As we navigate the ever-changing landscape of the stock market, we want to provide you with our perspective on the current environment and what it means for your investments. Despite recent volatility, our outlook remains optimistic for stocks in the long run. Here are some key insights to keep in mind:
Market Corrections Are Normal and Healthy
Market fluctuations, including 5% corrections, are far more common than many investors realize. These pullbacks are a normal part of a functioning market and help prevent excessive speculation. Historically, such corrections have often led to new market highs after periods of consolidation and renewed buying interest.
The Impact of Tariffs: More Bark Than Bite
The ongoing trade tensions and tariff discussions have dominated headlines, but history suggests that their impact on corporate profit margins is often overstated. It’s important to remember that over 75% of the tariffs introduced during former President Trump’s term remained in place throughout President Biden’s term. While political rhetoric may drive short-term market reactions, the actual economic impact of tariffs unfolds more gradually and tends to be less severe than initially feared.
Economic Strength Amidst Changing Market Conditions
The U.S. economy remains strong, supported by declining interest rates and a weakening U.S. dollar. While some investors worry about a weakening dollar, it’s worth noting that a sharp rise in the dollar could indicate economic distress or a global flight to safety, which is often associated with recessions. The current environment supports continued economic growth, which is beneficial for equities.
Patience Is Key: No Signs of a Bear Market
Recent volatility has led to concerns about a potential market downturn. However, our analysis suggests that the stock market is not showing indications of transitioning into a prolonged bear market. Historically, the last two weeks of February following a presidential election year tend to be weak for stocks, while March and April have generally been stronger. Of course, past performance is not a guarantee of future results, but we believe this trend could continue.
The Federal Reserve and Inflation: A Balanced Approach
The Federal Reserve has already completed its tightening cycle, and inflation, though sticky, is on a clear trajectory toward the Fed’s 2% target. This positions the Fed to cut interest rates if economic data shows signs of slowing or if unemployment begins to rise. Lower rates would provide further support for equities, reinforcing our bullish stance.
Stock Market Positioning: Near a Turning Point?
We continue to believe that U.S. stocks are nearing a selling climax, meaning that most investors who wanted to exit have likely done so. When selling pressure eases, buyers typically take control, leading to upward momentum in the market. While we cannot predict the exact timing of this shift, we remain vigilant in protecting your capital and identifying opportunities for growth.
More Positive Surprises Than Negative Risks
We believe that there are more positive developments that could surprise the market than negative ones. Many of the worst-case scenarios, including recession fears, higher-for-longer interest rates, and prolonged geopolitical uncertainty, have been extensively covered in the headlines and are therefore largely priced into stock valuations. As a result, the potential for upside surprises—such as stronger-than-expected corporate earnings, further disinflation, or constructive trade negotiations—remains substantial. Historically, markets tend to climb a “wall of worry,” and we see the potential for positive catalysts that could drive equities higher.
The Tariff Landscape and Its Broader Implications
Trade policy remains a fluid situation, but it is essential to understand the broader economic impact:
- The U.S. has imposed tariffs on imports from China, Mexico, and Canada, though enforcement on Mexico and Canada has been delayed.
- The effective tariff rate of 20% on $1.5 trillion in imports could lead to an estimated $300 billion in additional costs, with about 40% of that burden falling on U.S. consumers.
- China, Mexico, and Canada collectively account for 43% of U.S. imports, with total goods imports making up 11% of U.S. GDP.
- Initial estimates suggest tariffs could reduce U.S. GDP growth by 0.3%–0.5% in 2025, while Canada and Mexico face higher risks due to their reliance on U.S. trade.
- Tariffs on these key trade partners could add over 50 basis points to U.S. inflation.
- Canada exports 85% of its oil, with 93% of those exports landing in the U.S., accounting for 20% of U.S. oil demand. Tariffs could impact energy costs and supply chains.
- Mexico sends over 80% of its exports to the U.S., making its economy highly vulnerable to trade disruptions.
- European trade relations remain a wildcard, with potential future tariffs on EU goods. However, Europe has shown a willingness to increase imports of U.S. liquefied natural gas (LNG) to balance trade negotiations.
While tariffs will negatively impact U.S. growth and inflation, the impact will be felt more strongly outside our economy. The demands placed on most of these countries are tied to non-economic demands such as efforts to curtail drug and illegal immigration flow.
We make no political comment in favor of or against U.S. tariff policy. There is a case to be made for both positive and negative outcomes due to this policy. Our view is that if both parties want to come to terms with the other, the path to compromise is not a long one.
Final Thoughts
While short-term uncertainties persist, we believe the market remains positioned for long-term gains. We encourage investors to stay patient and maintain a disciplined approach. As always, we are closely monitoring economic and market developments and remain committed to safeguarding and growing your investments.
We appreciate your trust and confidence in our approach. Please feel free to reach out with any questions or concerns.
Sincerely,
Kessler Investment Group, LLC
All information in this presentation is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. All economic performance data is historical and not indicative of future results. The market indices discussed are unmanaged. Investors cannot invest in unmanaged indices. Certain statements contained within are forward looking statements including, but not limited to, statements that are predictions of or indicate future events, trends, plans or objectives. Undue reliance should not be placed on such statements because, by their nature, they are subject to known and unknown risks and uncertainties. Please consult your adviser for further information.
Opinions shared in this presentation are not intended to provide specific advice and should not be construed as recommendations for any individual. Please remember that investment decisions should be based on an individual’s goals, time horizon, and tolerance for risk.