Stock Market Alert: The Trouble With Tariffs

We have enjoyed 4 straight months of bullish gains since facing the scary April lows bordering on bear market territory.

The cause of that stiff correction was concerns about tariffs. The solution was the growing belief that all will end well with tariffs leading to a mighty bounce and new highs.

What happens next has everything to do with (you guessed it)...tariffs.

So that will be at the center of our monthly commentary today 

Market Commentary

As shared in the intro, the only serious investment topic worth discussing is tariffs.

Most market commentators say that the worst possible outcome is that tariffs are inflationary which could increase the risk of recession. That’s because most inflationary periods exhaust the wallets of consumers and businesses leading to a contraction in spending (aka recession).

The academics at the Fed fully understand this notion. Which is why they are rightly sitting on their hands awaiting the outcome. Not a matter of politics.

Now imagine that the Fed did succumb to the political pressure from the White House to lower rates now. This would increase inflationary pressures. Add stiff tariffs on top and you are nearly guaranteed a recession with severe job loss.

The most interesting counterbalance to this concern is the recently floated idea of a “tariff dividend”.

Meaning it is true that the Treasury is seeing an impressive increase in tariff payments from foreign companies. Some or all of that money could be given back to American citizens in the form of a tariff dividend check to help mitigate the impact of higher prices.

This would most certainly be a temporary benefit from the economic catalysts. On the other hand, it might spike economic activity which by itself would be inflationary.

Other economists will say that the worst possible outcome is continued lack of clarity on final tariff plans. That is because uncertainty typically leads to a delay in purchasing by consumers or new investment by business (the two main elements that fuel the economy).

Some of that negative effect is seen in the negatively revised employment #s. I don’t believe that was political either. The BLS is famous for outsized corrections to past data (meaning they have always been terrible at tracking employment). 

In this case, the many businesses that were uncertain about the path of tariffs and impact on their business rightly hired less people. This is a shock to no one in economic circles as it is a natural outcome from uncertainty.

In short...it’s all quite complicated.

Gladly most signs point to Trump following the 2018/19 trade war playbook by agreeing to more reasonable terms. And that certainly seems to be the case with the handful of deals already in place.

That path leads to less concerns about inflation...likely Fed rate cuts + tax breaks (and maybe tariff dividend) = healthy economy and the bull market marching forward.

How High Can Stocks Go?

All the above points to the likely continuation of the bull market. Now comes the bad news...valuations are getting a bit lofty.

This PE chart by market cap is worth a thousand words on the current elevated state of stock valuations.

It says that Mega Caps are in nose bleed valuation territory.

Large Caps are at the highest level since the tech 1999 tech bubble.

Whereas small and mid caps are the only game in town for those seeking value.

This lowers the odds of success for Mag 7 and SPY investments.

This increases the odds of success for stock pickers swimming in the small and mid cap space. Especially if they have a proven advantage in picking healthy growing companies trading at a discount (precisely the kind of companies the Zen Ratings helps us unearth).

The only counter argument to the above is that AI will change everything and valuations don’t matter.

Yes, that argument worked well for internet stock investors from 1997 to 1999. But in the end valuations matter leading to a bursting of that bubble in 2000 through 2003 with much pain and suffering for those holding on to their tech shares.

I do not believe the bubble is as inflated for AI stocks as it was for internet companies. But its hard to make a case for their valuations to go much higher.

So again, I believe outperformance will be found more in small and mid cap stocks. Especially those that pass the 115 factor test of the Zen Ratings with flying colors.

What To Do Next?

Discover the Zen Investor service that relies upon my 45 years of investing experience. 

During that time I have learned vital lessons from 7 bear markets…8 bull markets and just about everything else the “Mr. Market” can throw at us. 

I use this knowledge to create a detailed investment plan. Then lean into our proven Zen Ratings quant model to select the best stocks given their average annual return of +32.52%. 

In total the Zen Investor portfolio now has 20 top stocks that are hand picked for today’s unique market landscape.  

That includes 2 new stocks added in early August with stellar upside potential. 

If you are curious to learn more, and want to see my current top 20 stocks, then please click the link below to get started now. 

Discover the Zen Investor portfolio & Top 20 Stocks Now > 

Wishing you a world of investment success!

Steve Reitmeister…but everyone calls me Reity (pronounced “Righty”)

Editor of the Zen Investor

What to Do Next?

• 9 Special Stock Lists You Need Now >
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