Today I will recap the 3rd quarter and discuss the 4th, including Cumberland’s positions in the defense sector and healthcare, the trajectory for interest rates, political uncertainties, and tariffs.
The 3rd quarter of 2024 witnessed growing regional wars in both Europe and the Middle East. During Q3, the Federal Reserve’s policy became clearer as the inflation rate continued to trend lower. Short-term rates are heading lower as the future unfolds. And there is some economic weakening as the post-Covid shock period fades into a more normalized economy. Long Covid is still a major problem in the US and is now being ignored by most general media even though it impacts the US labor force (see our recent post about the U7). The employment reports seem to confirm the soft-landing scenario while extremist forecasters now predict serious recession. Lastly, politics has intensified to its worst in terms of shrill disaster warnings and nasty, mean-spirited bullying and name calling. And that is how the 4th quarter of 2024 begins.
Four specifics are on the table for discussion.
First, the defense sector is an overweight position at Cumberland. Defense Secretary Austin has implored the bipartisan leadership of the House to pass the defense authorizations needed to protect America’s security. He wrote: “The repercussions of Congress failing to pass regular appropriations legislation for the first half of FY 2025 would be devastating to our readiness and ability to execute the National Defense Strategy.” IMO, a handful of miscreant Members in the House of Representatives are still a problem in getting a budget and full defense appropriations. In Austin’s letter, as ABC News reports, “The defense secretary points out to Congressional leaders that a six-month continuing resolution ‘would represent the second year in a row, and the seventh time in the past 15 years’ the Pentagon has been stalled until midyear in receiving its funding orders from the legislative branch.” Readers note please that this is Congress at fault not the White House. Defense and national security require budget authority by Congress.
Meanwhile, the Justice Department has confirmed Russian interference in US elections. Here’s the story: “Justice Dept. Disrupts Russian Influence Campaign, Indicts Russian Nationals,” https://www.lawfaremedia.org/article/justice-dept.-disrupts-russian-influence-campaign--indicts-russian-nationals. What does it take to get folks to understand that Putin and his ilk, including the alliance with Iran (sending missiles to Russia) and North Korea (Kim is building centrifuges for nuclear usage), are an ongoing, serious threat to the United States. Note the interconnected alliance with Iran, Houthi, Hamas, Hezbollah, Palestinian Islamic Jihad and others.
Secondly, the healthcare sector has its volatility, and that is especially true in political years. Meanwhile, the pathogens that threaten us don’t play politics. We have multiple outbreaks of disease in the United States and around the world. They range from mpox in Africa to malaria and other mosquito-borne pathogens in America. And politics has again succeeded in poisoning the national commitment to public health. Anti-vax rhetoric that started as a focused targeted attack on Covid mRNA vaccines has spread with conspiracy theories. Results are that many American kids are not protected against polio or measles. So, what happens and is likely to happen is the expected outcome: We have the resurgence of these diseases in America.
For the investment structure that means greater demand for healthcare and for sectors within healthcare, such as biotech. To help understand the rationale for that overweight position, here’s a substack column by Eric Topol about cancer and its characteristics. Eric Topol from Ground Truths [email protected] . You may need the substack app. Or try this link: https://erictopol.substack.com/?utm_source=substack&utm_medium=email&utm_content=share . Also, The Economist has a special edition on longevity in the English speaking countries: https://view.e.economist.com/?qs=73b4357afc3293ab52345f1d1870c05dc780dc73a3a521feb9b1cc6a9f228d1e24b5388121be933b8f97959840c88aa453bfa84f5b8f759f842446fee44d1a59c83454314a93b7fa949ed68ae959b044 . Of note is that Australia ranks first among 6 countries. Sadly, America ranks last. It is worthwhile reading.
Thirdly, the outlook for interest rates has become clearer. The US Treasury yield curve has flattened out at under a 4% rate structure when we look at maturities from medium to longer term. This makes some strategic sense. If the growth rate for America is about 2% and the inflation rate is about 2%, then the nominal rate of GDP growth is about 4%. Longer-term studies show that the 5-to-10 years Treasury note maturity range tends to align with the growth rate of nominal GDP. So, we’re estimating a 4% nominal growth rate and a 4 % Treasury note yield. History suggests that these are close estimates.
Lastly, a factor that is unknown and worrisome is the movement from both political candidates in the direction of greater use of tariffs. Harris has outlined some additional tariffs in a more targeted approach. She is suggesting a continuation of the Biden use of tariffs, which was a continuation of some of the original Trump tariff war launches during his presidency. Trump has doubled and tripled down on tariffs. And he has made a tariff war a prominent theme in campaign. So, investors face higher tariffs from either candidate and much higher tariffs from Trump. IMO, this is a combination of a “Hobson’s Choice” and a “Morton’s Fork.” Readers can research those two characterizations and what they really mean. You won’t like either of them.
