12:00 TUESDAY – Investing Insights #261 – 07/15/25

by Robert Holman, CFA CFP^© | www.DefensiveAdvisor.com

STOCK MARKET RATING (THE BIG PICTURE) … 7.0 (1 - 4 is bearish, 5 is neutral, 6 - 9 is bullish).  Please note that I raised my overall market rating to a bullish 7.0 in mid-June and published that in my last report.

From STEPHEN MIRAN, Chairman, President's Council of Economic Advisors:  “Tariffs should be set in a 'reciprocal and fair manner' that addresses the regulatory distortions employed by our trading partners … The reason I don't think tariffs are inflationary at all is that traditional economic analysis, what economists call 'incidence analysis', argues that the more inflexible party bears the burden of any bilateral policy.”

He continued … “The US is very flexible, whereas our trade partners are much more inflexible.  Our trade partners have organized their entire economies around selling goods (exporting) to the American consumer.  There is no substitute anywhere in the world for the American consumer.  That gives us the leverage.”

The above may come as a surprise to those who have studied basic economics, where much emphasis is put on tariffs being a tax that is passed along to consumers in the form of higher prices.  That thought ignores that most consumers and most American companies wish to avoid higher costs.  So there are consequences - they react by reducing their purchases.  To the supplier, this means fewer goods sold.  I believe few considered this traditional incidence analysis, which is all about who ultimately carries the burden of a tax, regardless of who is responsible for paying the tax.  Who carries the burden, American businesses, consumers or foreign suppliers? 

In plain English, incidence analysis says that the tariff tax will NOT be passed along to American consumers.  Rational responses by American businesses and consumers to the cost increases will instead be passed along to foreign entities in the form of lower demand and, ultimately, cost reductions.  That’s because (in-part) the goods American companies want to purchase will get sourced elsewhere, i.e., where costs are lower. The other factor (in-part) will be the resistance of American consumers to the higher costs, both resulting in lower purchases of the tariffed goods.

While foreign companies will attempt to offer goods for sale at unchanged prices, American businesses and consumers will resist the higher costs.  Then, the offer prices of the foreign companies will have to come down because they are very dependent on the American consumer to sustain their economies.  It’s just basic traditional economics.

However, some uncertainties remain, including tariffs, inflation, economic growth, interest rates, and Russian conflicts. Market prices have rebounded to a previous peak, but it’s unclear whether they have enough momentum to break through or if they will hit the ceiling and move sideways. Keep in mind that final figures for First Quarter Real GDP revealed a 0.5% slowdown in economic activity. However, the economy now seems to be improving, particularly following the Iran-Israel resolution and the passage of the President’s comprehensive economic package.

It’s very unclear if an antagonistic Federal Reserve will cut rates by even 25 bps (1/4 of 1 percent) next week, when a cut of 50 bps would be so helpful to the U.S. economy.

As I published in my last report, according to analyst Seth Golden at Finom Group, the S&P 500 retraced 50% of its bear market decline.  Since 1956, whenever this retracement has occurred, the S&P 500 index has risen to all-time highs over the next 12 months, 100% of the time.  This bodes well for sticking with our performing portfolio positions and reaping the rewards. 

Under these circumstances, investors are better off deploying a portion of their remaining cash reserves and waiting to make final portfolio adjustments when sufficient hard data is available to indicate a sustainable trend in economic activity. Wait to make remaining portfolio adjustments until hard data is available to indicate a sustainable trend in economic activity.

THIS ARTICLE MAY BE OF INTEREST: Elon Musk backs Warren Buffett’s proposal to ‘end the deficit in 5 minutes’ as the bold idea gains steam again

PORTFOLIOS … After reading this report, if you are unsure how to respond to these conditions, you may send a message to my Secure Email and I’ll reply with the information you need.  I’ll also give you a free portfolio assessment. See the link below.

TO MY CLIENTS … THANK YOU FOR YOUR TRUST.

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LEARN FROM THE BIBLE … Proverbs 15:22 MSG - Refuse good advice and watch your plans fail; take good counsel and watch them succeed.

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Opinions in this post are for general information only and are not intended to provide specific advice to, or recommendations for, any individual without our complete knowledge of that individual’s total financial profile. No strategy assures success or protects against loss. Nor does past performance guarantee future results.