January 30: Earnings growth is continuing to keep P/E ratios in check. Luckily high (P) valuations haven’t eliminated all areas of relative value. Looking at stocks and funds outside of our borders is one place were value remains. Small-cap stocks is another. CEFs offering value and income are in the Agency MBS space and include BKT and PGZ, for example.
The FED is on hold with interest rate cuts because of policy uncertainty. The biggest area of policy uncertainty involves the potential for Trump tariffs to cause increased inflation and, because of tariff retaliation, to also cause a reduction in economic activity and earnings growth. An internally caused supply-side shock would revisit us with something like the covid-19 pandemic if it is short-lived or possibly the much more prolonged oil-supply shocks such as the mid 70s or early 80s. A longer-run economic downturn could also result from the attempt to achieve short-run economic gains through destructive long-run environmental policies. In the short-run, environmental destruction can reduce business costs but in the long-run it increases them.
The policy uncertainty is somewhat offset by our high dollar value in international financial markets that makes imports cheaper. It is also true that we are a large nation that can adversely effect international prices through tariffs. Still, no one knows exactly how tariffs might be implemented, or even if they will. Moreover, any short-run gains achieved through environmental destruction might increase growth and profits enough to offset the negative effects of tariffs. In sum, there is no clear outlook for the economy.
Given this type of investment outlook, some recommendations for growth include stocks such as: EAT, BMRN, UAL, RIGL, AVO, SEZL, GME, HCP, TRUP, and JKS. For dividends and growth: BBHR, EQNR, MNR, SON, and TXO. Over the previous 3 months, the top ETFs were: SKYY, FDN, PNQI, SLC, and VFH. We are steaming ahead in the fog so it may be better to keep some powder dry and invest cautiously. Predictions are all over the place.
