Deep Dive
Shownotes Transcript
This is Barron's Live. Each week, we bring you live conversations from our newsrooms about what's moving the market right now.
On this podcast, we take you inside those conversations, the stories, the ideas, and the stocks to watch so you can invest smarter. Now let's dial in.
Hello, everyone, and welcome to Barron's Live, our weekly webcast and podcast. I'm Lauren Rublin, Senior Managing Editor at Barron's. Thanks for joining us today for a look at the economy and the markets. My guests are Barron's Deputy Editor, Ben Levison, and David Kelly, Chief Global Strategist at J.P. Morgan Asset Management.
David spends much of his time analyzing the economy and its impact on the markets, and I can't think of a better week to feature his views given the parade of economic data that we're going to get in the days ahead and the debate that's raging on Wall Street and the real world as to whether the U.S. is or isn't in a recession.
or about to slip into one. So with that ominous reference, let me give a warm welcome to David and Ben, and thank you both for joining me today on Barron's Live. Thanks, Lauren. Glad to be here.
A pleasure. So David, we like to start with our outside guest and that would be you. I want to begin with that deluge of data. We'll get first quarter GDP and the March PCE numbers on Wednesday. That's the inflation report. We'll get the April jobs report on Friday. It's also the biggest week of the corporate earnings season. So
Let me ask you to take a big picture look. What do you expect from all these reports and what do you think you'll learn about the health of the US economy? Well, it certainly is a big week for numbers. I think we learned quite a lot.
The first major report, of course, is this real GDP report for the first quarter. And we think that real GDP growth was essentially zero. I mean, that's what our models are saying. Obviously, it could be between plus 1% and minus 1%. But it looks like the economy pretty much stagnated in the first quarter.
Outside of that, that is clearly a sign of economic weakness. But other than that, I think the other numbers will say the economy has moderated in terms of growth, but it's not quite in recession yet. So we still think we're going to see some positive gains on non-farm payrolls. We haven't seen a spike in unemployment claims yet. The PMI data, we're going to get purchasing managers data from all over the world. I think they'll show a spike
slowing global economy, but not necessarily one that is in recession yet. And other things like vehicle sales we're going to see should still be pretty strong in April as people try to buy ahead of the tariffs. But it's like everybody's waiting for these tariff effects to put the economy into recession. I think eventually the poison will seep through the whole economy and actually succeed in doing that. I think the economy will slide into a shallow recession in the second half of the year. But it's just taking a while for all these effects to feed through for various reasons.
By the poison seeping in, that really sounds ominous. You mentioned last week when we were talking that recession is everywhere but in the data. So give us some sense of where you see the most prominence.
Well, I think you have to look at it very carefully. It's kind of like the opening line in Anna Karenina where Tolstoy says that all happy families are the same, but all unhappy families are unhappy in a unique way. But all recessions are kind of unique too. They all have a little bit of a difference about them. And this one is tariff-induced.
And if that's what's going on, you get a lot of things that sort of prevent you from seeing it initially. So one of them is that we're doing a lot of buying ahead of the tariffs. So we saw strong vehicle sales, very strong vehicle sales in the month of March, and they should still be pretty strong in April. We're also seeing a lot of import activity that's going on. I think that's helping.
And then also high-end spending on things like services are still fine. You've got a lot of gains in consumer wealth in recent years. So things like spending on, you know,
on new vehicles and vacations. It's still looking pretty good. But there are other signs that things will be weakening here. Things like there are sort of forward guidance in some of these earnings reports. I mean, the earnings themselves look fine for the first quarter, but again, that's backward-looking. It's the first quarter. So it does look like companies are getting more nervous about
hesitate to hire. We're getting lots of signs that this is going to drag on the economy. It just isn't going to show up outside of this sort of stagnant GDP number. I don't expect the weakness in the economy to show up in a big way in the data that come out this week. Do you change your mind about all of this if for some reason tariffs were eliminated? Do you think that's the main factor here?
Yes, I think it is. But there are some supporting issues. So I think this big crackdown on immigration is limiting labor supply. And I think a lot of companies are still having a hard time finding people. And that's having a perverse impact.
because it means we're not seeing big layoffs. Companies had such a hard time hiring people that they're really hesitating to fire people in case they need them again soon if we avoid recession or have a shallow one. But equally, we think that companies are slowing down their hiring, and that's very important.
