The Real McCoy: April Update
Lesotho (apparently the United States’ most formidable trade enemy); photo by Vaiz Ha
“If the bounce doesn’t come and this turns into a serious downturn, there certainly won’t have been a shortage of reasons.”
-Me, three weeks ago
Everyone loves being right, but being right in your first ever Substack post is something very special. When I wrote Why This Crash Could Be the Real McCoy, I fretted that the market would recover in a few days and my first ever Substack post would make me look like a fool. How would I get subscribers when my first prediction on record had been a dismal failure? I even considered getting a new Substack account and deleting the old one, starting from scratch, if the McCoy ended up being fake.
Needless to say, that didn’t happen. It’s a real one.
So where do we stand now? Things were actually starting to drift back up before the infamous “Liberation Day”. The original post was written March 15th, when the S&P 500 sat at 5,639, and it bobbled around, nearly getting to 5,800 on the 25th and closing at 5,671 on the 2nd. When President Trump’s tariffs were unveiled, the reaction was unanimous: selling, selling, and more selling. The market plunged 5% Thursday, and another 6% Friday (actually the second largest absolute drop in the history of the S&P 500 index).
The acuteness of the drops was likely because the breadth and severity of the tariffs substantially exceeded expectations. (Although I don’t know why—Trump has been saying since he was on the campaign trail that he was going to tariff the hell out of literally everyone.) I’ll leave it to the experts to discuss the tariffs, but suffice it to say that they have a substantial likelihood of increasing inflation, sapping consumer spending, and even causing a national or global recession.
Lesotho
And there were things on the list that were odd. For instance, why was the country slapped with the highest tariff Lesotho? Not China, not Mexico…Lesotho? The small, poor, mostly rural enclave of South Africa hasn’t done much to us, has it?
As it turns out, a number of American brands, such as Foot Locker, JCPenney, and Lululemon, source from Lesotho, where workers are paid an average of $103 per month. Since Americans can’t compete with these wages, no reshoring will occur, and instead those $120 shoes will now cost $180, and that extra $60 will be shoveled into the gaping maw of the US government, which surely will find a way to still run an enormous deficit despite the extra revenue. There’s apparently nothing Lesotho can do about this: there’s no way they’ll ever get rid of their $230 million trade surplus with us, because they probably can’t afford very many of our exports.
The case for the tariffs was a simple one: if executed properly, they would rebalance incentives so that American companies invested in manufacturing here rather than outsourcing. The story of Lesotho, I think, indicates why this case might be difficult to realize, and why in most cases the tariffs will just mean higher prices for consumers.
What Are the Odds?
My recent piece on market corrections discusses how rare bear markets are, and how the differences between corrections and bear markets are grave. Before I wrote this piece, I was planning to look up how many days had elapsed in the correction and see how many previous corrections that had lasted that long turned into bear markets.
What I didn’t realize was that the market has actually only closed in correction territory for three days! It felt like more, maybe ten, but has been only three. This goes to show how spoiled we are: market drops don’t last long anymore, so when they do, even relatively short ones feel like they’ve been going on forever.
So there’s a chance we still get out of the correction in eight trading days or fewer, like three quarters of corrections before this one. However, this chance is diminished by the long-term nature of a lot of the concerns, as well as the fact that the NASDAQ is already in a bear market.
Everything is still overvalued as heck.
When I saw Apple was one of the biggest losers on Thursday, I pulled up the stock to see whether it was actually worth buying. I was shocked: the P/E was well over 30. That’s very high for a mature company, especially one that’s been struggling with sluggish growth.
Let’s take a look at the whole MAG7 and see if we can find any buying opportunities:
AAPL: P/E over 30.
MSFT: P/E 29.
AMZN: P/E over 30.
TSLA: P/E over 100. CEO currently away in politics alienating 60% of the country. Sales down 13% year over year.
GOOG: P/E 19. But the company faces an existential threat to its search business from AI, which I plan to write about here whenever I get the chance.
FB: P/E 21. But Facebook itself is no longer a hip product, WhatsApp doesn’t make money, and even Instagram is facing migration to TikTok.
NVDA: P/E actually reasonable at 32, but over half of revenue falls to the bottom line and I don’t see how that can continue when the market becomes more competitive.
No buying opportunities.
Additionally, looking over the long term, the S&P is still up enormously. Despite somewhat shockingly wiping out the previous year’s gains in basically two days, the index is up nearly a quarter over the last two years, has doubled over the last five years, and has returned 150% in the last ten. Given that the market is only supposed to return 6-7% a year in good times, 150% in ten years is an absolute dream come true, and nobody should feel entitled to an immediate rebound here (although I’m sure they still do).
So what happens next?
I wish I knew. A lot of it depends on decisions that will be made by a handful of people at the highest levels of government. Will Trump back down on the tariffs, or will their extreme nature cause other countries to enter into negotiations with us to have them reduced? What will happen with tax policy? Inflation? The Fed? All we can do is make educated guesses.
However, as an investor, you have two good strategies:
Keep doing what you’ve been doing: If you have $1,000 a month set aside for investing, keep investing that $1,000 a month as if this correction never happened. Don’t try to overthink it. History has rewarded this approach nearly every time.
Look for values: Outside of the MAG7 and tech names that are still overinflated, there are many good values. Iconic brands such as Delta Airlines, Ford, GM, Comcast, Fox, and T. Rowe Price all trade with a P/E ratio of less than 10. That doesn’t mean you have to buy all of them, but buy what you know and put that $1,000 into your favorite pick while it’s low.
As for me, I have no real read on what the market is going to do. Sometimes I have a gut feeling one way or the other. This time I don’t. But what you can count on is that I’ll keep posting my thoughts here as the correction evolves.
I found it so strange to base tariffs on trade imbalances.