What to do in times of uncertainty?

 

Trillions of dollars in hard-earning savings have been erased from retirement accounts in what seems to be a blink of an eye. One year's worth of savings gone in a matter of weeks. The decision to sell, buy, or hold has never been more difficult.

 

In the private sector, more than 50 percent of Americans own stocks in their tax-deferred retirement accounts. That total has been increasing, thanks to the market gains since the pandemic and new federal and state rules that require more companies to offer employees access to 401(k)s through the workplace. Congress has also authorized a new rule that goes into effect this year requiring new 401(k) plans to use automatic enrollment.

 

The problem, however, with most tax-deferred plans is how to manage them. Unlike pension funds, which are managed by professionals, individual investors are on their own. That works well during bull markets where you can set it and forget, but in times like these many realize they are out of their depth.

 

Through the years, I have advised many readers to hire a registered investment adviser, especially for those nearing retirement age. And yet, there are still savers who resist hiring a professional money management firm. I am aware that many who prefer to handle their own investments read my columns religiously, however, that is no substitute for active management. 

 

Over the past few weeks, I have fielded many calls and emails like the one above. Readers want to know how and what to do with their investments. My first bit of advice is don't panic. Second, stop checking your account every day. The more you lose, the more the temptation to sell everything becomes to stop the emotional pain of steep losses.  The rest depends on your risk tolerance and age.

 

I asked my former colleague, Scott Little, an investment advisor at Berkshire Money Management, what he is telling his clients. Here is what he is saying.

 

 "One thing holds true for most people. None are going to be using all their money all at once. A retiree may live 20, 30, or even 40 years in retirement, using their savings gradually along the way. Someone in a new career may have 30-40 years to feed their investments before they begin needing their investments to begin feeding them. Even a parent saving for college may have years before substantial funds are needed to pay tuition."

 

That is sage advice. If you are five years or more away from retirement, hold fast unless you can't sleep at night. In which case, it is an indication that you are invested too heavily in one asset class, like stocks. Diversification occurs when you are invested in several asset classes outside of stocks in areas such as bonds and commodities. You can also be diversified by investing some money overseas as opposed to putting all your eggs in U.S. equity.

 

And speaking of those U.S. equity eggs, thanks to the overconcentration by both mutual funds and exchange-traded equity funds in a small group of mega-stocks called the Magnificent Seven, diversification among equity holdings is practically non-existent. And unfortunately, the Mag 7 is getting hit the hardest in this decline.

 

For those comfortable taking on more risk, especially if you are young, middle-aged, or even if retirement is closing in on you. Most of you are still in the accumulation stage of retirement planning. Downturns like this are a real opportunity. The contribution process in employer-sponsored accounts is a perfect vehicle for dollar-cost averaging. Since most contributions are made monthly, gradually increasing your contributions while increasing your allocation to equity makes sense. History shows that downturns like this have been the best opportunities to increase wealth.

 

I recognize that not all of us have the risk appetite to buy stocks ''when the blood is running in the streets." In that case, rebalance your holdings into more defensive stocks like utilities or dividend-paying securities as well as more fixed income.  

 

What if you are retired? Many retirees' greatest fear is that the markets will continue to decline. The worry is that with no income coming in at some point, your money will run out. I knew several retired investors who sold at the bottom during the Financial Crisis of 2008-2009, many on the advice of their brokers. It was the worst thing they could have done. For those who did, It required almost five years to recoup those losses.

 

Rather than panic, devise a plan instead. For example, a plan of action might be to keep a year's worth of cash out of the market, says Scott Little. While the downturn continues, spend down the cash and allow your more growth-oriented investments time to recover. As markets become less volatile over time, use that opportunity to replenish your cash and prepare for the next year. You might also want to reexamine your risk profile. The best way to do that is with a third party, either an advisor or a financial planner.

 

Retirement accounts by their nature are long-term investments. At the same time, investing in stocks is a volatile proposition but the risk-reward ratio is worth it. Stocks will have periods where you can expect to see 20 percent,  30 percent, even 40 percent declines. And yet the equity markets have always come back. The trick is to stay invested.  

 

Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.

You may have weathered the Financial Crisis and the COVID-19 pandemic sell-off, some may even remember the Dot.Com boom and bust, but this time around feels different. That's because it is.

 

In my entire career, I have never seen the stock market move 8.3 percent in 34 minutes on a rumor. That is what happened a few days back. To put that in perspective, the S&P 500 Index gains in minutes an entire year's performance. The following day it gave back half of that. Sure, we can blame these moves on computer-driven trading, algorithms, options, and the like but it doesn't change what happened and could easily happen again. 

 

If you feel the markets over the last few months are more akin to a roulette wheel in Las Vegas, you wouldn't be far wrong. In an atmosphere of radical uncertainty, daily turns in stocks and bonds become random events like a Lotto game.

 

Most market-moving events can be assigned a numerical probability to a set of outcomes which could then be calculated and priced. The Dot.Com era comes to mind. Valuations on some stocks were so high that their prices could not be justified.

 

Uncertainty enters the picture when we cannot assign a number to the probability of an outcome. It can still be modeled however by using history, similar events, stress tests, etc. We call them educated guesses. The pandemic falls into this category, although not at first. The race for vaccines, enforced isolation, and masking-up to slow the spread were all elements of educated guesswork. 

 

Today we live in a world where we aren't even sure what the outcomes are, or any idea of what probability to assign to each one. "Radical uncertainty concerns events whose determinants are insufficiently understood for probabilities to be known or forecasting possible." That was the conclusion of John Kay and Mervyn King in 2020 in their book "Radical Uncertainty: Decision-making Beyond the Numbers."

 

They argued that in certain instances there exists a deeper kind of uncertainty for which historical data provides no useful guidance to future outcomes. Fast-forward to today. Most people recognize that a massive change in our economic and political system is underway.

 

The tariff wars are but one element of this upheaval. In a world where tariffs can be raised by more than 100 percent, they are without precedent in the modern world. In addition, the unpredictability created when tariffs are announced, and then changed, in some cases several times, are examples of what we see as a world gone amuck.

 

Markets behave differently under these circumstances.  Volatility, which usually occurs infrequently, becomes a permanent and daily feature of financial markets. As a result, investors and traders insist on a higher premium for the risks they can't even identify. That, in turn, drives valuations lower, while cash increases as fewer investors are willing to chance buying into this volatility.

 

Now that you know how markets have changed, next week I will examine, how you should navigate through these trying times based on your age and risk tolerance.   

 

Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.

Are we on the verge of an American economic and social revival as Donald Trump promises, or on the eve of destruction as his critics claim? That sounds extreme, but in this partisan world we live in binary events are all we care about. 

 

If all unfolds according to the Trump policy playbook, inflation will be lower, the country more substantial, and we will be able to grow our way out of this debt crisis through higher tax revenues from a booming economy. This land of plenty will take time to achieve, they warn, so for now, you must have faith in the narrative.

 

The bull case continues with tax cuts, government spending reductions, and tariffs that will supercharge the economy, but only after a period of pain unfolds. It is an unorthodox multi-faceted approach. It carries a great deal of risk, and several of its main pillars fly in the face of most economists' wisdom.

 

I wrote last week about how both the demand and supply sides of this economic equation face pitfalls. Many of the country's future growth hinges on the success of supply-side economics that have only increased income inequality in this country for decades. This week, we look at the supposed benefits of tax cuts and tariffs. 

 

The much-heralded tax cuts of 2017-2018 during Trump's first administration, were supposed to benefit rich and poor alike. However, the trickle-down assurances of people like Larry Kudlow, Trump's former economic adviser, never occurred. Roughly 90 percent of  Trump's last round of tax cuts benefited the wealthy and corporations.

 

This time around, despite the media and the administration's use of the word tax cuts, the present plan is only to extend the existing tax cuts first passed during his first. As such, both individual and corporate tax rates will remain the same. There is no economic impact therefore unless the extension of tax cuts fails to pass the House. If so, then we will experience a tax hike. I think the risk of that is small.

 

The good news is that some lessons were learned, and some lower-income Americans may get a reduction in taxes this time around. Trump has promised no taxes on tips, overtime pay, and Social Security benefits for retirees. At the same time, Congress is actually toying with the possibility of increasing taxes on millionaires to 40 percent.

 

Given that tax cuts may not provide the economic stimulus needed, the focus on tariffs becomes more important. Tariffs "are going to raise $600 billion a year, about $6 trillion over a 10-year period," according to Trump's chief trade adviser, Peter Navarro. That may be a revenue source to offset spending and tax cuts, but it comes with baggage.

 

As I have written many times in the past, tariffs are taxes. They are paid for by American companies and individuals that buy imported goods. Those taxes accrue to the government just like your income taxes. That means Americans are facing a hefty tariff tax increase. How large? It would be the largest tax hike since 1951, representing 2 percent of Gross Domestic Product if they are implemented.

 

Tariffs will not only hurt consumers but will also slow the growth rate of the economy. If our trading partners retaliate in kind, the damage will be greater. In this case, the global economy will also slow. This negative feedback loop could feed upon itself. The recent tariff on Chinese goods is an example of what might happen with other nations.

 

The total tariff rate on imported goods from China is now 70 percent. China recently retaliated by slapping a 34 percent tariff on American goods. In return, the U.S. increased our tariffs again by 50 percent last week, totaling 104 percent. China then upped its tariff again and so did we. Fortunately, this kind of tit-for-tat action has not spread among the other nations we trade with.

 

Just yesterday, the president announced a 90-day pause on those reciprocal tariffs he announced last Wednesday and instead settled for a much milder 10 percent tariff across the board. His one exception was China. He increased tariffs to 125 percent on that country's imports. His comments indicated that the pause was always part of his tariff plan.

 

Clearly, other elements of the administration's plan are working. The dollar has declined as has interest rates. Both help American exporters and will help the trade deficit. The oil price has also plummeted. That will go a long way in reigning in inflation. If the economy slows further, in the absence of more fiscal spending, inflation should remain modest. Those are remarkable achievements in such a short time.

 

The challenge will be reviving a faltering economy. That will depend on a successful conclusion to the tariff question. Many doubt the wisdom of Trump's actions. Corporations, financiers, and business leaders, along with Democrats, have warned that we are on the eve of destruction if the president did not relent on his tough stance on tariffs. It seems clear that he was listening.

 

This was a massive turnaround in Trump's recent attitude, which I suspect has more to do with the 20 percent-plus fall in the stock market and a near-meltdown this week in the credit markets. What is true is that the ultimate success or failure of much of this economic program lies squarely on the shoulders of Donald Trump, the negotiator-in-chief. He seems comfortable in that role and relishes it.

 

No plan is foolproof. Sometimes, against all odds, one approach will work, or if it doesn't, another one will. I am not sure that this burn-it-down approach to economics will succeed, nor will a return to growth come about as quickly as planned. I am guessing Trump feels the same way. He knows the time it will take to carry out these plans is in years, not weeks or months, even if he is successful in all his trade objectives.

 

As for today's populist generations, especially those most impacted by income inequality, some of the policies I outlined above are different from the same supply-side, trickle-down B.S. that created this level of income inequality in the first place. Others are not. Yet, the country demands change and change it will get. I am willing to give it a chance, despite my misgivings, knowing full well that any change is uncomfortable, if not painful.

 

However, I am older, made more than my share of mistakes, and have acquired the patience to see what happens over the long term. Let's face it, we live in a country that has lived well beyond its means for decades. Change is long overdue, even if it isn't the change you had hoped for.

 

I am rooting for the country and its future generations, not for any party or politician. I am hoping that Trump's voters, Wall Street, and the country at large will have the willingness, fortitude, and patience required to weather the changes and challenges we face now and into the future.

 

Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.

Transforming a government-heavy economy into one where the private sector leads not only takes time but also requires a period of detoxification, according to U.S. Treasury Secretary Scott Bessent. The idea that pain may need to come before any gains has caught the nation and the stock market by surprise. 

 

Last week, I explained that "the administration's first objective, is to slow demand in the real economy. Keynesian demand-side economics says the best way to do that is to reduce spending. Doing so, they believe, will also slow inflation. How do they do that? By distributing less money to the greatest number of people possible. That means slowing wage growth and providing fewer social services to Americans in the median income level and below."

 

This "pain trade," also includes the president's tariff agenda. The result will be slower growth, less inflation, and fewer jobs. As the demand side of the equation craters the economy, President Trump's strategy will be to increase stimulus into the private sector to expand the industry.

 

The game plan, according to their script, is to maintain massive corporate tax cuts while reducing taxes even further by gutting the Internal Revenue Service and corporate financial oversight. Tariffs will play their part by forcing foreign companies to invest in new plant and equipment in the U.S. Part and parcel of this will be deregulation wherever possible to allow corporations to increase profitability. The president's "Drill, Baby Drill" is an offshoot of this idea.

 

If this sounds familiar, it should, because this is classic supply-side economics. This well-worn supply-side theory is supposed to increase the economy's productive capacity by reducing taxes and deregulation, which should boost investment, job creation, overall economic growth, and more tax revenues.