Because one of the things I think people don't realize about the American economy is just how dynamic the labor market is. Every year, about 65 million people get hired and about 62 or 63 million people leave a job. So for a net job gain of two or three million, but 65 million people get hired. That is 250,000 people for every workday in the year.
So if you just have a small pullback in hiring, that can put you into trouble too. So I think the immigration problem is one. And then also just the bad sort of publicity that comes out of government cutbacks, both in terms of personnel, but also potential grants and aid and so forth. I think that's all dragging the economy.
But by far the most damaging part is the level of tariffs and the uncertainty around tariffs. That's really what's hurting the economy here. So the chairman of the Fed, Jerome Powell, has spoken to all of these issues. The Fed will meet again next week. Its policy arm will meet. Where does all this leave the Fed? What is the Federal Open Market Committee supposed to make of all the conflicting signals, conflicting data, and conflicting sentiments?
Well, I think Jay Powell put it very well two days after the election. He tries to maintain a distance between the Federal Reserve and the federal government. With regard to federal government policies, he takes those as a given and then adjusts monetary policy around it. But what he has said is that with regard to future government policies, he's not going to guess, he's not going to assume, and he's not going to speculate on the Fed vote.
I think that's really important because, as you said earlier, could an announcement on tariffs change things? Absolutely. If we decided that our negotiating stance was now that we were going to return all tariff levels to where they were on January 1 and then try and negotiate trade agreements in different countries around the world, you would see a huge market rally and a huge sigh of relief.
around the world and in the United States. So if we went to a policy of trying to get everybody's tariffs down to zero, rather than pushing up our own tariff rates, it would have a huge impact. But from Jay Powell's perspective, he can't count on that. In fact, it's really hard for the Federal Reserve to figure out what the tariff endgame is going to be.
And also, really importantly, they don't know what the tax endgame is going to be. There's a big tax bill that is, yeah, there's a big tax bill making its way to the government's desk or to the president's desk. And if that's major fiscal stimulus, the Fed won't want to cut ahead of that. So I'm thinking at least at next week's meeting, the Federal Reserve is still going to pause and say they're still waiting for information.
What do you think about the rest of the year and into '26? Do you see multiple cuts, fewer cuts? What's the forecast? I think we will, in baseline forecast, I think we will get multiple cuts because I think what will happen is, as I said, you get about 0% growth for the first quarter. I think you get about 0% growth for the second and for the third. You could get like three zeros before the economy picks up. Now, when the Federal Reserve looks at that,
Well, there are two things that are going to happen here. As the economy weakens, I think you're going to see a softening of the administration's line on tariffs. I think they realize, and you can sort of see it in interviews and say the Treasury Secretary this morning, they're feeling the pressure. They know that they need to try to provide the business community with some sort of certainty. If you can get it to an endgame, less tariff uncertainty, that would be a big thing. Then also, once you have a tax bill in place,
If that doesn't look like it's stimulating the economy too much, then all of the uncertainty has gone away and the Federal Reserve is looking at an economy that's sliding into recession. And if tariffs are kind of settled, they know that you're not going to get a big surge in inflation next year. So if that's where they are, then they can start cutting. And once they start cutting, they probably will continue to cut. Because there's one other thing to say about rate cuts. They won't stimulate the economy. No, not at all. Not a bit.
That's one of the ironies of this situation. People always think the Federal Reserve can stimulate the economy through interest rate cuts. It cannot. And so they'll cut interest rates, but if they cut them a little bit, people are just going to wait for some more.
And, you know, if the medicine isn't working, the Fed's probably going to keep going. So, you know, I think that they will probably end up doing more than three rate cuts this year because I think the economy is going to be soft enough to justify it. So you could be, you know, between 1%, 1.5% lower by the end of the year on the federal funds rate than the 4.25% or 4.5% that we see right now. Well, won't that have some stimulative effects, though?
No. That's a substantial number of breakups. No, we've... So explain how that happens.
Explain how it works or doesn't work. Well, you see, I think this is something we should have learned over the course of the 21st century. But we've seen multiple examples now of the Federal Reserve cutting interest rates and not stimulating the economy and raising interest rates and not slowing the economy. Just as a most recent example, we had extraordinarily low interest rates in the years following the great financial crisis, and we were one of the slowest rebounds we've ever seen.
