AIA Newsletter March 2025
Commentary
My expectation for the Trump Presidency was that it would be tumultuous and that markets would experience considerable volatility. As the administration begins to implement its policies, this has been the case.
The administration continues its Doge budget-cutting activities, Ukraine peace deal, and implementation of tariffs. It is quite the whirlwind of activity, and even the professional political class and journalists struggle to keep up.
The markets have been weak recently because markets don’t like uncertainty. The administration has a free-wheeling way of doing things and can say something on Monday and reverse itself by Wednesday. This creates uncertainty.
Nevertheless, I try and stick to my knitting.
I focus on identifying what is overvalued and what is undervalued.
As seen in the chart above, the US and tech stocks, in particular, are way overvalued relative to many other countries worldwide (as measured by the CAPE ratio). This is not new information, as I harp on it in every weekly video.
I am focused on areas of the world that are relatively cheap (Latin America) and have a potential catalyst (elections) that can cause a revaluation of these markets higher.
I am bullish on emerging markets, mostly because they are cheap and have been out of favor for years. But what is a catalyst for them to move higher? A weaker US Dollar.
I think it is essential to understand one of the Trump administration's top priorities, which is to get rates down and also lower the value of the dollar.
Why does the administration want a weaker dollar? To support export industries that they plan to help reshore to the US. In their view, if they can get the dollar weaker, that makes US products more competitive worldwide.
As you can see from the chart below, we are at a level on the dollar where, in the past, it has topped out and then weakened substantially.
How do they weaken the dollar?
Lower interest rates.
What are some ways to lower rates?
Cut the deficit, which reduces Treasury issuance.
The prolific spending that was going on during the Biden administration is over. Ending much of this fiscal stimulus means that GDP could contract.
However, I am not sure that Trump and his people would mind a recession or weaker economy, along with a weak stock market, early in his tenure as this would lead to the potential for more FED rate cuts, which also have the effect of lowering the dollar. Lower rates and lower energy prices could get the economy firing on all cylinders and cause the economy to boom. Take the pain early for more gain later.
When Trump came into office this time, he was not hyping the stock market like in his first administration. This leads me to believe they think we may have a mild recession and a bear market.
Atlanta Fed predicts negative 1.5 percent GDP growth in first quarter
The Atlanta Federal Reserve is projecting a contraction of the nation’s gross domestic product (GDP) of 1.5 percent in the first quarter, flashing a warning sign for the U.S. economy.
The projection is a significant shift for the Atlanta Fed over the last few weeks that comes a little more than a month after President Trump took office.
Investors Now Expect More Interest Rate Cuts This Year—As Fears Rise Of A Tariff-Driven Economic Slowdown
Treasury Secretary Scott Bessent said Tuesday the White House is determined to bring down interest rates, and investors are listening, as the market’s expectations of rate cuts swell, but the root of what’s driving the recently renewed rate cut hopes is not so rosy as the prospect of a shrinking economy as President Donald Trump’s tariffs take hold.
Investors now price in three 0.25-percentage-points cuts by year’s end as the most likely scenario, which would send the target federal funds rate down from 4.25% to 4.5% to 3.5% to 3.75%, according to CME Group’s FedWatch Tool, which tracks derivatives contracts betting on Federal Reserve policy.
This administration is different than the first Trump administration. He has surrounded himself with wise advisors, which he is listening to, and they have a plan. It may or may not work; that is to be determined, but if rates and the dollar come down, then we could see commodities and emerging markets benefit.
Stay tuned.