 

If successful, once again (if history is any guide), money will flow to the top 0.1 percent of top wage earners, who don't need it. They won't spend it either. Instead, they will save or invest it. In this case, this kind of stimulus is not inflationary. These are policies that have been used by both Republicans and Democrats for decades.

 

In this equation, however, the demand-side policies in the works will take effect much faster than the supply-side stimulus. That should cause a deflationary environment six months out. This is why Wall Street economists are predicting either stagflation or even recession. At that point, the Federal Reserve Bank will be called on to loosen monetary policy by cutting interest rates and switching from quantitative tightening to quantitative easing.

 

One might ask what happens if the Fed does not cooperate? We could easily see the economy tip over into recession. However, there is a long history of Fed bullying by presidents, when they wanted lower interest rates. I would expect that tradition would come into play quickly.

 

And what if the Fed plays along? Then the same dynamics would reward some borrowers. Once again, who benefits? Ask yourself who can borrow the most from banks when interest rates fall. Why the top one percent, as well as large corporations, that's who. And what have they done in the past with those borrowings — invested overseas?

 

If on the other hand, they are forced by some mechanism to invest here at home, the most lucrative areas with the best returns are labor-saving areas like artificial intelligence and robotics. If you believe for one moment that corporations will hire unskilled and under-educated workers, train, and pay them a meaningful salary, plus benefits, when a robot or software program could easily do the same job, I have a bridge to sell you.

 

Next week, I will outline the risks and rewards of this economic plan not only for the stock market, but for the well-being of those who are worried about their own economic future.

 

Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.

For those of us in the business world, the myriad economic policy initiatives spewing from the White House are both confusing and at times difficult to understand. 

 

Certain policies seem to cancel each other out. Full employment while reducing immigration, drill-baby-drill to force oil prices lower while raising tariffs to increase prices? 

 

The point is that if even the professionals are having difficulty, how can those with little financial background hope to understand where the economy is going and why?

 

It appears, for example, that economic growth may be moderating as consumer spending weakens, while inflation remains stubborn. Some are calling for a recession. Others stagflation, while the president sees a golden age ahead of us.

 

After sorting through all the above and reading the statements of the president and his cabinet while ignoring the partisan rhetoric, some objectives of the Trump approach to economics have become clear to me.

 

Few would argue that over the last eight years, fiscal spending, deficit, inflation, and the size of government have exploded. As a result, the share of the economy represented by the government versus the private sector has grown lopsided. From an economic viewpoint, the present situation is unsustainable.

 

The Trump administration wants a larger private sector and a smaller share of the economy by the public sector. However, all that government spending did have some beneficial consequences. The growing gap in income and wealth between the haves and have-nots, which we call income inequality, slowed somewhat from historical levels. But it also increased inflation. Over those years, most consumers neither invested nor saved their government-fueled additional income. Instead, they spent their enlarged paychecks on another TV, a bigger car, a family excursion to Disney World, or a front-row seat to the latest rock concert.

 

Turning the direction of the world's largest economy, however, is no easy feat. It will take time and, according to the president and Scot Bessent, his Treasury secretary, will involve a period of pain and discomfort for most Americans.

 

Their first objective, in my opinion, is to slow demand in the real economy. Keynesian demand-side economics says the best way to do that is to reduce spending. Doing so, they believe, will also slow inflation. How do they do that? By distributing less money to the greatest number of people possible. That means slowing wage growth and providing fewer social services to Americans in the median income level and below.

 

Here is where Elon Musk and his DOGE efforts come in. His job, while ostensibly to reduce waste in the government, is also about cutting government employment. All department heads now have that as their No. 1 priority. That is how you generate real cost savings.

 

In addition, Congress has its marching orders. Given the ongoing budget discussions, it is certain that the Republican majorities in both houses intend to cut social services drastically. Medicaid, SNAP food assistance, school lunches, low-income housing assistance, and dozens of other programs are on the chopping block. Those cuts will impact those who are making $80,000 a year or less, which is roughly 81 percent of the population.

 

That will mean no more rock concerts, and in many cases no more jobs unless you want to replace immigrants picking tomatoes or peanuts. Once these bills are passed, it will likely take three to six months for all these spending cuts and lost jobs to work through the economy. 

 

Our income inequality problem will reverse. How will that impact a generation of populists counting on a better life in the months and years ahead? Next week, we will examine the next step in Trump's economic plan, which will center on his program to jump-start a faltering economy through a return to supply-side economics.

 

Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.