advance buying of supplies in Q4 by firms trying to avoid possible pending tariffs. But a lot simply relates to increased indecision. Consumers won’t buy a new car or home if they feel less secure. Businesses choose not to deal with the whack-a-mole flurry of tariffs on/tariffs off that emanate from the White House. Courts have started to restrain some of DOGE’s mass firings essentially saying they have to be law abiding. Cabinet Secretaries at Thursday’s impromptu cabinet meeting strongly pushed back against DOGE’s actions trying to reclaim responsibility for cuts in manpower and programs. What looked like a purge investors might appreciate has turned into a bit of a mess that Trump needs to sort through.
Investors don’t wait for results; they move more quickly. When they hear new hirings are less, that consumer confidence is cratering, that manufacturing is weakening, and that car and home sales are in decline, they sell first and ask questions later. By this Friday, Congress either has to pass a continuing resolution or risk a partial shutdown of the government. Don’t expect much help from Democrats, especially if they are left out of negotiations. Republicans want to pass a continuing resolution to keep government funded until September 30.
To try and cut through all the noise, the administration’s goal is to reduce the size of government and improve economic efficiency. Tools to do that are three-fold; reducing the size of the Federal government, use tariffs to raise money and to potentially help reshoring manufacturing in America, and pass on the benefits in the form of lower taxes. Getting the correct balance isn’t trivial. Tariffs are essentially taxes, payments to be paid by importers as opposed to income taxes based on earnings. As proposed to date, tax cuts are much larger than tariffs. The equation is further muddled by the on again, off again nature of Trump’s tariffs. As for a smaller and more efficient government, Musk and his DOGE acolytes have made lots of noise but the net effect to date is minimal. Savings so far don’t even offset the increase in debt service for this fiscal year. Trade balances are worse because so many businesses have accelerated the purchases of overseas goods to beat the implementation of tariffs. It isn’t uncommon for some economic tumult in the first year of a Presidential term. What separates this time from others was the apparent fact that the euphoric reaction on Wall Street to Trump’s economic priorities was far greater than it should have been. Thus, stocks have essentially given back all the gains made since Election Day.
With that being said, let me digress and talk about a few other initiatives with potential economic consequences. First is a crypto reserve. We are a country with $30 trillion in debt. What logic supports buying any crypto currency that could rise or fall in value by more than 10% in a day? The same logic holds regarding a proposal for the creation of a sovereign wealth fund. Not only are we a nation with huge debt, but Washington is a terrible allocator of capital for two reasons. First, they don’t have the analytical capability to make proper investment decisions. But more importantly, allocation of capital by the government is always infused with political considerations. Not sometimes; 100% of the time. Employing outside managers is an inadequate solution. They won’t be immune to White House pressure. I bring these up not because they have enormous economic consequences but because they simply add to the confusion we deal with daily. Confusion is never a positive.
Speaking of our debt, the net amount of close to $30 trillion is about $90,000 per individual. To put that number into perspective, the median household net worth is barely over $200,000. While no one is asking the average family to pay off the nation’s debt, they are paying the interest to support that debt. That’s close to $300 per individual per year. It matters.
Trump talks about cutting the deficit. Not likely this year. He talks about shrinking government. He has a much better shot of cutting the regulatory impact than cutting employment by a material amount, at least over the next several months, given payments that will be made to terminated employees and those electing early retirement. His programs may work to his advantage next year, but not in the short term. Even Trump acknowledges near term pain. What investors need to decide is whether the near-term pain is worth the long-term gain.
The answer is that we don’t know. For months, investors gave Trump the benefit of the doubt. Last week that stopped. Wall Street isn’t always right. But the confusion is unlikely to be resolved in the next few months. In the meantime, I expect 2025 earnings estimates, which to now showed growth close to 15% to be revised downward. Interest rates have been pushed up by inflationary pressure and pressed lower by the prospect of slowing growth. If you look at the range for the 10-year Treasury yield since Election Day, at the moment they are right in the middle.
Economic confusion has moved investors to seek safety, selling high growth names and moving to the safety of drugs, consumer staples and banks. That may not be the best move. If growth is slowing or possibly declining, the non-cyclical growth companies are the ones whose earnings will hold up best. When I see Wal-Mart selling at a higher P/E than any of the Magnificent 7 except Tesla, I scratch my head. The one certainty in my mind is that AI investment in 2025 will be higher than it was in 2024. And over the next two years, we will all see more and more use of AI in real applications. Note McDonald’s# statement regarding the use of AI at the drive-in window last week as just one example. In the short run, emotion always dominates reality. But in the long run, reality wins. Many AI-related growth names are now 20-40% down from recent highs. That warrants a closer look as buying opportunities once the emotional selling dies down.
One last Trump-related thought. His idea is that tariffs will push manufacturing back to the U.S. It didn’t happen the last time and is unlikely to do so again. Why? Because it takes years to build a new auto assembly plant and that is after necessary permits are obtained. That means any new auto assembly plant won’t be operational until 2027 or later. What will be the tariffs in 2027? How about 2029 when Trump is out of office? If you were the head of an automobile manufacturing company, would you reshore simply based on today’s tariff policy?
Today, Carrie Underwood is 42. John Hamm turns 54. Sharon Stone is 67 while Chuck Norris celebrates a milestone 85th.
James M. Meyer, CFA 610-260-2220