Managing Editor’s Note: Jeff is away from his desk doing some boots-on-the-ground research for the next few days…
So, today and tomorrow, we’re turning to Nick Rokke, senior analyst at The Near Future Report. That’s our advisory focused on the market-shaping trends shaping the future of high technology.
Today, Nick dives into what’s going on with stocks right now and addresses the reality of the tariffs that have been all over the headlines lately…
Hi, it’s Nick Rokke here – Jeff’s senior analyst on The Near Future Report. I’ll be taking over The Bleeding Edge today and tomorrow as Jeff continues to travel to bring us the best boots-on-the-ground research.
As of ten days ago, the S&P 500 entered into a correction – meaning it fell 10% from its peak. That was a quick decline in just a month.
And worse, the Magnificent Seven stocks – Meta, Apple, Amazon, Netflix, Google, Nvidia, Microsoft, and Tesla – are down 20% from their December highs.
And this has many investors scared, wondering if there is more to this decline.
Today we’ll explore what’s causing the markets to go lower… It’s certainly not lower earnings. As we’ve seen over this past earnings season, 81% of S&P 500 companies met or exceeded their earnings targets this past quarter.
But strong earnings aren’t especially comforting when stock prices are dropping. So, we’ll explore the reasons for the fall and tomorrow we will talk about some of the best values I see in the market.
The reason for the fall? Global economic uncertainty is hitting all-time highs.
Source: www.policyuncertainty.com
As we can see, uncertainty has surged to record levels. And institutional capital doesn’t like uncertainty. A number of global elections, shifting trade policies, deficit cutbacks, and lack of action from the Federal Reserve despite dramatically lower growth in inflation have resulted in the short-term volatility that we’ve been seeing in the markets.
It hasn’t just been equities either. Last week’s bond market volatility contributed to the chaos. Institutional investors have been looking to de-risk their portfolios. Which stocks do they reduce their positions in?
The same high-growth, high-quality names that led the market higher over the past couple of years. These names likely became outsized positions in their portfolio so they were the first to go in an effort to rebalance their portfolios.
This is exactly what we’ve seen through this decline.
We are witnessing a seismic shift in global politics. Governments are shifting to a more conservative stance leaning towards free markets and individual liberty in multiple countries.
The most prominent example so far is Javier Milei’s victory in Argentina last November. Since taking office, Milei has implemented bold free-market reforms – slashing government spending, removing currency controls, and eliminating useless regulations. Argentina’s economy, once teetering on the edge of collapse, is now showing early signs of recovery. The results have been remarkable.
But this shift isn’t limited to Argentina. Just in the past three years, Italy, Hungary, Sweden, Finland, Slovakia, the Netherlands, Austria, and El Salvador have all moved toward conservative leadership. And just last month, Germany saw its own rightward shift, with the Christian Democrats (CDU) winning the most Bundestag seats in decades.
And then, of course, there’s the United States.
President Trump has been back in office for just over two months. He has moved aggressively to implement his economic and political agenda. This speed isn’t typical of the bloated U.S. government. But politically, it makes sense.
If economic turbulence emerges, the administration can blame any early hiccups on the previous government while claiming they’re here to “clean up the mess.”
With conservative leaders prioritizing fiscal restraint, deregulation, and trade policy shifts, markets are in a wait-and-see mode. Investors worry about how new tariffs and spending cuts will impact corporate earnings, creating a risk-off environment.
From an investment perspective, the most important policy shift so far has been the renewed push for tariffs.
Markets fear tariffs will be inflationary, leading to higher-for-longer interest rates and more expensive borrowing. But are tariffs really inflationary?
As with most economic questions, the answer depends on the details.
The biggest factor in whether a tariff will be inflationary is whether the product has what economists call inelastic demand.
Inelastic demand occurs when consumers don’t change their behavior when prices rise. For instance, if the U.S. were to put a tariff on foreign oil that made gasoline prices rise by $1 a gallon, how many of us would drive less?
Not many – we’d have to adjust. We need to get to where we need to go, and gas is a small part of most of our personal spending.
It is a necessity. And the tariff will be passed along to consumers in the form of higher prices. But few products have a necessity equal to gasoline – and I haven’t heard of any tariffs on energy imports yet.
For products with elastic demand – meaning demand fluctuates greatly with prices – these will not be inflationary. These products tend to be “wants” or products that are easily substitutable.
Let’s look at an example from Trump’s first term…
In 2018, the Trump administration imposed a 20% – 50% tariff on imported washing machines. Washing machines have fairly elastic demand because we can delay upgrading if ours is currently working. And most people don’t have a brand preference for their washer. They all clean clothes. Personally, I have more brand loyalty to my detergent than my washer.
In the chart below we can see the inflation-adjusted change in the prices of laundry equipment.
If we look closely at this chart, we can see at first prices surged – exactly what many economists predicted. But within two years, prices fell to new lows – even with tariffs still in place. And prices would have continued to fall had the COVID-19 pandemic not wreaked havoc on supply chains and increased deficit spending which absolutely is inflationary.
