Are Tariffs Ruining the Market for Investors?

Paul Winkler: Welcome to “The Investor Coaching Show.” I’m Paul Winkler, talking money and investing. And of course, maybe hitting a little bit of the news of the day. Lovectecus is saving me, throwing me some Post-it notes.

Lovectecus Allen: Hi.

PW: Hey, man. Yeah.

LA: Oh, voice.

PW: I had this stuff in here, and I thought, Oh man, I have to get this where I can get to a couple of things in here really quickly, and it just wasn’t working for me. I was like, “Where are Post-it notes?” I’m not in my studio, I’m in your studio. I’m in your house now, so I don’t know where anything is.

LA: Welcome.

PW: Yeah, man. Good to see you.

LA: Well, I do. So let me know.

PW: I noticed apparently, because it didn’t take you but two seconds to find what I needed. Nice.

Why Do So Many Investing Myths Abound?

So the thing that I thought I would talk a little bit about, there were some things I actually have been playing around with this week that I thought, Well, this would be really, really great. And you get halfway through the week, and literally everything changes.

I have not seen a presidency like this. I don’t remember ever having where I would do prep in the beginning of the week for the radio show and it would be totally obsolete by the end of the week.

So some of this stuff I’m going to use anyway, just simply because it would be good for educational purposes. Because I’m big on educating. I find that the more educated you are as an investor, the harder it is to take advantage of you, number one.

Number two, I find that a lot of myths abound in the investing world, and they just haven’t gotten any better. Twenty-five years almost of doing this radio show, and I thought I would be obsolete after about five. And no. And it’s really interesting because I guess the question is: Why do so many of these myths abound?

---

The myths can be used and they can be employed, and they can work just enough that people think they actually work because they’re repeated. 

---

They’re repeated. And then they’re reinforced only after they work, if that makes any sense.

Now if something doesn’t work, everybody shuts up. Just be quiet. You don’t say anything.

If it works, you can’t stop talking about it, especially if you’re the person that has done it. That’ll make more sense to you in a little bit because I’m going to actually go through some very specific situations.

But a lot of what has been talked about this week was the whole Fed thing. So remember, this week started out, and it was “Trump is going to fire the Fed chair, and that’s all there is to it. He’s going to be out of a job. And just prepare because this is what’s going to happen.”

So, there were people being interviewed in the first part of the week. And then, of course, there was also this talk about how we need to reduce interest rates. That was another thing that was being talked about.

Jeremy Siegel, he is a Wharton professor and he wrote the book — it’s a well-known book — “Stocks for the Long Run.” And it was a good book about just the nature of the stock market when we often think about market returns historically.

I did this thing on Channel 5 a few weeks ago, and I talked about it here already, but it bears repeating, because maybe some of you didn’t hear me talk about it. But I was looking back at, like, 55 years of data, and just going back to the 1970s.

Because I was just joking about how people try to get these high returns with their stock portfolios and they just don’t do that well. And I was kidding around saying, “You don’t know how many people had $100,000 in the 1970s that don’t have $50 to 60 million today.” I was just trying to wake up the reporter, Ben Hall, over at Channel 5 and just say, “Hey, look. People don’t recognize that the stock market is the greatest wealth creation tool known to mankind throughout all of history.”

The History of Returns

Now that doesn’t mean that in all periods of time, you’re going to have 10% returns. Sometimes you’ll have 15% returns over a 10-year period of time. It’ll be 15 per year, and sometimes it’ll be five per year.

---

But it will vary, and this is why we diversify, so we get rid of some of that variability. 

---

But if you look back through history, it varies because returns, over the long run, they have been very, very stable. And the reason that they’ve been stable is because stocks typically sell for a certain multiple of earnings.

So, I get interest payments when I buy a CD, and those interest payments are going to be the same every single year. Well, with stocks, I get earnings, and those earnings are going to vary from time to time. And sometimes what’ll happen is they’ll surprise us to the positive side, sometimes they’ll surprise us to the negative side.

