Where We Are, Where We Were, and Where We’re Going

We will continue to be looking at ‘side step’ stocks, which are those that are side stepping tariffs. There could be supply chain issues and increased costs to various companies, and there is still some headwind with any company that has strong ties to China. So to us, software companies have the upper hand since they are not dealing with supply chains the same way others are. The market has certainly taken notice to this theme as the expanded tech software ETF is out performing the S&P 500 by about 3.5% and the Nasdaq by 4.5%. So these names remain on the ‘shopping list’ going forward.

Thankfully, there has been a huge tonal and fundamental shift in our government from about a couple of months back. At certain points, we were looking at very high recession odds, Trump claiming to be winning while losing, and the treasury secretary and crew with a very hawkish tune and saying the market is not their problem. We were trading trillions in market cap, and an almost certain recession for a few hundred billion in tariff income and that formula was never going to work. It seems that the Trump admin had a lot of pressure from all angles and had to really make a U turn to fix things and we are glad they did. Some may call it a master negotiator, some may say he had no idea what he was doing, but the important thing is that we are past that mess. So now we know the treasury, and the treasury secretary a lot more weight in what happens in economics since they control fiscal policy and must really listen what they are saying say. The stock market was telling them that they were wrong as it acts as a leading indicator and they got rid of Navarro being front and center and pivoted more to Bessent who understands how much the market is a real time poll and how it can shrink of expand wealth in a flash as he was a hedge fund guy.

The new focus we are hearing is to grow the economy faster than the debt. So, the plan of DOGE and cutting a lot of spending is not going to happen which I think the administration realized. It is very hard to cut national debt while keeping the economy afloat or growing at the same time. No politician, rightfully so, does not want to be responsible for agreeing to cut Medicaid, Medicare or social security. So, some of these initial campaign and agendas are going to the wayside as taxes most likely are not going to be cut, and that they are not going to spend so this is welcomed news for stocks. There seems to be more of a balanced approach now between getting some tariff income and not tanking everything else around us.

The Moody’s downgrade really seemed like a political move than anything else, as they had not adjusted the rating the entire Biden presidency as trillions in spending was passed, and the interest on the debt ballooned, but right as the Trump admin is putting together a budget/spending bill they give the US a credit downgrade. Stocks shook this news off very quickly, but this is not good for bonds as yields went up off this and the treasury auction was not great last week. In general, the spending boosts stocks and hurts bonds.

Expanding on this, and why we stay away from bonds is that you get your coupon/dividend payment, but we have been in a rising rate environment, so the price of those bonds is gyrating and have had bad returns on the actual price – horrible in fact. So, we are focused on total return much more, not getting a 6% yield, but the price has moved lower by 6% or more, so it must be asked where you have really gotten with this equation. Total return has been much better in stocks, having growth, dividends, or having such great growth that they can be clipped off for income/dividends if needed, and if not, you can let them ride out longer. So, the best allocation is between stocks and money market to us.

Part of what is going on here as well is that the Trump admin/republicans don’t want to be on the wrong side of the midterm elections. The reason a lot of this write up has been discussing politics is because political cycles and decisions are very intertwined with markets, and as we discussed fiscal policy may even have a larger impact than monetary policy (the fed) since they can only do so much and have a ‘blunt’ tool with interest rates.

It may have taken a back seat since a lot of distractions occurred, but AI is still the rage for tech companies as they are pouring hundreds of billions into this and spending on data centers. We have a pretty good idea what the best ‘merchandise’ is in the market which relates to tech and software, and we will continue to be keen on buying opportunities there. There is no point in looking at stocks like Ford, GM, Nike, for example (there are many others) or anything that is not growing or moving higher when there are so many other good opportunities in the market. Also, we must know where we are in the playing field with two years in a row with the market making significant gains, so you may want to be ‘stingy’ about keeping your gains and be tactical, playing defense first and offense second depending on your risk tolerance and time horizon.