Meanwhile, when inflation got up to 9.1% in March of 2022, the Federal Reserve started raising rates aggressively. Now, inflation came down.
but economic growth didn't. The economy just kept on plowing along 2% to 2.5%. There's a reason for this. Over time, the economy has become less and less interest-sensitive. There are fewer businesses that are making decisions based on a few percent one way or the other. Meanwhile, there are a lot of consumers who have interest-bearing accounts. When the Federal Reserve raises interest rates by a quarter point, they all get a pay increase. If they cut interest rates by a quarter point,
they all get a pay cut. And when you actually add up the pluses and minuses, that equation is basically at a point right now where there is no net short-term stimulus effect from cutting interest rates, none, zero. And so they will not stimulate the economy by cutting interest rates. What will they do by cutting interest rates?
Well, they could possibly help financial markets, or at least the stock market. Because if they do cut short-term interest rates, then that will tend to push long-term rates down. And of course, people look at financial assets and compare them in terms of the yield or total return you can expect to get from them. So if you've got a lower total return expected from the bond market, then that will tend to push people back into equity. So I do think that lower rates can help the stock market a bit.
And they can also push the US dollar down, and that might ultimately be beneficial for the economy in the long run. But those are all longer-term effects. And sort of secondary effects. Well, yes. A lower dollar will, over a long period of time, bring our trade back into better balance. So that is a good thing. And certainly, stock market increases are immediate in terms of wealth. But the effect that wealth has on consumer spending, again, a pretty long lag on that one.
All right, one more question before we go to Ben and this week's earnings. I wanted to ask how you think about the US budget deficit. There's a lot of hand-wringing about it's an extra-able growth. Are you one of the hand-wringers or do you have a more, sort of more measured or sanguine view of things?
Somewhere in the middle. I mean, for so many years, I've heard people say unsustainable. This deficit is unsustainable. And I'm beginning to think that word doesn't mean what I thought it meant. Because for years, we've had this deficit getting bigger and bigger and bigger and hadn't had anything to do with it. So I think the deficit this year is going to come in about $2 trillion. The debt-to-GDP ratio will be about 100%.
And if we just extend the Tax Cut and Jobs Act tax cuts, do nothing else, just extend the ones that were going to expire,
the debt-to-GDP ratio is estimated to rise to about 130% of GDP by 2034. You're going to see a significant increase in the debt-to-GDP ratio anyway. I think we can probably handle it for a while, though. I think it means somewhat higher long-term interest rates. But the real key is, and you've seen that so far this year, is people have to trust
the federal government and the federal reserve. They've got to trust the federal government to not go hog wild crazy on the budget and to try to bring it back into balance and have some discipline. And they've got to trust that the federal reserve will be allowed to be independent and allowed to try to control the rate of growth of the economy in the long run so as not to cause inflation. If you lose that trust,
then you're going to have a more significant problem. But for the moment, I think we can probably get a few more years or maybe more than that before it becomes a crisis. But of course you should address it because it's not going to make us any richer in the long run to have all this debt.
I think we'll be talking about it on Barron's Live for a long time, in other words. I think so. All right. Let me turn to Ben for a moment. And Ben, as I mentioned, it is a big week for corporate earnings. Let's start with an overview. How are things going roughly midway through earnings season?
They're probably going better than expected. I mean, the earnings are tracking right now at about a 9% over estimates, which is pretty good. I mean, it's often a little bit higher, but it's not bad. And you're starting to see more of them, too. So you're getting back to historical averages. It didn't start off well, but it's getting a lot better. The guidance hasn't been good.
but companies have also talked a lot about how they're going to try to manage tariffs. And I think that's helped a little bit as well. You've seen some industrials that really said that, you know, it was, I think it was Al Root who put into one story that like beat and maintain guidance is a new beat and raise. And I think that's really a lot of what's happening right now. You're getting some guidance that a lot of guidance has come down. A lot is being held in place.
But not enough to really keep the market from pricing in about 10 percent growth this year. I still think that might be a bit optimistic. But for now, the market's hanging in and on with those earnings. So I have a question for David. If we're looking at 9 percent growth for first quarter earnings, how is it that the economy might deliver zero growth?
Well, the 0% growth from the economy is coming from really two sources, as far as we can tell. One of them is that real consumer spending grew at a 4% annualized rate in the fourth quarter. So there was a real spending binge in the fourth quarter. Of course, consumer spending is almost 70% of GDP. So it was always going to grow more slowly in the first quarter. And we think we'll only see about 1% growth.
