Since the beginning of the 2nd quarter, the markets have taken an abrupt turn to the downside. As we have alluded to in the past couple of years, the markets have gotten very expensive on a price to earnings basis (P/E ratio). Now, with President Trump deciding to wage tariffs on many countries across the world, it has unleashed a wave of uncertainty that even the most schooled money managers are having a difficult time navigating. Part of that is because the size of the tariffs took the market completely off guard. In our view, the tariffs were a catalyst for the market to begin adjusting those securities with very high earnings multiples. This was prevalent in the “tech” markets, particularly the “Magnificent 7” that we often hear about. Last Friday the Dow dropped 2,231 points or 5.5% in one day and most companies were not spared.
It will be very interesting to see how interest rate policy evolves in the near future as many believe that the President wants lower interest rates. This has made Jerome Powell’s job much more difficult as he will need to navigate pressure from the President to lower rates while adhering to the Federal Reserve’s dual mandate which requires it to pursue both maximum employment and stable prices in the US economy. Going too far in either direction with interest rates both have negative results. Lower rates could mean higher inflation and higher rates is worse for the economy and the stock market.
We believe that the market is going to take time to sort out the nuances of the tariff impact as it relates to corporate earnings. Particularly because the earnings impact will only show up in July with the 2nd quarter results. During this time, we view this as an opportunity to find the great stocks that were not spared in the recent selloff and pounce on the opportunity to add them to portfolios. The uncertainty of the markets will subside and those who execute during this adjustment period should be well rewarded in the long term.
