As long-term investors, we view immigration as a powerful driver of economic innovation and long-term value creation. Despite escalating anti-immigrant sentiment and increased enforcement activities, immigrants—documented and undocumented alike—make substantial contributions to the U.S. tax base, labor force, consumer demand, and entrepreneurship. Immigrants paid $652 billion in federal, state, and local taxes in 2023¹, equivalent to 2.3% of U.S. GDP and more than the entire economies of countries like Belgium or Argentina. This capital is vital for public infrastructure, schools, healthcare, and retirement systems. Notably, undocumented immigrants pay a higher average effective tax rate than the top 1% of households.²
Investment Update Trade War
Here we go again! As Trump 2.0 initiates Trade War 2.0, the stage is set for what might be a far more punitive retaliatory tariff cycle compared to what we experienced during Trump’s first Presidency. For starters, in the rest of the world there’s already a coordinated effort to fight back against President Trump’s tariff strategy, including boycott lists of American products as well as identifying specific American products for retaliatory tariffs. Trade negotiations outside of the U.S. are already underway in order to dampen the blow of the trade war with America. Global leaders are especially incentivized to band together today as Trump threatens to “get Greenland” from Denmark, “take back” the Panama Canal, “make Canada the 51st state”, and “take over” the Gaza Strip. Meanwhile, on the other side Trump has become more emboldened due to his re-election victory and the groveling he’s enjoying from within his party. Both sides are quite likely to dig in their heels this time and the results could be far worse in terms of economic and geopolitical outcomes.
Valuations (& Values) Matter
“I think there are some groups of stocks that are highly vulnerable because they’re in cuckoo land in terms of valuations.” These words from the controversial but always entertaining Marc Faber1 could not be more succinct given current equity market conditions. The post-pandemic rally in global stocks has the All-Country World Index (ACWI) up almost 150% from the lows in 2020. The S&P 500 has been even stronger over the same timeframe leaving stocks in expensive territory. Some would argue that valuations don’t matter because global stocks have been expensive for years and they keep marching higher. Further, the S&P 500 is especially overpriced relative to the rest of the world according to numerous indicators including the Cyclically Adjusted Price-to-Earnings Ratio (CAPE2), but the U.S. market has generally outperformed since the end of the 2008/2009 financial crisis (Chart 1). It’s important to note that valuations should not be looked at in isolation. Sometimes higher valuations are warranted by higher growth prospects.
Japan: False Dawn or Land of the Rising Sun?
“Fall down seven times, get up eight” is a Japanese saying of resilience and perseverance. It also succinctly describes the pattern of the Japanese economy over the last 35 years. The Japanese real estate and equity bubble burst in December 1989, and since then the domestic economy has fluctuated between deflation and reflation with 45% of monthly inflation readings indicating falling prices. This situation is unique to Japan, which has been one of the weakest economies among the G7 countries over this timeframe. Japan has repeatedly experienced “false dawns” over the last 35 years where its economy appeared to be escaping the cycle, only to have economic recoveries fizzle out.
A Silver Lining to the 2024 Outlook
What a difference a year makes! According to the Merriam-Webster dictionary, the word of the year for 2023 was “authentic,” which is certainly a major improvement over “gaslighting,” which was the 2022 word of the year. Transitioning from the negativity of “gaslighting” in 2022 to the positivity of “authentic” in 2023 was mirrored in the global economy and financial markets.