The Global Trade War and the Asymmetric Returns to Long-Term Forecasts (NOTW#32)
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The indices were down again this week, with the drop probably related to what took them down last week: the increasing probability of a global trade war. I discuss this and the upside of long-term forecasts in the market overview.
In the news of the week I also share a significant insider purchase I had missed in one of the portfolio companies. The Chairman of the company bought $10 million worth of stock in the open market to up his stake to $100 million. This is a $500 million market cap company, by the way.
Without further ado, let’s get on with it.
Articles of the week
I published three articles this week. The first was Danaher’s earnings digest. The company reported an okay quarter, but guidance was quite soft. I discuss three reasons why one could be optimistic about the future.
The second article was an update on Texas Instruments’ capital management update. I discussed some highlights of the call and laid out my valuation scenarios.
Finally, the third article of the week was a comprehensive report on Zoetis. I believe Zoetis is an outstanding company from a quality standpoint, and I explain why. I also discuss the valuation in depth and share my thoughts on the stock at current levels.
Next week, I plan to bring my Amazon earnings digest and an article discussing what I will be selling one of my portfolio positions. I also thought about writing something about Nintendo, but the quarter changes absolutely nothing about the thesis, and I think it’s much more noise than signal. I will, however, work on a valuation update on the company with a special guest (although I don’t know how much time it will take us).
Market Overview
The Nasdaq and the S&P 500 were down again this week, albeit only slightly. Both dropped less than 0.3%. It’s, however, the second consecutive negative week they’ve suffered (this shouldn’t be news, but based on what the market has done lately, it is):
I can’t fully explain the reason for the drop (as always), but it might be related to Trump’s words about potential retaliatory tariffs. The Global Trade War continues in full force, and Trump announced that the US will make an announcement regarding retaliatory tariffs next week on Monday or Tuesday. I have no clue about the content of this announcement, and I will not make any sales in my portfolio based on this information (I will, however, publish an article next week announcing the sale of one of my positions but for different reasons).
In my view, making long-term decisions based on tariffs is a bit speculative for two reasons…
We don’t know what Trump’s objective is with tariffs. Some people argue that the goal is just to negotiate, not implement them for long. I have absolutely no clue (and neither do those who claim to know)
It’s Trump’s last mandate, and we don’t know what will happen when a new President is elected in 4 years.
I would evidently prefer to know what Trump is about to do and why (it would result in fewer uncertainties), but the reason I don’t try to forecast it is that macro is highly complex, and envisioning what will happen even when you have almost perfect information at the start is nearly impossible. Let’s take a look at an example.
Some people claim that Tariffs are inflationary and that Trump’s tone regarding workforce reduction across Government entities will create a recession. If these people are correct, the US could potentially enter a situation called stagflation, where you get rampant inflation combined with a weak economy. This is a challenging situation because if the Government or the Fed try to stimulate the economy to come out of the recession, they could be pushing an already-high inflation higher. The rationale makes sense, but the only problem is that the people who are calling stagflation today have been calling it since 2021. We did get inflation, but the economy did just fine over the period.
I’ve come to appreciate that saying things confidently in the investment world makes you look great at any given moment. This is until time goes by, and then you are likely to look like a fool more often than not (at least 50% of the time). Luckily for these people, attention spans have shortened so much that nobody is even likely to remember the forecast when it’s proven wrong. I believe it was Goldman Sachs who said that the return of the S&P 500 will shrink to a 3% CAGR over the next decade. The strategy here is simple: if it doesn’t happen, nobody will remember, but if it does happen, Goldman Sachs will market the hell out of it. There’s only upside!
The industry map was mixed this week. Ironically, Nvidia was likely up significantly for the same reason that a good chunk of Big Tech companies were down: Capex. As discussed in my Deepseek article, Capex is an expense for Big Tech, but a revenue source for Nvidia and Capex guidance was…extraordinary (let’s leave it here):
The fear and greed index retraced to fear levels, but there’s no denying that market levels are far from fear:
