Zeitgeist: the spirit or essence of a particular time period.
The chart below shows the levels of the Betashares Nasdaq ETF (ASX: NDQ) (blue), S&P ASX Emerging Companies Index (green) and S&P ASX All Ordinaries Index (red), over the last 10 years. These are the broad indices that I generally consider most relevant to my own investing. I invest in mostly tech stocks, Australian stocks, and small-cap stocks, so I consider these three indices because Betashares Nasdaq ETF (ASX: NDQ) reflects tech stock returns in Australian dollars, the XAO is the broadest Australian market index, and the XEC is the lowest market capitalisation Australian index, albeit still a poor proxy for the microcaps I sometimes own.
As you can see above, the Nasdaq has come down a bit from its peak, and the emerging companies index is also looking weak. The broader Australian market has been holding up ok, but is still down. A more zoomed in view of the last year is consistent with the theory that Trump’s protectionist economic policies have put a stop to the previously positive price momentum the abovementioned indices displayed over the past year (or more).
There are many reasons behind the apparent slowing of stock market momentum, and generally speaking, I’m not one to spend too long trying to predict the fluctuations of markets. That said, from time to time, something happens that makes me think that the profits of companies will be negatively impacted on a broad scale. The arrival of covid-19 on the scene was one such event, causing me to drastically increase cash holdings. Trump’s economic policies are not as devastating as covid was, but they are still enough to incentivise me to build up my cash reserves, fast.
Specifically, what I am most worried about is the decision by the US government to impose tariffs on Canada, Mexico, and China. In turn, Canada and China (at least) intend to impose tariffs on US produce.
On top of that, Trump is ending military aid to Ukraine. While tribal misinformation spreaders characterise all this aid as cash sent to Ukraine, most of the money that the USA has spent to support Ukraine ends up with the US-owned defence manufacturing industry. The way it works is that the US sends old equipment to Ukraine, and then spends billions on replacing that stock with new equipment, manufactured at home. As a result, withdrawing aid to Ukraine will immediately mean less demand for US equipment, and less revenue for US companies.
On top of that, Ukraine has previously refrained from all-out destruction of Russia’s energy system, in response to US fears that doing so will drive up the price of oil, stoking inflation. Obviously, with America abandoning the country it once pledged to protect in exchange for giving up its nukes, Ukraine has zero incentive to hold back on the destruction of Russia’s fuel export industry. Indeed, it has just launched a major strike on Russian energy infrastructure.
I’m guessing Ukraine can take fuel capacity offline quicker than the US can ramp it up, though as always, the gulf state oil producers will have more influence on the oil price than either the US or Russia, so this is not an oil price prediction.
What I am predicting is that tariff wars will slow growth and stoke inflation in many different countries.
Now, I hasten to add that the tariffs may prove fleeting, and — no surprises — there are already credible suggestions Trump will soften his stance in the very near future.
History shows that tariffs slow down economies on both sides of the tariff wall. Logic also dictates that tariffs are inflationary: Importers will have to put their prices up, and exporters will suffer from increased competition when other countries inevitably enact their own tariffs on US goods. Overall, prices will go up for items ranging from avocados (from Mexico) to engine parts (from Canada) to iPhones (from China). This combination of low growth and inflation is often called ‘stagflation’ and I think this will become the dominant narrative until Trump changes tack on protectionism.
And it also has to be said that while you can turn tariffs on and off with the stroke of a pen, restoring trust (and a willingness for businesses to invest in the face of flippant but damaging protectionist policies) is not so easy.
On top of that, Trump has recently announced a ‘crypto reserve’ which sent a range of B-grade cryptocurrencies like Solana flying. This move, if executed, will enrich grifters, criminals, and speculators worldwide and divert federal funds from expenditure that would otherwise improve productivity (for example by improving access to healthcare) or stimulate demand (for example, by ramping up artillery shell production).
