Election Over, Investments Onward
Welcome to December, and I hope everyone had a Happy Thanksgiving! We have a lot of items to cover this week, as many significant events occurred in November, and I have a critical decision to make: to remain in the F Fund or move back into stocks.
For the first time in a long time, my mindset has shifted from a short to mid-term view to a mid to long-term perspective. Normally, I prefer to think long-term, but the uncertainty and multiple risks in the economy and geopolitical environment forced me to consider and invest based on these potential near-term risks.
With the U.S. presidential election behind us, I believe we will now have a more stable economic and geopolitical environment. For the first time since President Cleveland, we have a non-consecutive president. Consequently, everyone on the planet knows what to expect from a second President Trump term. He campaigned on policies like tariffs, peace across the globe, a deregulatory environment, better governance, and secure U.S. borders, all of which he attempted, implemented, or achieved during his first term.
Nested within the idea of better governance is the Department of Government Efficiency (DOGE). Of all his proposed policies, this could be the most disruptive. A quick 'fuera', in Argentinian terms, for multiple departments, agencies, and employees could significantly impact the economy. The question is how many and how quickly these actions will occur, and ultimately, how disruptive they will be. There's a risk of an overreaction or a proper reaction to DOGE's activities, and this uncertainty is driving my caution for the first few months of next year. After this initial implementation, the benefits could be quite stimulating for the U.S. as a whole.
The second most impactful policy is probably the tariffs policy. I do not think tariffs will actually be implemented on a wide scale, just threatened. If countries do not comply, which they already seem to be doing, tariffs will be imposed. However, based on the previous reaction during President Trump’s first term, they will negotiate. The concessions will benefit U.S. businesses and should drive jobs, especially, manufacturing jobs, back to the U.S. I see this as a positive development in the long term, but potentially disruptive in the short term.
In November, we saw another 25 basis point rate cut from the Federal Reserve. While these rate cuts were stimulating to the stock market, they also signal some trepidation from the Fed about the health of the economy. My perception of the Fed's actions is nuanced. I think they are seeing weakness in the economy, but I also believe they saw the inflation rate approaching their target and are managing a very tricky balance (see the IS-LM-FE model). An inflation rate of 2.6% and projected rate cuts next year look to be stimulating for both the economy and the stock market.
On the geopolitical stage, I don’t see these wars and conflicts significantly impacting the economy or international markets. A resolution to the Russo-Ukrainian war won’t make Ukraine a major player in the world economy, nor will it bring Russia back into the global economy very quickly, if at all. The conflicts in the Middle East seem to be ebbing, except for recent battles in Syria, and the isolation of Iran is likely to keep energy prices lower than in recent years. The biggest challenge we face is our potential conflict with China. This event is so significant in its impact that I don't think it's even worth considering in an investment strategy, as there's no way to invest around it. We just have to resolve it.
I'm also considering the impact of potential trades that might occur in December by investors looking to make market-impacting moves to manage their taxes, rebalance their portfolios, reduce risk from overvalued equities, or lock in profits for the year. The effect of these actions is unpredictable but significant in the short-term market (December), causing me moderate concern.
I'm definitely long on the U.S. economy and the stock market. If President Trump can bring about all the positive changes he's proposing, a dramatic and fundamental shift in the U.S. economy could result. Recognizing I opted for the security of the F Fund since September in what I deemed a highly uncertain environment, I think it's time for a shift back to a long-term view. I'm back into the C Fund 100%. Keep investing!