But the other big thing is that we saw a lot of imports ahead of the tariffs. And so the import numbers just shot up in the first quarter. And of course, you know, imports are a net subtraction from GDP. And that's giving us this weak GDP number. I think also the fact that the dollar was falling over the course of the quarter has boosted foreign markets.
income for many US multinationals, which has also helped with these numbers. But again, all of this is sort of a prelude to the hit that we're going to take from tariffs. It was sort of just waiting for that effect and it wouldn't have shown up in the first quarter numbers. Just one other thing that I think we've noticed in the earnings reports too, as Ben mentioned, is almost every earnings call, people are talking about the steps they are taking to be careful and to allow them to adjust to
to this slower economy, maybe recession or trade war.
And individually, it all makes sense, you know, cutting back on travel and entertainment expenses, putting in hiring freezes, slowing down capital spending. But collectively, those are the sort of actions which will slow the economy down. And I have a very hard time believing that for the year, we're going to get close to double digit earnings growth if this is a year characterized by zero, followed by zero, followed by zero in terms of real GDP growth. This episode is brought to you by the Remax Collection.
seasoned real estate agents who help open the door to the most luxurious properties worldwide. Visit Remax.com/luxury to learn more. Each office independently owned and operated. Let's look at some of the companies reporting this week. Ben, we've got four of the Mag7 reporting: Meta, Microsoft, Apple and Amazon. It's a pretty powerful lineup. What can you tell us about them? Let's start with Meta. What do you expect to hear?
I just want to first tackle them as a group because it's been interesting to watch really the trading in them since really since all this started because they've all kind of traded in the same way. You know, they fell through, fell very hard through the beginning of April and they've bounced pretty nicely since then. They had a fantastic week last week.
That was helped in part by Alphabet, which had its earnings. The earnings weren't great, but the stock had it. They weren't bad, but they weren't great. The stock still had a pretty big move higher because it had been beaten down so much. But now we're getting all these other earnings. If you listen to the bulls, they're excited still. These stocks have been
beaten down, they're cheaper than they were. Someone like a Dan Ives at Wedbush is still expecting to get a lot of good news on AI. He doesn't think tariffs are going to be ultimately that big a deal. But then you look at the stocks and the stocks have really all bounced to levels that are kind of concerning on a technical basis. They're sort of running into resistance. So the numbers better be good.
We have meta platforms coming on Wednesday. That's when they've dropped 15% over the past three months. We're still up 23% over the past 12. Revenue is going to grow nicely. Earnings are actually supposed to drop a little bit. They are spending a lot
on AI. Over at Evercore, they think that Meta can beat, but again, a lot of this is going to come down to what they say about the outlook, what they say about their spending, and they're also having an event this week. Meta is called, I think it's Llamacon, which is going to be focusing on their AI products.
And maybe that, that's the day before earnings, and maybe that actually provides a boost as well. But people really do want to see that this AI spending is turning into something, and LamaCon will get Meta a chance to do that. Not the Metaverse, in other words. No, we could. God, let's hope not. We're also going to get Microsoft.
Yeah, we're going to get Microsoft. Yeah, let's talk about Microsoft for a moment. Yeah, I mean, it's been the worst performer over the last 12 months of the Mag 7, or I think if we don't count Tesla. It is actually down 3.6%, while the others are all up pretty nicely. Dan Morgan over at Synovus is actually fairly excited about Microsoft. We're getting solid earnings growth there, solid revenues growth.
He also thinks that Microsoft has five product groups and each of them generates over 20 billion in annual revenue. And that diversification is really going to help the company as you go through this period where you have so much uncertainty around everything. He thinks that is going to help it really provide fairly consistent earnings throughout this year. And I think partially because of the
the underperformance that there may be actually room more upside there. It just retook its 50-day moving average, which maybe that holds, maybe it doesn't, but that was an interesting thing to see. Good sign, at least. All right. What about Apple? Apple has been a strong performer over the past 12 months, less so over the past three. Yeah, it's been a bad seven over the past three. People have been unloading it. You know, there is...
