Why I am Doubling Down on Economic Optimism - Even as Markets Slide
I recently published an article highlighting why I believe that today’s chicken little legacy media has it all wrong when it comes to the economy, and why investors need to be leery of relying on agenda-driven journalism and antiquated economic barometers when making financial decisions.
In the piece, I emphatically stated that the proverbial economic sky is not falling - despite the recent market turmoil or what the well-synchronized headlines would have you believe.
Even today, with the market down, significantly, on tariff fears, I am doubling down on economic optimism. In fact, for the reasons listed below, I am more confident than ever that the United States of America is on a path to unprecedented prosperity.
Reason #1: Nothing has Fundamentally Changed in the last Two Days to Justify this Sell-off
Stocks didn’t suddenly report massive losses in the last two days. Companies didn’t suddenly stop making products. Consumers didn’t suddenly stop buying products. The only thing that changed was that one nation, on a planet of 195, decided to look out for its own interest by announcing a “reciprocal tariff” initiative.
Today’s market drop is reminiscent of June 2016, when the S&P 500 tanked on news that the United Kingdom, in looking out for its best interest, voted to withdraw from the European Union.
Nine years ago, the British Exit (referred to as Brexit) sent stocks around the world into a tailspin - even those companies domiciled on the other side of the planet with no exposure whatsoever to the U.K.
Just like Brexit, today’s market decline demonstrates the repercussions of a global financial system that is monopolized by algorithmic traders and detached shareholders who are selling stocks with complete disregard for company fundamentals.
And just like after Brexit, today’s market will recover.
When falling stock prices are market driven and not due to company fundamentals such as earnings falling below expectations, they have tremendous resiliency and tend to rebound quickly. Following Brexit, the S&P 500 ended the year with gains of nearly 12%, and it is presently up over 150% since its Brexit crash.
Instead of panicking about the market volatility that you have no control over, you are better off seizing the opportunity to buy on dips and explore ways to diversify your portfolio with alternative asset classes that provide more stability and less broader market correlation.
Reason #2: Today’s Non-diversified U.S. Equity Markets Cannot Stop the Colossal Economic Expansion that Decentralized Innovation Has Put into Motion
Although you do not influence the direction of the stock market, the unfortunate reality is that there are three companies that do: BlackRock, Vanguard and State Street. These three passive investing firms, which use an undisclosed quantity of algorithmic trading to buy and sell stocks, hold the largest shareholder positions in 40% of all listed U.S. corporations and 88% of S&P 500 firms alone.
Let me explain why this is so problematic.
It is not in a nation’s best interest to relinquish control of its capital markets to anyone, let alone to robots who are more interested in a company’s trading patterns than in its products and services. These types of investors do not create jobs, foster innovation or help communities flourish. In fact, because their inverse ETFs increase in value when stocks decline, they are actually betting against the very companies that are in the markets to provide real macroeconomic value.
Many people may not realize just how paramount it is for companies to possess vast and diverse cap tables. When just three behemoth companies control the majority of a company’s shares, they have the ability to collapse a company’s market capitalization, within seconds, with just one sell order. On the other hand, when a company has a much larger pool of smaller direct investors, a single sell order has minimal to no impact. The same holds true for indexes at large.
More expansive and diverse investor bases will not only bring greater stability to markets, but it will also help ensure that stocks are valued based on their fundamentals as opposed to isolated market events.
As discussed on a recent episode of Stinchfield Tonight, the lack of company diversification in the S&P 500 index is equally as troubling. With just seven companies now comprising an unprecedented 35% of the S&P 500, and with listed companies diminishing in general, there simply aren’t enough publicly-traded stocks to absorb the hit caused by the downward readjustments of algorithmic passive investors (quantitative funds).
Fortunately, decentralized innovation has emerged to create the greatest asset diversification opportunity in the history of mankind. Real-World Asset Tokenization, in particular, is poised to foster an endless supply of non-correlated investable assets that will more than make up for the accelerating dearth of publicly-traded companies.
The sweeping macroeconomic benefits of mass portfolio and investor-base diversification cannot be overstated. As the portfolios and cap tables of American investors and businesses become increasing more diverse, the nation will be rewarded with better products, stronger businesses, more jobs and greater confidence in the capital markets.
Reason #3: Tariffs Do Not Cause Depressions
Right now, the markets are trading on sheer anxiety. Last week, the media insisted that tariffs would lead to a recession.
Since a mere recession hasn’t instilled enough fear, this week we are being told that tariffs cause full-blown depressions.
Going viral on social media is a scene from the movie, Ferris Bueller’s Day Off, depicting Ferris' classmates being taught that the 1930 Smoot-Hawley Tariff Act, a bill which increased tariffs on imported goods, worsened the Great Depression.
Just because you see something in a movie, does not make it true. Otherwise, every frog would be a prince, every DeLorean would be altering the space-time continuum, and every sports team would be victorious following of a 30-second half-time inspirational pep talk.
The reality is that the Great Depression was caused by…
Anyone? Anyone?
The Great Depression was caused by the stock market crash of 1929 - which was a direct result of a giant consumption bubble that was intentionally ruptured by a relatively young, Federal Reserve.
During the 1920s, both consumption and the stock market soared - thanks to a new invention in mass media, called the radio, which transformed the face of advertising, fueling a period of profound consumerism and decadence.
In 1929, during a period of zero inflation, the Federal Reserve needlessly raised interest rates to astonishingly high levels in its attempt to restrain the stock market boom. As a result, industrial production plunged, causing a 30% decline in GDP (from 1929 to 1935) and skyrocketing unemployment.
In case you needed additional proof that tariffs were not the culprit behind of the Great Depression, look no further than to a previous tariff bill, called the Fordney-McCumber Act. This tariff bill raised the average import tax more than twice that of the Smoot-Hawley Act.
Do you know what followed the Fordney-McCumber tariff Act?
Anyone? Anyone?
The 1922 Fordney-McCumber Act was immediately followed by one of the most prosperous periods in America’s history known as the roaring twenties.
Reason #4: American Communities will Reap the Rewards
The final reason that leaves me optimistic during this time of market tumult is that I believe that America’s communities will be the ultimate beneficiaries.
Long before the U.S. markets catered to global interests, there were thriving regional stock markets and community banks that served local entrepreneurs and investors.
Instead of a handful of robotic juggernauts trading global tickers, actual human beings would invest in the small businesses that enhanced their community or, at the very least, produced goods that they were passionate about consuming.
Because of the ties to the community or product, individual investors were markedly connected to their investments. They cared about the business and, in many cases even had a personal connection to the business owner. This bond cultivated a breed of long-term investors as opposed to short-term traders.
The average holding period of a publicly-traded stock, today, is a mere five and half months versus the 6 to 8 years it was during the 1950s and 60s - an era when local economies were booming.
While, in recent decades, market globalization and one-sided tariff arrangements have certainly created an enormous amount of wealth for some, it did so at the expense of the vast number of America’s small businesses needed to strengthen our local communities.
As the capital - that was once allocated to our neighbors - moved into offshore investments, regional businesses suffered, and investors became increasingly detached from their investments. As a result, towns across the country deteriorated -economically as well as morally.
If Trump’s tariffs help eventuate the restoration of communities across America, then today’s temporary market volatility - no matter how extreme - will have been well worth it.
This article is for informational purposes only and is not intended to be personal financial advice. Please obtain independent financial advice before making any investment decision based on the information contained on this website.