But in general, if we look at every single 30-year period, even including the Depression, World War II, Korean War — that period of time which was very, very rough — even if we include, let’s say, the Cuban Missile Crisis years and the Vietnam War and the oil crisis years, even if we include the tech bubble years and those things, you look at these long periods of time, these 30-year periods, and what you notice is that the rate of return for large U.S. stocks is about 10.

Now, small is higher value, it’s higher. Small value, significantly higher. International large, about the same. International small, higher than large U.S., significantly, about four percentage points per year. And that’s significant.

If you have a two percentage point difference per year, you got about a 40% difference in accumulation over 20 years. Forty percent, that’s significant, right?

But I was just using the example of large companies. You have the rule of 72. So 72 divided by your rate of return tells you how long it takes for money to double. Seventy-two divided by 10 is about seven, right?

Well, if we look at 55 years, you take seven and you go, how many times does it go into that? And you go 7 x 7 is 49. And 7 x 8 … So you go eight, right? I would say you go, “Okay, now we got eight doubling times.”

Hundred thousand grows to 200, and then it goes to 400, it goes to 800, 1.6 million. And then it goes to 3.2 million, 6.4 million, 12.8 million. And now, we’re just up to seven, right?

Literally, you take that and you go, “Okay, now we’re at 25.6.” So, we’re looking at 25.6 million.

And you go, “Oh my goodness.” That is just the lower-performing asset category. It was the point that I was making.

Stocks for the Long Run

So Jeremy Siegel’s book, “Stocks for the Long Run.” Because the question that people have is, “Yes, stocks did that in the past. Are they likely to do it in the future?” That is the question that often comes up.

And I say, “Well, you don’t ever know anything for certain, but here’s what we look at and here’s what we know through academic research is that returns come from a cost of capital and the cost to use your money, your capital is, what? The earnings of the company.”

Are stocks now selling for what they have historically sold for? And the answer would be, yeah.

---

Large U.S. stocks are a little bit higher than what they’ve sold for, but there are other areas in the market that are actually selling for a little bit lower.

---

Because remember, you can’t just look at earnings and go, “Well, are stocks overpriced or are they underpriced?” Because you have to take into account earnings growth. You have stocks selling for a higher price — slightly higher.

We’re only talking about 20 times earnings instead of 16. So, it’s not unbelievably high for large U.S. stocks.

Now, small companies are selling for about what they’ve normally sold for, so they’re not over historic norms. Actually, slightly less than historic norms. But if we look at that, we say, “Well, that price is a little higher than normal.” But if you have earnings growth rates that are expected that are higher than normal, then I would look at that and say, “Okay, it’s justified.”

I’ll get to productivity in just a second here. I want to get back to Jeremy Siegel because he was being interviewed on this, and he was talking about the Fed and the lowering interest rates. And here’s what he had to say about that.

Jeremy Siegel: Yes, good morning, Becky. Listen, I’ve looked at the data, and I do believe there are persuasive economic reasons for the Fed to aggressively lower interest rates right now. I know that Steve, just a little while ago, was saying, “Show me some evidence data that shows us.” Well, one of the Fed’s favorite indicators for long-term —

PW: I’m not going to get into the reasons for it because he gets a little bit wonky there. But he does get into something a little bit later where I just thought it was kind of funny because he gets into an exchange with the host on CNBC regarding this, this whole idea that the Fed interest rates need to come down.

Changes from New Information

JS: Actually, I’ve been looking at those long-term inflationary expectations, and they’ve actually been going down. Okay.

Rebecca Quick: I mean, you yourself a week ago, a week ago on WisdomTree you wrote, “While the Fed has covered the ease, the mixed signals from the bond market complicate the picture.” You said that with the yield curve no longer inverted, the case for Fed rate cuts weakens.

PW: Okay. So, isn’t that funny? In the very, very beginning, he’s talking very, very confidently on what’s going on, why the Fed needs to lower interest rates. And he’s a sharp guy. This guy’s a Wharton professor.