You know, it's supposed to grow earnings, it's supposed to grow sales, but there's so much there that we don't know in terms of, you know, it's manufacturing. It manufactured out of China, so it really is exposed. You know, I think right now there's – it doesn't have to worry about the tariffs, Trump has said, but who knows how that is actually going to play out. It's trying to move elsewhere.
JP Morgan's analysts actually think they were going to get a modest beat in earnings and stronger revenue. And they aren't really worried about this pull forward that might exist in terms of the iPhones because they just think the stock has pulled back enough and the valuation is low enough that things are set up pretty well for the stock. So we'll see how that goes.
All right. Amazon has been a real mag seven. It's down 20 percent over the past three months. What's the forecast for Amazon? I mean, it's really exposed to China in terms of the stuff that it sells on Amazon.com and also to this fears about consumers pulling back. I think the stock reflects both of those quite a bit. It's expected to have a strong first quarter. It does seem like consumers haven't pulled back yet.
The stock is supposed to see a big jump in earnings to $1.40 from 98 cents as sales jump to 153 billion from 143 billion. Bank of America is pointing out that really it is tariffs are the focus of the call.
You know, what's the impact on inventory, on your selling prices, on margins? And what is it doing to try to mitigate all that? So I think, I mean, as much as we'd like to see, you know, just be able to say, oh, it's going to beat earnings. It's going to be great. It's really stuck in the in the tariff storm, probably more than any of the other mag sevens, except for Tesla, which really shouldn't be in that group anyway.
Both points are well taken. Let's take a look at Coca-Cola, a defensive stock, not among the Mag7, but actually a pretty good performer over the last year. Yeah, it's been great, especially over the last three months. It's up 16%. It's up 16% over the past 12 months. So it's really all come very recently. It's come to the top of a fairly long-term trading range. Earnings aren't really expected to grow. It's supposed to be
come in at 72 cents, that would be in line. Sales are roughly going to be roughly the same as well. I think what's interesting about Coke, especially when I compare it to Pepsi, used to be that Pepsi with that snack business was the one that got all the attention. But Coke doesn't have the snack business, which is really seems to be an impediment for Pepsi right now with people changing their dietary habits.
And Coke also has done some interesting things in terms of moving into other products that aren't just soda. And it's going to be very interesting to see how well the stock, how well the company has done across the different geographies and whether it's in this global diversification is really what's going to pay off for it. But so far, it's been one of the big winners among the consumer staples this year.
Most certainly. All right. One more stock to talk about for the moment. We'll see if we have time more for later. General Motors reports on Tuesday, as we know, the company has had some trouble in recent months. Yeah, I mean... The company is going to report...
This is the one where there's a disconnect between Trump's policies on wanting to make U.S. manufacturing great again, but the actual manufacturers. For GM, all the tariffs talk, everything that's happening has been really tough for the stock. It's gotten hit pretty hard. It's down 13% over the past three months. It's relatively flat, up 2.8% over the last 12 months.
And it really needs to, you know, it needs certainty on tariffs so it can figure out how much can it charge for the cars? How is it going to have to shift its supply chain and that kind of thing? RBC, though, is actually fairly positive. You know, they do say all the focus is on the uncertainty about tariffs.
But they think that and they and they think that GM might pull its guidance or put it to the low end. And they actually think both of those would be OK, because the market, you know, this already started to price that in and just giving a sense that, hey, you know what? We don't know. Or, oh, you know what? We think it's going to be bad. It's just going to tell people that, yeah, we're starting to reset things.
So, you know, it's going to be an interesting one to watch. Like, what can they say? How much of this is really priced in? And we will find out when they do. Very, very complicated situation. I do not envy Mary Barra at this moment. No, but stock is actually holding up pretty well. That's true. That's true. But I'm speaking of the complexity of the decision she will have to make ahead.
So I want to go back to David and ask a little bit about the market. And you have mentioned, David, that we are long overdue for a rotation and in fact, several rotations. So tell me where you see value now in terms of stocks, in terms of geographies and things like that.
Well, first of all, yes, I think we've needed a rotation for a long time. Part of that is just when you have a very good market and a very positive market like we had in both 2023 and 2024, a lot of money just keeps on gravitating to whatever has done well recently. You've had a lot of momentum trade here. I think that's what made the MAG7 look so expensive going into this year.
But then when you have a correction and the threat of a bear market,
You never know the hour nor the day when a bear market is going to hit, but you do know the location. The location is always the thing that has been most speculative and hyped and front page to that point. It's not surprising to see mega cap growth stocks taking it on the chin in relative terms so far this year. Within the US, I'd say, look at value versus growth. It looks cheaper.
