THE CLOUDS WILL BE CLEARING
I hope you are enjoying the changing of the seasons and more sunlight. Sunny skies are coming.
During the first quarter of 2024, the NASDAQ Index lost 10.4%, the Russell 2000 Growth Index lost 11.2%, the S&P 500 Index lost 4.6%, and the iShares Barclays 7-10 yr. Treasury Bond ETF (IEF) gained 3.2%.11
The quarter started strong with the stock market adding to several months of gains until later in February when the gains were erased in three trading days. The question that arose was whether the correction was merely a minor setback or a significant downturn for the market. A challenging question to evaluate, given the intricacies introduced by a substantial influx of new data.
My feeling is that the current state of the market will pass, and the markets will regain momentum before the end of the year. I’m in buy mode.
By historical valuations, at the beginning of the year many high-tech holdings which comprised a large weighting of the major stock indexes were priced too high. As of the swift drop beginning April 7th, they were still trading far above historical norms.
The administration’s harsh tariff policies gave a convenient and appropriate catalyst for stock market participants to reevaluate their very optimistic projections. Over time, stock prices reflect forecasts of future earnings, adjusted by the likelihood of those earnings being realized.
This is bad for novice investors chasing popular names and an opportunity for investors who understand how to calculate the worth of a company. Said another way, investors chasing stories find themselves in a more difficult situation when bumps in the road occur since they don’t understand the mechanics of what price is reasonable to buy or sell a stock.
The influx of new data arises from the administration’s unprecedented and wide-ranging policies, which have no prior parallel.
Tariff rhetoric is high with claims on both sides of the issue portraying their position is correct. This is ridiculous and will continue to promote volatility in the markets. Given the extent of tariff activity and the interconnected nature of global markets, compounded by the complex decision-making processes of numerous countries and leaders, predicting an outcome with accuracy is impossible.
At this point, I was going to explain tariffs, but the subject is so broad I suggest interested people perform internet searches from many sites to form an opinion.
Here’s how I see things:
1. A long standing “Bear” market should not develop.
- The U.S. banks are on solid footing
- Unemployment continues to be historically low
- There continues to high levels of money market balances which could enter the market
2. The stock market correction is natural, especially for many hi-tech stock price/earnings ratios (P/Es) which were significantly higher than historic valuations. The tariff situation in my view was a convenient excuse to sell the market down. Many of these names remain at elevated prices.
3. The tariff situation is not a permanent one, but a forceful lever to quickly bring global leaders to the table to rectify a long-term unfair trade situation with the US. If the tariffs were permanent, it would lend greater weight to the doomsday predictions, as they could be viewed as a lasting tax, which would be detrimental. The administration has repeatedly claimed that they will work to reduce or eliminate a tariff if the opposing side comes to the table.
4. Tariffs are likely to de-escalate soon, as numerous influential global leaders have already engaged in discussions. Among the “nearly 50” countries mentioned by U.S. Trade Representative Jamieson Greer during his address to Congress on Tuesday are Japan, South Korea, and Israel. The stock markets should experience a relief rally, but the unfair trade situation includes more than tariffs. Many countries, especially in the European Union (EU) not only impose tariffs, but stiff regulations, quotas, and burdensome trade restrictions on US products.
To give a glimpse about the inequity, the following is an excerpt from the U.S. Ways & Means committee: “Prior to President Trump’s reciprocal tariff action, an estimated two-thirds of the 600,000 products exported by American companies paid higher tariffs than foreign trading partners paid on similar exports to the U.S.— Thailand charges a 50 percent tariff on U.S. beef. Japan charges a 700 percent tariff on U.S. rice. Australia effectively blocks the sale of U.S. beef while we imported $3 billion from them last year. The European Union rejects our biotech crops through a torturous six-year regulatory process. It’s only fair that we levy tariffs similar to the ones faced by American-made products.”
An example can illustrate how trade views and policies are often misunderstood. Japan’s imported rice tariffs, reaching as high as 778%, might appear excessive, wouldn’t you agree? In Japan, rice is consumed in large quantities and traditionally served, virtually with every meal. For the Japanese, rice is more than just a staple food; it embodies unique characteristics based on where it’s cultivated and serves as a profound cultural symbol. Japan’s stance on rice protectionism stems from their post-war initiatives to ensure food security and sustain rural communities. They remain resolute in avoiding excessive reliance on imported rice, though they do import approximately 10% of their supply.
5. Assuming the tariff situation cools down soon, it seems to me that the U.S. will avoid a deep recession, possibly any recession.
6. As market uncertainty diminishes in the coming months, investors may consider adopting a more aggressive approach to buying, provided it aligns with their individual risk tolerance.
7. In its entirety, DOGE (Dept. of Gov’t Efficiency) is making the U.S. Gov’t more efficient which should lead to better utilization of our taxes. Paying down our national debt is of key long-term importance. Greater oversight is expected to reduce corruption and favoritism.
Obstacles:
- The uncertainty surrounding tariffs, along with the time required to finalize negotiations on tariffs, regulations, quotas, and other trade imbalances.
- Impending Iranian Nuclear resolution
- Uncertainty about the Trump Tax Bill in May and addressing government funding in September
- Continued geopolitical unrest with the Middle East, China, Ukraine, Russia…
Even though the world is confusing today, I see progress in the issues and will be looking to buy new potential stock market stars. Following a market correction, leadership often shifts as previous leaders may have grown too large to achieve the same level of gains they once did. Currently, I see significant potential in smaller, rapidly growing companies and will focus my efforts on acquiring them as the market offers opportunities to purchase them at excellent value.
As always, I will stay alert, closely monitor new developments, and seize opportunities for innovative ideas while mitigating potential risks.
Very truly yours,
Martin L. Yokosawa
Torii® Asset Management, Inc. Landolt Securities, Inc.
9S040 Stearman Drive, Naperville, IL. 60564
Copyright Martin L. Yokosawa. All Rights Reserved
Securities processed by and investment advice provided through Landolt Securities, Inc. Member: FINRA/SIPC
Torii Asset Management, Inc. and Landolt Securities, Inc. are not affiliated companies.
DISCLAIMER.
This presentation was created by the research and thoughts of a human, not by an artificial intelligence (AI) program that generates content automatically. AI can produce text, images, or presentations based on prompts, often mimicking human writing style, but lacking the nuanced understanding and creativity of a human author.
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- [1] These returns are price based and exclusive of dividend reinvestment. Return data provided by QUODD Financial, ETFreplay.com, and Yahoo Finance ↩︎