Tariffs are a tax – a sales tax imposed on Americans. They are collected by American companies, and they are remitted to the US Treasury. And they provoke retaliatory responses from foreigners. So, when a candidate says, I will institute a tariff on goods from X country, they are really saying, I will impose a sales tax on you, Mr. and Mrs. America. Tariffs raise prices. They lower productivity. They are a form of protectionism. The worst history of tariff wars is exemplified by the Smoot-Hawley tariffs of the Great Depression era.
All that said, tariffs are here and are likely to increase. The old notion of free trade and competitive openness is dead. How markets respond to tariff wars is a difficult thing to forecast. It requires examining sector by sector to identify and quantify impacts. Example: US utilities are nearly all domestic US businesses, so they don’t pay much in tariffs. Meanwhile, imported tech or pharma may be subjected to high tariffs.
We enter the 4th quarter with a wild election year now ending thanks to the calendar. And we worry for the defense and safety of the United States. As for the politicians, these are what we have, like it or not. It is our system. Please remember that it takes a House and a Senate to pass tax code changes that agree with a president. So that variable is not clear now. But it is an executive branch function to impose or lift tariffs. It used to be Congress, but the Congress has ceded that authority to the president in years past. It is unlikely that any Congress would have enough votes to retake the tariff authority away from the White House. It is also unlikely that any White House would ever willingly give it up.
I will add some detail about tariffs for serious readers and research-oriented investors.
For a precise history of duties and tariffs and free trade agreements see this detailed document provided by the Office of Analysis and Research Services Office of Operations at the US International Trade Commission: “US imports for consumption, duties collected, and ratio of duties to value, 1891-2023 (Table 1)tariffs” https://www.usitc.gov/documents/dataweb/ave_table_1891_2023.pdf. Readers and investors will be able to observe in this table the data on tariffs and on free trade during the modern post-Civil War period for the United States (about 140 years). In my opinion, history tells us that the Trump tariff plan is very risky for the US economy and the rest of world. If you are willing to look closely at the history and data, you might see similarities with the Smoot-Hawley tariffs of 1930; many believe that they deepened the Great Depression once the full tariff war evolved. Note that the stock market crash of 1929 and the period of 1929-31 was a recession, not a depression. The real collapse and the Great Depression were in 1931-33.
A Barclays Research email from September 12th, titled “Tariffs: Counting the costs,” draws this conclusion: “Tariff increases by the US on China and the RoW (rest of the world) would lead to output losses for all. Their size and distribution depend on US trade exposure, retaliation measures and confidence effects. China would be hardest hit, knocking ~2pp off growth, followed by the US and EA.” The next observation also comes from Barclays, in a separate September 12 email, “Tariffs: Cross-asset implications”: “Given the combination of higher prices and lower growth shocks that tariffs tend to imply, the growth effects are likely ultimately to lead the differentiating impulse response across assets. We identify and quantify the effects on global equities, credit, the yield curve, and the dollar.” The two emails link to reports for Barclays customers and are a 30+ min read.
Here's a short reading list capturing other takes:
““What Trump’s Proposed Tariffs Would Mean for the Economy,”
https://www.morningstar.com/economy/what-trumps-proposed-tariffs-would-mean-economy
“Trump tariff threats will trigger import ‘rush,’ say trade experts, and consumers pay the price,” https://www.cnbc.com/2024/09/11/trump-trade-policies-will-fuel-freight-rates-consumers-pay-price.html
“TPC: Trump Tariffs Would Raise Household Taxes And Slow Imports,” https://www.taxpolicycenter.org/taxvox/tpc-trump-tariffs-would-raise-household-taxes-and-slow-imports
“Why Trump's tariff proposals would harm working Americans,” https://www.piie.com/publications/policy-briefs/2024/why-trumps-tariff-proposals-would-harm-working-americans
David R. Kotok
Co-Founder and Chief Investment Officer
Email | Bio
Links to other websites or electronic media controlled or offered by Third-Parties (non-affiliates of Cumberland Advisors) are provided only as a reference and courtesy to our users. Cumberland Advisors has no control over such websites, does not recommend or endorse any opinions, ideas, products, information, or content of such sites, and makes no warranties as to the accuracy, completeness, reliability or suitability of their content. Cumberland Advisors hereby disclaims liability for any information, materials, products or services posted or offered at any of the Third-Party websites. The Third-Party may have a privacy and/or security policy different from that of Cumberland Advisors. Therefore, please refer to the specific privacy and security policies of the Third-Party when accessing their websites.
Sign up for our FREE Cumberland Market Commentaries
Cumberland Advisors Market Commentaries offer insights and analysis on upcoming, important economic issues that potentially impact global financial markets. Our team shares their thinking on global economic developments, market news and other factors that often influence investment opportunities and strategies.