But the point I want you to get is no matter how sharp these people are, how much they know, catch that she picked up on that he changed his position on something just a week earlier.

And the point is that things change so rapidly. And basically, what he comes out with, he explains why he changed his position.

JS: Well, you’re right. And now, it’s just about flat. But this is before I looked at the case for these inflationary expectations.

PW: Okay. So there it is right now, new information comes out.

---

This is how markets work: New information comes out, and you have to have the information before it comes out. 

---

And what I’ll find is, those people will invest in individual stocks, let’s say. Let’s say that they own some companies, and I’m like, “It’s not a really good idea, buying individual stocks.”

Now, most of the time, if you look at professional managers, as I’ve talked about, like 90% of them are underperforming the market over 15-year periods. And it doesn’t matter what country you’re in. That happens.

And you go, “Well, these people are smart. How is it that so many of them tend to underperform?”

Well, it’s because the market is actually … You have people trading that are very, very well-informed, they’re very, very knowledgeable, and none of them get the leg up on anybody else over any length of time.

And you may have heard me say this before. It’s almost my hope that if anybody engages in individual stock picking, that they fail at it right away. Early. Early on in the game. And the reason being is that if somebody is successful with individual stocks, they tend to get a little bit of a head on their shoulders. They have a tendency.

Their ego says, “Hey, you know what? I’m really, really good at this.” And that’s a danger for investors when they do that. It’s a danger for anybody that ends up getting returns that are higher than the markets when they’re investing in individual companies for a period of time.

Hindsight Bias

I had a situation, somebody was telling me about something earlier, where somebody had bought a stock. And what ended up happening is, literally, COVID had driven the price of these stocks up.

He had gotten rid of them before COVID came along, and there were companies that would’ve benefited from such a scenario from that, and he’s upset that he did not hang onto that. And I’m thinking, Well, did you know that that was going to happen? Did you have an inside track on China? So, the reality of it was his hindsight bias.

---

This is what we find with investors: Hindsight bias drives things. 

---

“In hindsight, I just knew this was going to happen, or I just knew that the Fed was going to lower interest rates, or I just knew the Fed was going to raise interest rates.” And the question is, did you bet the farm on it? Did you absolutely know beyond the shadow of a doubt where you bet everything on that?

And the answer is usually, “Well, no. Not really.” So, did you really know that?

And then we actually play a game with people when they’re investing in individual stocks. We’ll say, “Okay, how much do you know about this company?”

And they’ll say, “Well, I know this. I know what they sell. I know what the product line.”

“Do you know the health of the CEO?” “Not really.” “Do you know the CFO’s name?” “No. I don’t really know that person.”

“Do you know what their tenure is?” “No.” “Do you know their retirement plans?” “No.”

“Do you know what the competition is doing behind the scenes that hasn’t been announced yet?” “Oh, no. I don’t know that.”

And we will go through a litany and we’ll go through a long, long list of things that, “These are things that actually are going to determine the price of the stock and the future performance of it. And you don’t know any of these things.”

And people have to admit, “Yeah, you’re right. It’s really just a guess.”

Now if you look at stocks in the market historically, who’d have thunk, as I’d like to say, that back in the ’30s, the 30 most important companies in the American economy, I mean among the 30 most important, the Dow Jones Industrial Average — we consider those the 30 most important companies in general, they’re representative, in the economy — that not a one of them would still be on the list. Not one.

Not one of them would still be on the list today, and that’s how fast companies come and go. And really, that is the problem with individual holdings and individual stocks. So that was part of what was being talked about this week.

Putting The Stock Market Into Perspective

Another thing that was talked about a little bit is tariffs, and I’m going to get into that because that has been the ongoing topic. Austan Goolsbee, who is the Chicago Bank president, was being interviewed. He’s an interesting, interesting guy.

I like his kind of how he used to be very political. Very political. And now, you listen to him as the bank president and he just dodges stuff so well, but I just like the way he handles questions regarding tariffs.

