In my days working at Fidelity, I recall legendary investor Peter Lynch saying that we have to be careful not to get scared out of our investments. Earlier still, at a talk at Columbia University in New York, where I went to school once upon a time, I heard Warren Buffett say two things that have stuck with me like a bad stain from lunch. Buffett’s first memorable point was that “good investing is like driving a car on the wrong side of the road and hearing lots of people yelling at you to get back in line.” Buffett’s great, second point was that to be a good investor a person doesn’t need a high IQ or multiple degrees; he or she doesn’t need to be a genius, either. What’s needed is the right temperament.
So beginning with those three, great points from two master investors – about being a contrarian, about holding to one’s convictions, and not letting emotions overwhelm you – lets look at where the market is today, my long-term investors, and what we long-term should and should not do.
In sum, we should stick to our knitting, keep on keeping on.
2018 continues to be a very different year from last year. We’re not down for the year, but – holy cow! – it seems to be marked by one disappointment after another. The investment landscape seems terrible, nerve-wracking. Our President, who is also our investor-in-chief, feels that a tariff war is like a walk in the park. That stance, along with a Federal Reserve that has raised interest rates twice this year so far and appears intent on raising them two more times this year – and four times next year – have a lot of investors fretting. Is a recession coming soon? Is a trade war around the corner?
Calm is less interesting to reporters than tense, but tense is what we have too much of today yet what we have to invest through.
Let me share a few perspectives that may put today’s troubles in some prospective. First, tariffs.
Tariffs are not good. They are, essentially, a tax on consumers. Government gets some revenue but gums up the efficiency of commerce in the process and interferes with competitive improvements. I really don’t think Trump wants a tariff war, but he wants to make a point that the press, which is so relentlessly negative on him, will not help the public hear. Facts tells us that other countries put higher tariffs on our goods than we put on theirs. Recent World Trade Organization figures tell us that AVERAGE USA tariffs on other nations are 3.5%, compared to 4.1% for Canada, 5.2% for Europe (the EU), 7% for Mexico, and 9.9% for China. Sound like small differences, I know, but with very big numbers at stake, large amounts of money is extracted from Americans.
These percentages are, again, averages. Individual products flowing between trading partners can be higher or lower than the WTO averages. For instance, cars going to the EU from America are hit with a 10% tariff, but cars from the EU into the USA are hit with only a 2.5% tariff. Is that fair?
On the other hand, pick up trucks going between the EU and the USA are tariffed in the opposite way; that is, the EU hits US imported pick ups with a much lower tariff than America hits EU pick ups coming into the USA.
We don’t hear these nuances on our news. We hear only that Trump is trying to force tariffs on nations. Again, Trump is demonized. But the President’s larger point – for all his bluster and exaggeration and too much tweeting – is, “Hey! guys, why don’t we – all of us – do away with tariffs altogether.”
My guess is that, in time, Trump and the US, because we are so large a trading partner, will force others to accord the US better tariff treatment. That’s my guess. I don’t believe a tariff war is coming: it would hurt our trading partners so much more than it would us. I commend Trump for his courage and fortitude to try to make trading fairer for our workers, for the USA, and for others. The fact that other US Presidents ignored this injustice makes it no more right than that those same Presidents ignored US laws governing illegal immigration.
As for the Fed, here, too, context is lost. We see only higher rates and that spells recession is around the block.
I beg to differ. Interest rates are still low, by historical standards, but moving up slowly, reflecting a strong and improving economy after ten years of being on bed rest or trapped by a President who was not particularly interested in economic growth. And economic growth is a key element here. As long as the Fed’s rate increases do not get ahead of economic growth, we’re probably fine with respect to avoiding a recession. What that means is that the Fed’s short term rate (“the Fed funds rate”) is right now between 1.75% and 2%, and is still below the ten-year treasury note (about 2.9%) and the growth rate of the economy. That last number is a key, and the Atlanta Federal Reserve Bank estimates that the economy, in this second quarter of 2018, is growing at 4.7% a year. We’ll know better in a month or so, but that Atlanta Fed number is a stunner. In the Obama years, the economy was growing, on average, at about 2% a year, and we were told that our aging economy couldn’t grow faster, that we should get used to “a new normal” and more government intervention.
My guess, folks, amid the heat and humidity of summer in the Midwest USA, is that we’ll get through the tariff stuff, after some threats and drama, with something better than we currently have in America, and that interest rates’ upward movements are not about to kill us or throw us into a recession. Not that we will never have a recession again, please know, but that we’re not about to have one yet.
So, as Lynch and Buffet told me I tell you: be a contrarian. Stick to your convictions, and don’t let you emotions hijack your retirement.
God bless you all.