I don't really have a huge-- I certainly wouldn't go overboard on buying small cap because we could be just in front of a recession here. But I think value versus growth in the US. And then, absolutely, people need to look around the world.
I'd say, in general, just look at how little you've got allocated to the rest of the world. But a particular shout out for Europe, which is particularly cheap, both Europe and the UK, they look pretty cheap and they are seeming to act together a little bit more, particularly the Eurozone market.
Given the German election and the fact that they finally got rid of their fiscal break, it looks like they're going to do more fiscal spending. And they may not be quite as impacted by-- I mean, these tariffs won't help. But a trade war may not impact them as much as-- for example, won't impact them as much as countries like Canada and Mexico.
That's one area. Then another sort of broad question people have asked us is, "Well, what areas of the world are less impacted by US tariffs?" You have to go south, basically. If you look at Australia, if you look at Latin America, and if you look at India, all of those markets are somewhat insulated from the effect of these tariffs on their local economies.
All those areas are places to look to redeploying some capital. But the main thing is, you know, I wouldn't necessarily go heavily overweight international, but almost everybody's underweight international right now. And so the question is, is that reasonable?
I'm not going to say something negative about the US economy because, in the long run, I've got a lot of faith in the US economy. The question is, is it exceptional still or is it just resilient? You could argue that it's resilient. It'll come out of whatever weakness it's going to have and it'll grow again.
But if we do enough bad things to ourselves, we may actually end up losing the sort of exceptional nature of the American economy from a financial market perspective. And then you have to ask, well, does it justify having P.E. ratios, which are 50 percent higher than they are in the world outside the United States? Do you see any candidates for exceptionalism elsewhere?
That is a great question. I don't think in terms of big markets, because the US is such a big market relative to everything else. And each region, you've got a bit of a ding on. India's stocks aren't particularly cheap. Latin America, of course, has this political pendulum where things swing back and forth pretty violently. So it's cheap for a reason.
Japan certainly has got more practice in dealing with the declining labor forces than other people, a lot of positive long-term trends in Japan, but it still has a shrinking population. China, again, is perhaps willing to weather the tariffs. I think it's going to play a harder game than the administration imagined. They have a big real estate issue and a big
population issue too. So it's hard to find an unblemished candidate for big exceptional market. But the point is that they're all priced as being C students or D students, and I don't think they're that. So I think that there are opportunities in places like Europe, Latin America, and Japan where I think you could have some increased evaluations. Yeah.
Well said. We had a question from Stuart about the bond market, and I wanted to ask you about that. We haven't talked about bonds yet. His question was where you see the 10-year yield by year end, and I'm hoping you can use that as a jumping off point to talk about fixed income generally. Yeah, so right now we're about four and a quarter or so on a 10-year treasury. Yeah.
It's close, but I wouldn't be surprised if we end up in a similar place by year-end. I do think that if the economy slides into a mild recession, you're going to see significant cuts at the short end. The problem is...
that I think you'll also see some degree of fiscal sugar pushed into the economy for 2026. So people will almost immediately look forward to a recovery. And recovery, which is being promoted by fiscal stimulus. You've got tight labor markets, which will, I think, still tight labor markets for immigration reasons, which will tend to put a floor under wages. You've got the
And you've got the possibility of an economy picking up somewhat. And of course, you've got all this additional debt. The deficit's already going to be about $2 trillion this year. It looks like it's going to be more next year. It's hard for me to see a big rally in the long end of the bond market. So yes, I think you could get a, we could enter a shallow recession and you'll get short-term interest rate cuts, but I wouldn't make much of a bet on the long end moving one way or the other. I think somewhere in the 4% to 4.5% range is probably right. Okay.
Okay, good question, good answer. We had a question from Jack who wanted to know whether you could discuss the factors behind the weakening dollar. Yeah, so it's really interesting because this is kind of the opposite of what happened back in 2018 when we had the first trade war. I think the...
The biggest difference this time around is simply back then, the US economy-- well, there are two differences. Back then, the US economy had a lot of stimulus already built in because of the passage of the 2017 Tax Cut and Jobs Act, which was already going to stimulate the economy. So even if tariffs slowed it down a bit, they're still going to look pretty strong.