And I think it’s instructive because a lot of people are looking at that particular one thing and saying, “Stock futures and stock markets are going to be driven by this one thing.” But he puts it into perspective, and we’ll do that right after this.

But anyway, Austan Goolsbee is the Fed president in Chicago, and he was talking about tariffs. And I want to just kind of play what he had to say about tariffs just in relation to markets and things that we often talk about here.

Austan Goolsbee: Tariffs are one input. They’re one shock that happens to the economy, but conditions change all the time. We’ve got the productivity growth rate has been surprisingly and in a lovely way, been very strong for a couple of years.

I would definitely want us to get a bead on whether tariffs or supply chain disruptions are affecting productivity growth. And we just need to see.

Most of the U.S. economy is domestically driven, as you know. At the end of the day, imported goods are only 11% of GDP. So, unless it jumps out of just its own 11% lane, the impact of tariffs on the macroeconomy could potentially be modest.

PW: So, that’s what I was talking about. Before, I was talking about the fact that you look at tariffs and you look at all of this talk, and it’s only one thing, number one.

And 11% of GDP, gross domestic product, is tariffs in international trade. And you think we make a really big deal out of it — and it is. I mean, that’s significant. But the reality of it is we look at that and we get so myopically focused as investors on one thing.

What are the unemployment rates going to come in? What is considering confidence going to come in? And what is productivity going to come in at? The Fed, what are they going to do with interest rates?

---

We look at it, and it’s a myriad of things that actually really affect stock markets. And for us to get our handle on all of them, it’s too much. 

---

And I just scratched the surface with a few major things that are talked about. But the reality of it is you could have storms, you could have gas prices, you could have access to precious minerals, and things like that could drive markets. I’ve been talking a lot about, and I’ve been hearing a lot of people talk about, birth rates and how that can affect the economy.

That’s going to be a longer range thing, but it could actually drive technological progress because we don’t have the people to run things or build things. So, you’re dealing with things that are so, so diverse and so wide-ranging to try to get a bead on. And that’s what they’re trying to pin him down on.

“Where’s the market going to go? What’s going to happen?” And that’s what these financial channels do: They typically try to focus on that and figure out what’s going to happen next.

The Effect of News on the Markets

Now, the other thing that was a big conversation, and this is a really, really good tutorial regarding what makes markets move and what makes them move fast and furiously. Now, what is it I often talk about that makes markets move, and why it’s so unpredictable, is because of news.

---

News is what makes markets do the things that they do. And news, by its very nature, by its definition, is unpredictable. 

---

I can’t know what the news of tomorrow is going to be. A few weeks ago, I talked about that study. It did show that it didn’t really matter.

It was a really funny study where they gave people the headlines, and I don’t know exactly how the study was performed, but they literally gave people the headlines of the Wall Street Journal three days ahead. And they said, “Okay, what would you do based on this headline?”

I don’t know if they kept them. They were isolated from all information or something like that, but they gave them the headlines. And they said, “Okay, what would you do based on this headline?”

And they found that most people, even with the headlines three days in advance, still lost money with their stock selections and their investment selections. And you go, “That’s insane.”

But news is a big deal. And sometimes, different news items can be a bigger deal than others. Let me just say that.

Now, the whole thing about Fed and the Fed chairman and saying, “Is Trump going to fire the Fed Chairman?” That was big news early in the week, right? People couldn’t get enough of talking about this. And the reason is that Fed independence is pretty important, and Goolsbee was asked about why Fed independence is important.

Steve Liesman: Austin, the dollar has been a little weaker, bonds a little weaker as well. Does it matter that the president is talking about the potential to terminate the Fed chair?

AG: Look, I’m not going to get into the discussion on that. I know the Secretary — I agree with the Secretary of the Treasury when he said Fed independence is a jewel box that we don’t want to mess with.

I’ve been at the Fed for a little over two years. Before I was ever at the Fed, I will tell you, economists are basically unanimous that Fed independence is critically important. And to see why, just look at the countries where they don’t have Fed independence. Inflation is higher, unemployment is higher, and growth is worse.