If Trump manages to trigger a market crash at the beginning of his reign, around now, this would set the scene for a bull market run towards the end of his term. Trump has repeatedly raised the prospect of running for a third term. While that would not be constitutional, Trump’s past actions on January 6, 2021, mean that I believe he would be happy to flout the constitution, if he can get away with it. My view is that Trump will be best positioned to maintain power beyond his current term if he is enriching the existing rich and powerful US oligarchs, who usually own large chunks of listed companies.
Therefore, I believe it is in Trump’s interest to push forward with damaging policies now, in order to entrench the tribal left-right divide that drives his working class power base, and set the scene for a bull market that could run from 2026 through to 2029.
The core differentiated view I am taking is that Trump is not unpredictable. Rather, Trump’s actions are somewhat predictable if you understand his goal to be to transition the US from a capitalist democracy to an authoritarian klepto-oligarchy. Ultimately, what I am saying is Trump looks unpredictable if you believe his lies, but his actions are not unpredictable if you accept his true goals.
My hypothesis is that the market is not pricing in Trump’s likely actions because most participants refuse to accept that the US president has goals that are fundamentally bad for the US democratic institutions that have sustained pax Americana for almost 80 years.
Of course, this is merely a theory of mine, and I’m not going to act like I’m sure it is accurate, because I am not sure. The only thing I am sure about is that it has been more than a generation since we lived in a world where America was run by protectionist isolationist leaders, and as a result, there are no living humans who remember the consequences of that geopolitical setting first hand.
We are well and truly through the looking glass when a man (Neville Chamberlain) who many of our grandfathers reviled as one of history’s most dishonourable cowards is now lauded as a hero. Meanwhile, tribal “conservatives” in America celebrate gifting taxpayer money to cryptocurrency owners while firing thousands of federal employees (who, even if they were not very productive, would at least spend their salaries on goods and services, and certainly collectively produce more societal value than Solana does.)
According to my theory, which could be completely wrong, we can expect Trump to act in a way that hurts the stock market for some time, and then change his tune once markets have come down to a lower level, initiating a new bull market.
Then, as soon as Trump changes his tune, I would start increasing my exposure to stocks again.
This is because I think the removal of the very same tariffs that are currently killing sentiment will drive markets higher. And the rally could be fueled by further tax cuts for companies, which directly increase profits and certainly have the potential to push up stock prices further still. In turn, this would keep the rich and powerful happy as we enter the final year of Trump’s current term, which should facilitate Trump’s plans, whatever they may be.
What Am I Doing About It?
Recently, I cashed out of two recommendations, Dropsuite and Maas Group after waiting the requisite period after my Sell Recommendations, of course. This has bolstered my cash reserves although to be quite frank I’m spending some of that cash on a home extension so I’m not quite as ‘cashed up’ as you might presume.
On top of that, I sold a bunch of lower conviction stocks last week and I will most likely continue to sell non-core low conviction stocks over the rest of this week. Even after recent sales, almost 20% of my ASX portfolio is invested outside of the official recommendations. All of those positions are potentially on the chopping block even where I think the stocks remain attractively priced. For me, official buy recommendations are not to be sold for purely macroeconomic reasons, because those companies are specifically chosen for the fact that I believe they can weather storms like the one I have described above. They should emerge even stronger on the other side of a pullback.
Finally, I also built up a tiny portfolio of short positions via contracts for difference. I may well get cold feet and close these positions at any moment, because shorting is basically a bad idea, and unless you are more capable and experienced than I am, you should not consider it. In the long term, stocks go up, so short selling is swimming against the tide. I have my own need to grow and learn as an investor, and I’m disclosing this to you so you understand that I am not just predicting rain but also buying an umbrella. That said, my short positions in total have a value of less than 2% of my long portfolio. I won’t mention any of the stocks I am short, and I have taken a basket approach, without having any deep conviction about any of the ideas. My goal is to test if this strategy works well to smooth my returns during a period of volatility, but I won’t put enough capital on the line to make that much of a difference, and I won’t be talking about it much.
I want to note emphatically that I do not believe that I can time markets. It is quite possible I could (for example) avoid some drawdown with my more conservative positioning, but then fail to reallocate my cash reserves into stocks before the stocks rebound. Another possibility is that Trump could decide at any moment to say or do something that sends stocks soaring again. I am explaining my thoughts to my Supporters because my attitude towards markets has changed drastically in the last few weeks.