This time around, you had the economy coming in. In April, it entered the fifth year of economic expansion. It was already slowing down. We're at full employment to start with. And so it didn't have much in the way of stimulus to push growth higher. Then the other thing is that the tariff battle, we've picked a fight with every kid on the playground at the same time.
If you're going to try and bully somebody, best to just pick on one kid. By picking on everybody at the same time, global investors have basically taken the view that the US is going to get hurt more by this than the rest of the world is. I think that's a reasonable view. This is why, of course, tariffs and trade wars are silly.
In theory, the Chinese should be sweating it out because they're going to lose manufacturing jobs. But if we don't have any toys to put on the shelves at Christmas or if we run out of rare earth minerals to put into our tech industries, we've got a real problem. We may have a worse problem than they do. If you think about it, over the years, we've bought a lot of cheap Chinese stuff and they've bought a lot of expensive US securities. That's actually been a pretty good deal.
I think when you look at it from that perspective, us trying to close the door on what has profited us so much over the years, I think the rest of the world is making a judgment call. Of course, the last thing to say is the dollar is too high on an economic fundamental perspective because we're running big trade deficits. When you look at foreign investors, for nationalistic reasons, maybe they don't want to put too much more money in the US.
But also, if they think that US exceptionalism is going to ease off here, maybe they pull some money out and redeploy it, both US investors and international investors. And of course, one of the big reasons the dollar's been pushed up in recent years or held up is because of foreign capital flows into the United States. Those flows go in reverse. That, I think, helps bring the dollar down. So I think there are many parts to it. But I think the dollar's too high. And it's not a surprise to me that it would eventually come down.
All right, I wanted to ask Ben a question from Robert. Ben, you have a very good column in Barron's this past weekend. This question relates to it. Robert wants to know, have we reached a peak with tariffs, with the tariff noise, and has the market correction reached its bottom?
There may be no answer. You should really let David answer this one. I'll pipe in and I'll give you another answer after you've had it first. Again, like I'm going with...
I'm going to go with what I've been saying. When I came to your bullish, I just think the tariffs went too far. And it's not just the tariffs. It's what has made the stock market so much, I guess, just better than all the others. It's
It is. It's this international trade system that we have. It's that these companies have great margins as creep going and that we let them and we let our companies make a profit. I think we've just changed to we're trying to change too much with the global economy now for that to maintain itself. And so you look then I look at the chart and it's had a great rally off the bottom, but it's rallied right into resistance. You know, I think a lot more.
more good news has to come on the tariff front. But then I still worry about these longer term impacts, about changing the trade system that has worked well for the US and then the economic sluggishness and what happens to earnings and all those things. So I don't think the tariff noise is over. And I'm looking to be more of a seller of stocks if we get a big upside than buying right now. David, do you have the same view or a different one?
Close. I think we're past the high tide on tariffs. I mean, the absolute tariff rates. We've got an analyst in our team who every day tries to calculate the average tariff rate that the US is imposing upon everybody else, which has been a tall order the last few weeks. But I expect that that number is going to come down over time. What I think is going to happen is, I mean, you've got to look at it from the perspective of the people we're negotiating with.
With most of these countries, if you're going to do a negotiation, they're probably going to say, well, look, why don't we roll back to where we were in January 1 and then negotiate off that? And of course, the administration is going to say no, because we want to have this 10% universal tariff. So then they'll say, well, look, let's at least start with 10%, and we'll put 10% on you, you put 10% on us. Okay, that's the starting point. Now let's negotiate.
I think that's where we may be headed, but that implies that this 90-day pause is not really a 90-day pause. I think it may be a pause forever because I just don't think that you can... There's so little logic behind the level of the tariff rates we're trying to impose on other countries and cause so much bad blood that they really can't negotiate from there.
I think a reasonable approach for the administration would be to say, look, let's call it 10% universal tariffs. I mean, I don't agree with tariffs, but from where they start, if they say, let's go with 10% universal tariffs and then negotiate ways of removing tariffs on both sides, that seems to be a logical approach.
position for the administration to move in. And I think they will move in that direction because I think they're getting a lot of incoming on these tariff increases from small businesses, large businesses, farmers, consumers. And it's going to get worse as the tariff impacts actually begin to hit the shelves.