Fed Independence

PW: This is something I’ve talked about here on the show. Now, one of the things that I added to that list when I’ve talked about this on the show here is that we don’t like the idea, or I don’t like the idea, of the Fed being driven by somebody in office. A politician.

---

Because you think about it, if somebody’s going to get elected, what do they want to have happening? They want the economy to be strong. 

---

They want things to be going well. They want people to be buying houses. They want people to be buying cars. And if they have the power just before the election occurs to drop the interest rates, if they can just get people in there that will do what they want them to do, drop the interest rates during an election year, you can get the economy rolling in the election year.

And then what happens? That person gets re-elected. And then afterward, they don’t care if they let the interest rates do whatever they will because people forget about your first year, two years in office. All they think about is what’s happened in the last two years.

So, that’s why I’ve always thought that was a really bad idea to have any undue influence of politicians regarding the Federal Reserve and Federal Reserve policy. And they complain in these politics, and this was talked a little bit about as well. Steve was talking about Fed independence and politics in general.

SL: I wonder if it might be worth to look at the real reasons for Fed independence, which has nothing to do really with the short-term call you make, because you guys, you get it right sometimes and you get it wrong sometimes, and maybe the president knows exactly what the right interest rate ought to be right now. But isn’t there a long-term issue here in terms of how Fed independence underpins the value of the dollar and the value of the whole bond market? In that if you get it wrong, you’re going to correct yourself either way.

Whereas if you are subservient to an administration … And this is not theoretical because we went through this balance in the ’70s where the Fed got it wrong and didn’t correct itself until somebody else was appointed and came in. So isn’t that really the issue is the long-term credibility of the Fed, not the way it operates within a cycle?

Centralized Planning

PW: Now, I think that was really astute what he just said there because this is something I talk about in general in investing. We talked about stock markets, and people worry about stock markets going down.

And I go, “Do you think it’s going to last forever?” “Not really.” And I go, “Why have markets always recovered?” Because they’re run by people.

Now, you think about it: If the Fed is run by people that have to make sure that they correct if something goes south on them, think about this, when you are owning a company, when you’re investing in the stock market and you own a company that goes down in value, it’s run by people that have got to make sure that they do something to bring it back. And it’s either going to be trying to sell more things or they’re going to be talking about reducing expenses.

And I think that’s a really good reason for, if you look at our financial system and you look at capitalism in general, not having centralized planning. Now, what is socialism? What is communism? Socialism, communism, that’s centralized planning.

It was long ago theorized by Adam Smith in “The Wealth of Nations” that if you would just let the invisible hand do its thing, is what he called it, then what would happen is we would have a great economy around the world. And that is literally as much pessimism as you hear.

Capitalism has been spreading all over the world. And that’s the reason, because it works. Why does it work? It’s because it’s run by people in the same way.

And I think, and I’m hoping you’re seeing my parallel here that I’m trying to draw. I’m hoping this makes sense. Lovectecus, you’re nodding your head yes.

---

Because independence of the Fed is like the independence of companies run by people and the government staying out of things.

---

Unlike when you’re looking at a country like China, where the country is trying to direct everything, that’s where you run into problems. Now, a lot of people look at China and go, “Oh, look how successful they’ve been.”

But if you look at how successful they’ve been, they’ve been successful because the people have largely been kept down. They’ve been kept down and they have not been allowed to prosper like other countries around the world that employ capitalism in its truest form.

I just thought that was just a fun theoretical thing. Anyway, that’s just my nerd coming out.

Advisory services offered through Paul Winkler, Inc an SEC registered investment advisor. The opinions voiced and information provided in this material are for general informational purposes only and not intended to provide specific advice or recommendations for any individual. To determine what investments are appropriate for you, please consult with a financial advisor. PWI does not provide tax or legal advice. Please consult your tax or legal advisor regarding your particular situation.