If your heading is unchanged, your plan should be, too.
It is understandable to see sharp drops in equity markets and feel an acute urgency to ‘do something.’ Acting on this impulse might feel productive, but it can also make you worse off later; in fact, there’s a statistical likelihood this will be the case.
Trump: Take 2
The administration is executing sweeping changes, many by withholding federal funding through executive order instead of passing laws. Trump has stated his goals of cutting government spending and increasing America’s global influence while reducing international dependency.
However, execution is key and he is poorly wielding improper tools. Trump favors blanket tariffs to increase consumption of US goods and decrease reliance on imports. But because tariffs increase prices on domestic consumers, they decreases consumption, causing demand and profits to fall. The ad hoc way tariffs have been implemented (or not) is causing businesses to postpone capital investment and has set off retaliatory responses, which harms US manufacturers as demand for US goods decline. If Trump manages to persuade US businesses such as US automakers to not raise their own prices, as he’s attempted, this will harm those industries further.
Another problem is that the current administration views government as separate from and detrimental to the private sector. This simplistic view belies the complexity and interdependence between the two. For-profit companies rely on the government, but not just for grants and subsidies. Businesses also depend on the US government to introduce new products. Shrinking the patent office means pharma and biotech firms will be delayed bringing products to market, which will hurt earnings. The US government builds and maintains infrastructure that commerce depends on, like transportation channels and communication. Eliminating departments overseeing these areas adds cost and risk to companies’ distribution. Lastly, the government is an important consumer of public companies, buying millions of dollars of IT services, defense, and energy, to name a few.
Because business and government are so inter-dependent, these broad changes will effect businesses and the economy in pernicious ways we have not yet recognized. Yes, running an efficient government is important, but doing it in a careful, analytical and data-driven way is crucial, and missing.
Trump is transactional. He wants quick wins, or at least the perception of quick wins. He has little appetite for methodical consideration. He encourages action and the attention resulting from these actions. Will that matter to voters? It should and it will. But it will take awhile, as natural consequences play out. So we have to be patient, and not overly reliant on these outcomes. Hence our need for buffers, proper allocation, and diversification.
We invest in Companies, not Countries.
We are not investing in the skill of our government. We aren’t even investing in a economic outlook. We are investing in companies. Companies are more nimble and unencumbered than governments. They adapt in countless ways to legal and economic changes. There are too many factors to derive any meaningful conclusion of how a policy decision will affect a company’s earnings.
Case in point – Japan suffers from an aging population, high government debt and its own inflation challenges — their energy prices are up 10.1% year-over-year and food prices 17.3%. Yet, Toyota, is one of the most profitable companies in the world, with 2024 revenue of $305.8 billion. French citizens pay some of the highest entitlement and income taxes in Europe, but multi-billion dollar firms such as AXA, LVMH, and Hermes are domiciled in France. Nestle and Roche are Swiss, Airbus is Dutch and SAP is German. Diversification allows us to benefit from earnings wherever they are generated. Over the last 20 years, on average roughly half of the top 50 performing companies are not American.®
