Are We There Yet?

Anyone that has traveled with kids is familiar with the constant question: Are we there yet?  We wouldn’t be surprised if that same question is consistently on investors minds over the next few months. At least when you traveled with the kids, you knew where you were going. We wish we could say as much about the stock market and interest rates, but we know as little as everyone else about what is to come.

This week we attempt to take a look at what is happening from the President’s perspective. We don’t profess this to be absolutely accurate. It is most difficult to put oneself in Trump’s shoes, but attempting to understand what he wants to do can illuminate the risks and potential rewards of what is happening. What does Trump want to achieve? What is the ‘End Game’? We would identify Trump‘s economic priorities as follows:

  • The Federal deficit must be brought under control. Despite being the richest country in the world, there are limits to what we can afford. The federal debt needs to be reined in to a level that can be supported by the economy. The fact that interest expense is now one of the largest budget items drives that point home. According to the Treasury Dept, thus far in fiscal 2025, interest expense is 14% of Federal expenditures.  It’s a key reason that Trump wants lower interest rates. So much of the budget is on auto-pilot, that getting the deficit under control will not be easy. Tariff revenue will help, but in the grand scheme of things, tariffs can’t make a meaningful dent in the deficit. The fact that Congress has never been bashful about adding pork to government spending isn’t helping and whatever savings DOGE can produce, are also a drop in the bucket when addressing the federal debt problem.
  • We must free our critical supply chains from China risk and establish new suppliers for critical materials. China is now recognized as an adversary. Therefore, As a corollary, we must restrict Chinese access to U.S. technology. That implies a need to re-invigorate U.S. manufacturing and develop new internal or friendly external sources for critical materials. Tariff policy and proposed tax policy are primarily being used to make U.S. manufacturing more competitive with the rest of the world, but these actions could also push inflation higher.
  • Nothing makes debt problems easier than faster economic growth. This is where the two policies converge. The faster the economy grows, the better able the U.S. is to handle the debt load. The plan is for the re-emergence of U.S. manufacturing power to drive more rapid economic growth and drive the deficit down on a relative basis and remove the U.S. from the Chinese manufacturing base.

For all of our sakes, we hope he pulls it off, but it is important to understand that this massive transition is not going to be easy and likely requires that economic activity weakens in the near term and a recession is not out of thee question. Trump has a miniscule majority in the House and Senate and with mid-terms coming in November of 2026, he has very little time to push his agenda through, which in our view explains the speed and severity of his actions to date, but having an explanation doesn’t make it any easier to live through. Trump has made it clear that ‘there will be some pain’, but the economic and political situation effectively demands that the pain comes now if there is to be any recovery by the time the mid-terms arrive.

More of the Same

In our view, this implies an outlook that calls for more of the same – a continuing flow of contradictory statements and changes in policy. Everyone is asking for clarity, but we don’t expect it any time soon (and we are far from alone in that assessment).

Lacking clarity, the stock market is reacting (probably overreacting) to every change in commentary, however that process has at least one benefit. As the stock market swings wildly, we are able to see what this administration does in response. The result is in the chart below, at right. Thus far, stock market moves have been rapid and violent in both directions, but what we have experienced is that if the S&P 500 moves down to the 5000 area, the administration comments become more conciliatory, driving stocks back up (now called the Trump Put). Likewise, as the S&P500 moves toward 5600, the comments tend to become more combative, pushing stocks back down. For now, a broad range form 4900 to 5600 would appear to be the path of least resistance.

Under 5000, we become more constructive on stocks with the caveat that if any slowdown/recession is not short and shallow, the current downside barrier could be violated. For now, patience is a virtue.

At the risk of repeating ourselves too often, what is most important is that long term investors stay in the game. Timing markets is difficult enough, but timing a Trump market is even more difficult. Remember that you don’t own stocks, you own pieces of companies that generate earnings and cash flow and will continue to do so. It is those earnings and cash flows that will define value over time, no matter what happens over the net few months.

Have a great week!

 

What We’re Reading

 

Palumbo Wealth Management (PWM) is a registered investment advisor. Advisory services are only offered to clients or prospective clients where PWM and its representatives are properly licensed or exempt from licensure. For additional information, please visit our website at www.palumbowm.com.

The information provided is for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon. You should consult your attorney or tax advisor.

The views expressed in this commentary are subject to change based on market and other conditions. These documents may contain certain statements that may be deemed forward‐looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur.

All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.

All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability, or completeness of, nor liability for, decisions based on such information, and it should not be relied on as such.

The views expressed in this commentary are subject to change based on the market and other conditions. These documents may contain certain statements that may be deemed forward‐looking statements. Please note that any such statements are not guarantees of any future performance, and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur.

Past performance is no guarantee of future returns.

 

General News

By: Adam