We haven't seen anything yet, but we will within the next eight weeks or so. And I think that's going to force the administration to back off. But as I say, I would love it if we could back off to a position of, we're just going to try and get their tariff rates down to zero. The average tariff rate applied on the United States at the start of the year was about 4.6%. The average tariff rate we applied and everybody else was about 2.2%. So there was a gap. I mean, they were applying higher tariffs to us than we were applying to them.
And 0.0 is better than 2.2 and 4.6, but it's got no relationship to the tariff rates we're talking about right now. And if we could get to that point where we're actually negotiating about bringing actual tariff rates down that we had at the start of the year, that would be a positive thing. I'm not sure we're going to quite get there, but I do think we'll see lower tariffs than were announced on April 2nd.
Yeah, David, you're actually the second person that I've heard in the last week talk about this idea of getting to zero zero. I mean, is that is that something that you think is really out there? Are people considering that at this point?
No, but I don't think they are. I'm not sure if the administration is or not. And it gets the one reason why the administration might say no to that. I mean, they're quite nimble at pivoting. But I think the problem is they plan to put tariff revenue in their tax bill. They could just get past that because tariffs are actually a terrible tax. They are very regressive. They're more aggressive than the sales tax because poor people spend a much larger share of their income on goods than
than richer people, and the tariff is a flat tax on imported goods, if that's what it is. So it's very regressive. But the problem is it's built in right now. They're planning they're going to use this tariff revenue to pay for some tax cuts. If they could just get off that, find some way of saying, we're not going to do that,
Then it's perfectly, you know, they would say they could change things both politically and economically by saying, look, we're going to use our market power to say that nobody's going to have a tariff upon US goods and we won't have a tariff on their goods. When you do that, you'll bring down their tariff rates more than bring down our tariff rates. It's a win. So, you know, why not? Why not, you know, steal a win from this? And so that's why it makes so much sense to do that. But you have to give up on the idea of tariffs as a revenue source if you're going to make if you're going to make that leap.
Perhaps that will be the next pivot. We shall see. Let me just close by asking a question from Robert who wants to know what all of this tells him to do as an individual investor in the next six to 12 months.
you have any sort of parting words for investors on how to how to position based on everything yes i think i think the most important thing is you know there are two things one do not try and time this in terms of what policy is going to be because one tweet can wrong foot you and you saw that in april it was a very treacherous month for anybody who's trying to make a bet that way
But the second thing is, assume that we're going to have a soft economy and a lot of people asking questions about the valuation of the assets they hold. So take a careful look at valuations. I would use valuations as my North Star here. If something looks reasonably valued from a business perspective with an unbiased eye, looks good in terms of valuations.
I would tend to be a little overweight in those areas and underweight the stuff that looks like it's got ridiculous or hyped valuations or valuations in things like crypto, which make no sense at all because there's no inherent value. So try and get away from the purely speculative and focus on valuations. And secondly, diversify very broadly. It's not enough to be 60-40 because...
If you are in an environment where you could have interest rates go up, even as the stock market goes down, which is what we've seen from time to time in this, then the bonds are going to hurt you. The stock's going to hurt you. So I think you have to go beyond 60/40. You look at valuations, make sure you've got an international portfolio, but also add some alternative assets in there.
And you have to do all of this paying close attention to the tax amount. You don't want to try and do this without exposing yourself to huge capital gains taxes. But I'd say look at valuations and just realize however diversified you thought you were, you probably weren't diversified enough and just broaden out that diversification. All right. Good advice for a Monday. And David, we thank you so much for joining us today. Anytime.
And thank you to Ben as well. And thank you to our loyal listeners. We really appreciate your questions and your audience.
Next week on Barron's Live, we're going to get the view from Omaha, namely the Berkshire Hathaway Annual Meeting. Ben and I will be talking on Barron's Live with our colleague Andrew Barry about his views on Warren Buffett, his trip to the annual meeting, and his outlook on stocks and bonds generally. Andrew, as many of you know, is a veteran Barron stock picker, and he's one of the best. And I like to say that few things happen on Wall Street that escape his attention and his analysis.
Ben and I both look forward to speaking with him, and we'll catch you up next week on Markets. Hope to have you on the line next Monday. Stay well, everyone, and have a great week. Viking, committed to exploring the world in comfort. Journey through the heart of Europe on an elegant Viking longship with thoughtful service, cultural enrichment, and all-inclusive fares. Discover more at viking.com.