And this tariff led Korean manufacturers Samsung and LG Electronics to open new factories in the U.S., creating over 2,200 American jobs.
This shows that tariffs aren’t inherently inflationary. They can even stimulate domestic production, offsetting initial price increases.
And of course, it’s not just washing machines. We’ve seen similar results in the U.S. solar industry. The U.S. put a 30% tariff on solar panels in 2018… And the price of solar installations has declined every year. And U.S. production has surged, creating thousands of jobs.
For more details on solar, Near Future Report subscribers can see our solar recommendation here.
And it was the same for the steel industry. Prices of hot-rolled coil ended up falling from $600 pre-tariff in 2018 to $550 a ton by 2020. And prices fell because U.S. companies, Nucor and Steel Dynamics, could expand their domestic production.
So despite the fear, tariffs are not always bad – and they’re not always inflationary. We feel that the market selloffs due to tariff implementations are way overdone.
At Brownstone Research, we’ve always leaned toward free-market principles. Why? It creates the best conditions for economic growth and investment opportunities for us and our subscribers. In a perfect world, governments wouldn’t interfere in industry. Countries with a competitive advantage would produce what they excel at, trading freely with others.
But that’s not the world we live in.
Foreign governments protect their industries through subsidies, tariffs, value-added taxes (VAT), and regulatory barriers. If the U.S. refuses to counteract these measures, it risks ceding key industries – vehicles, semiconductors, energy – to foreign competitors. And that’s exactly what we’ve seen over the past few decades.
This is the classic “prisoner’s dilemma” in game theory. If one country gains an advantage by taxing imports or artificially supporting its industries, the only rational response is for the other country to do the same – even if, in a vacuum, free trade would be better for everyone.
And that’s why tariffs can be a powerful economic tool. If used correctly, they protect American industries, spur domestic investment, and create jobs. Over time, that’s bullish for the U.S. economy and the stock markets.
The more likely outcome in the coming weeks however is a rebalancing of very unbalanced trade agreements between the U.S. and its most important trading partners. The implementation of tariffs is simply a negotiating tool used to establish more balanced trade. And it will be successful.
But tariffs aren’t the only factor influencing markets right now. Another major development is Elon Musk’s leadership with the Department of Governmental Efficiency (DOGE). Musk has said he’s “cautiously optimistic” that DOGE can slash the annual federal deficit from $2 trillion to $1 trillion by 2026.
This is an ambitious goal.
We’ve talked about how out-of-control government spending has masked underlying economic weakness. In 2024, U.S. GDP grew by $1.4 trillion – but the government borrowed $2 trillion. Without that borrowing, the economy would have contracted. In fact, GDP would have shrunk by about $600 billion, or 2%. That’s a contraction worse than the Great Recession.
So, while most of us agree that reducing the deficit is necessary for long-term economic stability, we also need to acknowledge that cutting government spending by $1 trillion is effectively removing $1 trillion from the economy.
It’s important to understand both the positive and negative ramifications of all policies. And these cuts will have ripple effects.
The immediate fallout will hit the Washington, D.C., area the hardest. Government jobs, government contractors, and the real estate market in the capital will bear the brunt of spending cuts.
We’re already seeing the impact.
The average home price in Washington, D.C., has fallen 9.8% from its 2022 peak, as some homeowners try to sell ahead of expected job losses. This is just the beginning of what will be a broader economic slowdown tied to deficit reduction.
The broader economy may be able to absorb this slowdown, specifically, if GDP continues growing over $1 trillion per year. Then it more than makes up for the lost spending.
And if the Trump administration and DOGE can simultaneously cut wasteful spending while fostering economic efficiencies – such as deregulation, energy expansion, and fast-tracking key industries – then we could see economic growth further offset the contractionary effects of deficit reduction.
That’s the challenge: cutting unnecessary government spending without tipping the economy into recession.
Markets are forward-looking. Investors don’t wait for official economic data – they price in expectations ahead of time. And right now, markets are struggling to gauge how these policies will shake out. But our thoughts are:
We’re in unchartered waters. We can expect the markets to continue to be volatile… But to continue trending higher. The next couple of years have the potential to be extremely productive and lead to well above-average economic growth.
Now it’s my belief that last week’s market bounce marks the beginning of the bottoming process for this correction. But we should still expect volatility to persist over the next couple of weeks – especially leading into the April 2 tariff implementations.
This, however, is exactly the type of environment where smart investors go bargain-hunting.
Even though the S&P 500 is only down 10%, many individual stocks have fallen 20%, 30%, and even 50% from recent highs.
Tech stocks, in particular, have been hit hard.
And that means some of my favorite growth stocks – companies with strong fundamentals and long-term tailwinds – are now trading at valuations typically reserved for value stocks.
Tomorrow, we’ll highlight a few of those opportunities – stocks that could deliver outsized returns as the market stabilizes and moves higher.
Regards,
Nick Rokke
Senior Analyst, The Bleeding Edge
P.S. If you’re interested in finding out more about the research Jeff and Nick are doing over at The Near Future Report, you can go here to learn more about a recent opportunity Jeff has uncovered.
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