April has been a wild one in the markets. Apart from some of the panic during the height of the pandemic and the Financial Crisis, this month has been as volatile as any I have seen in my entire career. However, now that things seem to have stabilized a little, the question people want to know is this:
Is now a good buying opportunity?
This makes perfect sense. After all, technical analysts suggests stocks tend to rebound once they hit certain “resistance levels.” Further, our collective past experience tells us equity prices tend to increase over time. In short, and in no uncertain terms, the past seems to be screaming “this too shall pass.” At least temporarily.
Unfortunately, as I am obligated to say, past performance is not necessarily indicative of future results. The key to understanding that phrase is agreeing to what we mean by the future and performance.
Do I think the broad U.S. stock market, as defined by the S&P 500, will be higher in nominal terms 25 years from today? Unless there is a cataclysmic shift in how we live our lives and conduct business, I think it highly probable the S&P 500 will be at least 5,526 on April 26, 2050. In fact, woe be unto us if it isn’t. Seriously.
- However, does the recent comeback from the recent lows mean the markets are poised to extend their rally from 2023 and 2024?
- Are we getting ready to meaningfully breakout to the upside?
- Will we have another 15%+ year in U.S. stocks?
I am not quite as certain about that as I am the general direction of the markets over the next quarter-century. In truth, I might be inclined to be more pessimistic in my answer than optimistic in my answer.
To be sure, there is undoubtedly at least one person reading this thinking: “Come on, Norris. You know as well as anyone, the S&P 500 is considered cheap when it trades significantly below its 200-day moving average. Sometimes you have to just hold your nose and dive into the muck.” I mean, sure, if past performance IS indicative of future results, which is something I am not supposed to say or otherwise admit.
The thing I am struggling with is a question which no one has answered to my great satisfaction: “Do foreign investors still consider the United States a good bet?”
As much as it might singe the ears of the average American to hear it, our economy won’t function very well without foreign capital. There, I have said it. In fact, without it, our current standard of living, in aggregate, would languish.
You know our massive trade deficit? You can think of it as we import finished products and export U.S. dollars. The larger our trade deficit, the more dollars there are in the hands of foreigners. If what we learned in Econ 101 is accurate, for the value of the dollar to remain stable, any increase in the their supply HAS to be counterbalanced by an increase in the demand for them.
If not, we will have to shell out even greater amounts of our currency for imported goods.
Fortunately, foreigner investors have historically seen the U.S. as a pretty good bet.
- Our financial system is extremely liquid and transparent.
- Our companies are innovative and profitable.
- Our culture is relatively entrepreneurial and risk-tolerant.
- Our government has been generally supportive of global economic growth.
In short, the U.S. is all of those things which are attractive to investors.
As a result, according to the U.S. Treasury’s “monthly Treasury International Capital flows,” foreigner investors of all types plowed over $6.4 trillion into the U.S. economy, financial system and investments markets from 2014 through 2024. In so many ways, they gave us our money back, even if we now have to share some of our growth with them.
However, what would have happened IF foreigners had sold their dollars when they got them? Or they demanded payment in a different currency? A precious metal or cryptocurrency even? What if they didn’t take our dollars and buy U.S. stocks, bonds and even deposits? Essentially, what if they took, for all intents and purposes, our money and plowed into THEIR economies and financial markets instead?
After all, $6.4 trillion, over the last decade, tied up in U.S. dollar-denominated assets means that money isn’t tied up in euro, yen, pound, rial, yuan, peso, krona, krone, ruble, rupee, baht, zloty, won, rupiah or franc-denominated assets.
That’s right, if foreigners don’t take their dollars and plow them back into the U.S., the value of the dollar falls. When that happens, prices tend to rise because even the dollar can’t escape basic economics. When prices increase, interest rates go up. When interest rates go up, overall economic activity tends to stagnate. When overall economic activity stagnates, our consumption slows, which reduces our demand for foreign-made goods. This slows the growth of the supply of dollars in the global markets, and it eventually stabilizes.
…presumably at a price lower than where it started.
I think you can get my point. If, for whatever reason, foreign investors ever view the United States as a bad investment, the value of the dollar will fall since we are dependent on them plowing our trade deficit back into our economy and financial markets. Frankly, our system and way of life depends on it.
If it sounds a little scary, it is. However, this system has allowed us to live well beyond our means for a long time. Further, even the poorest among us have creature comforts which were once luxuries even for the wealthy.
No? Consider this: John D. Rockefeller never held a smartphone. John Pierpont Morgan never watched a television. Andrew Carnegie never surfed the Internet. Henry Ford never sent an email. John Jacob Astor never rode in an automobile, listened to the radio or watched a movie. Cornelius Vanderbilt never had electricity in any of his mansions, and never took aspirin, acetaminophen or ibuprofen. Finally, Sam Walton never bought anything off of Amazon.com, not that he would have even if he could have.
The collapse in the U.S. dollar relative to other major reserve currencies this month has been concerning. While not unprecedented, bad things tend to happen when the value of our currency falls in excess of 4% over such a contracted timeframe.
No, this doesn’t necessarily mean economic doom. To be sure, the worst might be behind us, and the dollar could continue to strengthen from recent lows.
However, what will foreign investors make of a United States which apparently wants to upend economic globalization? Which seems to be turning inward, and doesn’t mind alienating its purported allies and trading partners? Which changes economic policy on a whim or social media post? Which is, shall we say, more erratic than investors might like to see when deciding where to invest their money?
Will they continue to want to gobble up U.S. stocks and bonds? Will they want to make long-term investments in American infrastructure? All of it IF they don’t view the United States as a reliable and stable partner?
- No, we can’t continue to run up such massive deficits, and keep whistling past the graveyard.
- Yes, we need to level the playing field with our major trading partners.
- To be sure, global supply chains might be great during peacetime, but are a real problem during times of war.
- Indeed, it is questionable whether the United States could conduct sustained, multi-front conflicts with the loss of a major trading partner or two.
No argument. However, we can’t be blind to our current financial situation and how we are playing the game. That is unless, we are willing to accept some economic, shall we say, dislocation in the short-term in order to get from where we currently are to where you arguably need to be.
This is the reason why I am not as sanguine as I could be about whether NOW is a good buying opportunity in the short-term. Are we already going through this transition? Are we already in the recession such a transition would likely engender? Are we willing to contend with a weaker currency, and another leg up in inflation, as we wean ourselves off our propensity to consume? Will the next president and/or Congress scuttle what the current administration is attempting to accomplish?
As such, I think it premature to be too sanguine about the markets, and suspect we will have more volatility at some point. While it might not be as great as what we experienced immediately after so-called Liberation Day, I suspect foreign investors are even less clear what to presently make of the United States than Americans are. And, as I have hopefully made pretty clear, we need their money.
With that said, as for the long-term, yeah, the United States is still, and likely will be, the best bet going. So, is now a good time to buy? It depends on your time horizon and return expectation.
Thank you for your continued support. As always, I hope this newsletter finds you and your family well. May your blessings outweigh your sorrows on this and every day. Also, please be sure to tune into our podcast, Trading Perspectives, which is available on every platform.
Chief Economist
Please note, nothing in this newsletter should be considered or otherwise construed as an offer to buy or sell investment services or securities of any type. Any individual action you might take from reading this newsletter is at your own risk. My opinion, as well as those of our Investment Committee, is subject to change without notice. Finally, the opinions expressed herein are not necessarily those of the rest of the associates and/or shareholders of Oakworth Capital Bank or the official position of the company itself.