Trump Tantrum Takes Market Risk to New Level
It's hard to see stocks maintain their resiliency amid political drama, budget bill uncertainty and housing market woes.
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Stocks fell on Thursday, as Elon Musk engaged in an escalating spat with the POTUS that sent Tesla, Inc. TSLA to a decline of 14% in trading on the day. That helped push the Nasdaq down just over .8%. My heart goes out to Elon. He has been the CEO of many successful enterprises but never had been exposed to how sausage gets made in D.C. during the annual budgetary process. The fight between two egocentric billionaires also was inevitable at some point. It is like putting two alpha dogs in the same room, eventually they are going to try to tear each other’s face off.
After taking considerable reputational hits by leading DOGE, Mr. Musk appears quite frustrated that little spending is being cut within the proposed federal budget for the 2026 fiscal year. This is largely because no politician has ever been reelected by cutting spending, even when it is wasteful or redundant or both. And getting reelected is the No. 1 priority for most of Congress. This is a key reason the U.S. federal debt is over $36 trillion and still growing at an unsustainable rate.
This tantrum just complicates getting the 2026 federal budget passed, which was already poised on a precipice, given the razor thin margin the administration has in the House. This is yet another uncertainty for investors, which are already facing a litany of them right now. These include concerns about tariff policies. Trade frameworks have been few and far between even as the administration’s self-imposed deadline for the temporary suspension of reciprocal tariffs is just five weeks away.
The over three-year conflict in Ukraine continues to rage unabated as peace talks seem to be going nowhere. The Federal Reserve also continues to remain on hold, despite some recent encouraging readings on the inflation front. The central bank seems intent to sit on its hands while it becomes more apparent what impact tariffs will have on inflation, before reducing the Fed Funds rate.
Higher interest rates remain major headwinds to both the commercial and residential real estate sectors, key economic engines. April construction spending recently came in weaker than expected, down .4% from the prior month and a half a percent lower than the same period a year ago. Home builders are having to increase incentives to move their growing inventories as the housing sector remains moribund. Large home builder Lennar LEN has gone from allocating 1.5% of overall sales to incentives during the peak of the pandemic housing boom to nearly 13% of revenues in the first quarter of this year.
At this point it is hard to imagine the market continuing to be able to climb an ever-taller wall of worries. Given the current valuations of the overall market, a significant pull back of at least 5% to 10% by the end of summer is my baseline scenario right now. I am positioning my portfolio accordingly.
At the time of publication, Jensen had no position in any security mentioned.
