Before you read the contrary someplace else, know this—the sun is going to come up in the east tomorrow. The Earth is not going to stop revolving. The world is not going to collapse. Essentially, none of those doomsday scenarios playing in people’s minds are going to happen.
Market Volatility
To be sure, the recent market volatility hasn’t been any fun. But, then again, market volatility is never any fun. We just haven’t had any of it in a while. I mean, the last couple of years have been pretty easy. You just put your money in some large cap growth or tech fund and, voila, you did just fine.
In fact, you probably did better than fine. However, you secretly suspected the good times had to come to an end at some point, didn’t you?
Now, don’t take that last sentence wrong. To be sure, the red ink over the last several days has been a cold glass of water to the face. However, that doesn’t mean the fun is over for good. Or that your tech stocks are truly going to blow up. Or that your balance sheet is ruined. Or that you won’t be able to retire when you originally planned, if at all.
Take a deep breath and relax.
As I type this at 12:38 pm CST on March 7, 2025, the S&P 500 is down 3.56% over the last 5 trading sessions. As bad as that might be, I suspect many people thought it was actually worse than that. However, over the last 12-months, the index is up around 11.25%.
Obviously, that isn’t too shabby.
The Economy
Here is the straight dope:
- The economy is cooling off a little from last year’s surprisingly strong pace.
- The usually-resilient U.S. consumer has been sort of AWOL for much of the year, and the labor market continues to be, shall we say, quirky.
- Throw in D.O.G.E. trying to slash government spending and the Administration throwing tariffs around like Mardi Gras beads, and you get a decidedly fuzzy economic picture.
By fuzzy, I mean it is very likely there will be a negative sign in front of the GDP number for the 1st quarter of 2025. Before you freak out, a decent chunk of that negative number will be due to an increase in our trade deficit for the quarter. It completely ballooned during the first two months of the new year! The reason? Well, wholesalers stocked their shelves prior to any tariffs taking place, as in a lot.
So, how much is a lot?
- In 2024, the average monthly trade deficit was $76.486 billion. The monthly range was ($66.59) billion to ($98.062) billion in December, which was the second highest monthly deficit on record.
- However, in January, get this, the deficit mushroomed to ($131.382) billion, including services.
- For goods alone, the deficit was $156.767 billion after being $123.281 in December 2024.
Trust me, businesses were already preparing for potential tariffs in 2025, and stocking their shelves accordingly. This will have a depressing impact on the GDP equation, which is: C+I+G +/- Net Exports.
C, which is consumer spending, will be softer than it was in 2024, and so will G, government spending. Throw in a sharp increase in the trade deficit, and the I part of the equation, investment, will/would have to really, really surge in 1Q 2025 to NOT have a negative quarter overall.
As for that, investment WILL be positive for the quarter. An increase in inventories WILL be a big source of growth. Unfortunately, it just probably won’t be positive enough to keep us out of the deep end of the pool to start the year.
But is THAT enough to freak out? To stand out on the window ledge? To pour 5-fingers of whiskey and then throw away the bottle cap/cork? To blame this person or that person, and curse the darkness?
Personally, I don’t think so. This, too, shall pass. However, I don’t believe there are many reading this newsletter who believe the U.S. could have continued doing things the way we were indefinitely.
Debt, The Deficit & Income Inequality
The trends in our deficit spending were-and-are alarming. If nothing is done to curtail the growth in the public debt relative to the size of the economy, simply servicing what we owe will squeeze out other government spending and investment.
As for our trade deficit, it is true the U.S. doesn’t need to produce or export a single item for our economy to grow. As long as foreign investors continue to flood our economy with their cash, we can grow indefinitely, at least officially.
I use that caveat, at least officially, because our recent economic growth has been very uneven. Basically, the rich have been getter richer and everyone else hasn’t. As a result, our Gini coefficient, which is a measure of income inequality, has risen significantly since 1980. In that year, our Gini was 34.7. In 2022, it was 41.3.
While that might not seem like a huge move, it sort of is.
Interestingly, our trade deficit in 1980 was only $13.06 billion. This was 0.46% of GDP. Conversely, it was $912.262 billion in 2024, which was 3.13% of GDP.
Hmm. Income inequality has increased dramatically since 1980, as has our trade deficit. Put another way, there is a strong positive correlation between our trade deficit and our Gini coefficient. It has been 0.78776 since 1992.
This begs the question: IF we produced and exported more in/from the United States would we see a reduction in our income inequality, and therefore wealth inequality? If so, would that not be beneficial for societal cohesion even if it might not be as friendly to wallets and pocketbooks? At least not in the short-term?
Huh. This is definitely not the newsletter I had intended when I started it.
Where We Go From Here
This, then, takes me to the following. Lowering our massive, arguably unsustainable, deficits, both Federal and trade, should have the ultimate impact of:
- Ensuring the solvency of the Federal government which would;
- Help to ensure the future delivery of needed services and entitlements programs and;
- Depress the cost of capital in the U.S. economy due to less debt in the system and;
- Lower trade deficits might actually help with income/wealth inequality which;
- Would replace the need for an even more progressive tax code which;
- Would engender greater investment back into the U.S. economy.
However, you don’t go from massive deficits to the benefits in that paragraph without feeling some pain.
You can liken it to, say, weaning a 600-lb. person off of sugary, nutritionally empty calories. At first, they aren’t going to like it one little bit. Then, the health benefits will start to kick in, and they will be overjoyed they got their life under control. You could say the same about forcing someone to quit smoking.
So, is some short-term volatility worth it? Understanding no one ever likes to see red ink in the markets. However, can you stomach it IF it puts the U.S. economy and U.S. Treasury on more sustainable paths? Obviously, this would, could or should lead to greater returns in the future.
Obviously, that is “glass is half-full” way of describing this week’s unpleasantness. This being better things are on the horizon, as they always are. Do you want to know what else is on the horizon? In the morning, and in the East, the sun is. It has been that way for billions of years, and it will be so for billions more…no matter what we do today and how much we fret about it.
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.