Most investors are acutely aware of the Wall Street maxim that “perception is greater than reality.” This phrase couldn’t be more applicable to what the market’s price action has been demonstrating for the past several weeks. Robert Kaplan, Vice Chairman of Goldman Sach and former president of the Dallas Fed, told CNBC in an interview last Friday that stagflation is here and now, following the latest Personal Consumption Expenditures (PCE) report.
Friday’s selloff came after news that the PCE, the Fed’s preferred inflation measure, said that inflation in February was 2.5% higher than a year ago. While that was in line with economists’ forecasts, the important “core” PCE, which excludes the volatile food and energy sectors, rose by 2.8% in the last 12 months, slightly more than the expected 2.7%.
While tariffs impact only 11% of the total U.S. GDP, the market is reacting as if tariffs will impact 90% of our GDP — but trying to convince investors they are overreacting is always a futile effort. Fear begets fear, and downside momentum begets panic selling in those sectors that appear vulnerable to a trade war.
The latest consumer sentiment surveys reflect a heightened state of caution over a reignition of inflation and job security. What seemed to rattle the market most last Friday was the latest University of Michigan survey, which fell to a three-year low. It revealed inflation expectations of 5.0% for the year ahead, the highest level since November 2022, rising from 4.2% in February. This depressing report comes as the April 2 deadline for reciprocal tariffs going into effect approaches, and those nations being targeted have so far failed to buckle under the threats by President Trump. It’s high noon, and no one is giving ground.
Right, wrong or indifferent, the rest of the world wants to maintain their higher tariffs on U.S. goods (versus U.S. tariffs) rather than lower their tariffs to U.S. levels. The U.S. investment community doesn’t seem to care, apparently wishing Trump would lower our tariffs on imports to where they were, so America would keep getting ripped off, suffering huge annual trade deficits. It sounds like an “I don’t care what happens as long as my stocks trade higher” mentality, and I’m at a loss for words how to respond to that.
The whole “Tesla Takedown” movement against Elon Musk is another bad stain on those who don’t have any sense of urgency about the $37-trillion-and-rising debt in which the U.S. is drowning — a debt level that is rapidly moving to a point of unsustainability. Late last week, DOGE leader Elon Musk and members of his team talked with Fox News’ “Special Report” host Bret Baier about their efforts to identify waste, fraud and abuse in the federal government. In a 30-minute interview, Musk was joined by DOGE members Steve Davis, Joe Gebbia, Aram Moghaddassi, Brad Smith, Anthony Armstrong, Tom Krause and Tyler Hassen. I encourage all readers of this column to take the time to watch this interview.
I’m sure their view will be challenged by advocates of the status quo, but I feel Musk and his team are brilliant and are on the right road to streamline government efficiency. Without some radical surgery, the country is on the road to going bankrupt, but with these experts, armed with their levels of inspiration and skill, there is a chance to balance the budget. Reducing our $37 trillion debt load will be harder. That not only requires greatly slimming down government spending without compromising Social Security, Medicare and Medicaid, but also the raising of some taxes that Trump will have to compromise on if he wants to truly save the system from soaring debt service that has now eclipsed the entire defense budget.
For those that find this line of thinking “off topic” in an investment column, consider your long-term investment goals, including your family legacy. I have three grandsons, and I see what happened on the watch of the past several administrations and Congress — at least since 2001 — as unforgivable, especially during times of tremendous economic prosperity. What DOGE is uncovering at so many levels seems to border on criminal behavior. Why more people are not 110% behind the work to rinse this pay-to-play system of fraud and special interests is troubling to me. Some “tough love” is needed to save the system.
The Constitution is clear about divided powers, so it is time to shrink the bloated federal government and decentralize much of it to the states. This model is called New Federalism and was initiated by the Nixon administration and embraced further by the Reagan administration. The idea is that states know better what is best for their counties, cities and communities than some massive bureau in Washington, D.C.
So where does all this lead us when it comes to how the market trades under these new, low-confidence conditions? Well, it’s not at all hard to figure out where to position risk-on assets in a market fraught with uncertainty. Assuming the present conditions persist, thanks to our fear-mongering media, I believe investors should go to where the money flows. What is working in this market correction so far is health care REITs, utilities, insurance providers, consumer staples, telecommunications and gold.
This comprises a go-to “right now” portfolio of stocks and ETFs that are consistently trading up when the rest of the market is getting sold down. As of last week, the notion that this new reality would just turn around and start rebounding, per the recent oversold rally, was nullified by the consumer sentiment data on inflation. Future inflation data, which won’t come until mid-April, will have to prove that this fear is not justified. Until then, the detox phase of getting off the government stimulus morphine drip goes on, and at some point, people will appreciate the sobriety of a federal government fighting against its own demise.