One way or another, the vast majority of my capital will remain invested in long term buy and hold multiyear compounding growth companies with honest and competent management. This has been my strategy for more than a decade and I will not be changing it now.
That said, I have to listen to my instincts, and my instincts are telling me I am better off selling most non-core positions now, rather than holding on. The reason for that is I have much lower conviction in my non-core positions than in my official recommendations, and therefore, I will be quite likely to capitulate on those positions anyway, probably at a worse time. Having more dry powder will be beneficial for my psychology because it will be easier to take an aggressive opportunistic approach to any sell-off.
How Does The New Bearish Zeitgeist Impact The Long-Term Buy-and-Hold Recommendations?
Generally speaking, my official recommendations are intended to be held throughout tumultuousness like this.
As a cohort they are skewed towards recurring revenue derived from fairly essential activities. Many are somewhat well positioned in an inflationary environment, because they have pricing power and low capital requirements.
My plan is to ride out the storm with those long-term official recommendations. However, I do note that a few of the recommendations have earnings leveraged to stock markets, and therefore, a broader bear market could certainly reduce the near-term earnings. In particular, a bear market would negatively impact the earnings of the funds management and funds management adjacent companies. While it is therefore possible that a bear market could impact my thinking around some of my holdings, my decisions will remain company specific, and of course my Supporters will be the first to know if I change my view in any way.
At the same time, it is quite possible that some of the more expensive profitable ASX growth stocks that I have had my eye on could come down to a tantalising price, and they could become new recommendations in the future.
Finally, since my official recommendations are already my highest conviction ideas, I may use any broad market weakness to increase my holdings in some of them. For example, I remain relatively underweight some of my recommendations, such as AUB Group (ASX: AUB).
What, me worry?
While the world does seem a little crueller today than a year ago, and Hunter S Thompson’s bombastic claim that, “There is no such thing as paranoia,” keeps floating into my head, I do believe that this too will pass. It is simply not in anyone’s interest to endlessly stifle growth by hampering free trade, in the long term.
In the meantime, I consider cash holdings (in a high interest savings account or term deposit) to be a great hedge for times like now when I’m feeling paranoid. I do not need to do things like shorting to make my positioning more conservative. Increasing my cash by selling low conviction positions will do the job, and that is what I am doing. Cash retains [most of] its value in the short term (as long as I put it in a high interest savings account) and allows me to take opportunities quickly, if and when they emerge.
I think it would be completely reasonable for you to view my decision to build up my cash reserves in response to something as ephemeral as a macroeconomic zeitgeist as misguided or illogical. And that may be so; each of us needs to invest in accordance with our own psychology. If you find more success in tuning out macroeconomics at all times, then that is probably because your psychology is more suited to that approach than mine is.
Alternatively, your positioning may already be more conservative than mine (and for most readers, it probably is!)
That said, I do think the prospect of months of trade wars is quite concerning, and I don’t particularly want to hold non-core stocks through that, since I would possibly lose my nerve and sell at the bottom, due to lack of conviction. Therefore, I will likely sell more of the non-core stocks I hold in the near future. For each non-core holding, I am asking myself: do I like this stock enough to hold it through a downturn, where things get tough, and the share price drops; or would my conviction be too flimsy?
I would definitely not recommend interrupting a long-term buy-and-hold thesis because of macroeconomic concerns, I do think that the rapidly changing zeitgeist should prompt us to take a close look at our portfolios today, if only to ensure that we retain confidence in the theses and comfort with the position sizes.
Disclosure: The author of this article owns shares in AUB and will not trade AUB shares for at least 2 days following the publication of this article. This article is not intended to form the basis of an investment decision and is not a recommendation. Any statements that are advice under the law are general advice only. The author has not considered your investment objectives or personal situation. Any advice is authorised by Claude Walker (AR 1297632), Authorised Representative of Ethical Investment Advisers Pty Ltd (ABN 26108175819) (AFSL 343937).
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