Good Monday AM from your Hometown Lender,

The markets have settled into some orderly trading over the past week and rates have improved based on stability.

There is no economic data (or tariff news thus far) on the calendar today. This week picks up with a lot of employment data and GDP . While rates will react to jobs data, expect more knee-jerk reactions to (tariff) headlines as well. We are starting to see talk of how the tariffs are hitting markets, especially on the imports like Temu and Shein. There will be more of that as companies deplete stock already on American soil, but some products cost more in tariffs than the products themselves… I expect this week will show signs of labor market weakness, with likely more to come. Many companies are already cutting back on staff, reducing hours, and trimming costs. Expect it to get worse as companies like Target and Walmart have to start replenishing stock in May, and those companies told President Trump last week in a meeting that shoppers are likely to see empty shelves and higher prices. Normally, a weakening economic outlook would help mortgage rates fall. However, if prices on goods increase and we see a jump in inflation while the economy slows down, we enter stagflation. Mortgage rates likely won’t fall much in that scenario, because of the opposing forces at work.

Here is a good piece from the WSJ this AM on the economy…

Investors are worried—just not about the right things.

We’ll probably get more evidence this week that tariff uncertainty is weighing on U.S. economic growth. That’s clearly bad for American companies’ sales but, barring an economic calamity, slowdowns on their own have had surprisingly little effect on stock prices in the medium term.

Nominal economic growth (which includes inflation) has been similar during both good and bad decades for stock prices. For example, it was slightly higher in the awful 1970s than the booming 1980s. And it was faster during the aughts, when stocks went nowhere, than during the 2010s, when they rallied.

By far the two most important factors for stock prices over longer cycles are how much companies earn on those sales—profit margins—and what multiple investors are willing to pay for those earnings. Both look vulnerable amid a breakdown in global trade and capital flows.

Reported margins for the S&P 500 averaged 7.8% between 2000 and 2015, excluding recessions, according to S&P Dow Jones Indices. Last year they were 10.7%.

Offshoring of manufacturing to China and elsewhere helped boost margins and keep inflation tame.

It also funneled dollars back into the bond market, enabling the low interest rates that allowed American companies and homeowners to borrow cheaply. The federal government, too, was able to run big deficits, stimulating the economy. Rates have risen, though, and those low ones aren’t locked in forever.

Without the full operating and financial benefit of globalization, margins could easily drift back to their pre-2015 level. Even assuming Trump’s 2017 corporate tax cuts are permanent, that could mean a 20% drag for earnings—the “E” in the P/E ratio.

The “P” looks iffy too with more-enticing bond yields competing for investors’ dollars and the world’s savers no longer as desperate to pay a premium for U.S. investments. Non-U.S. developed markets’ P/E multiple and the U.S. long-run average are both around 16 times compared with the current trailing P/E multiple of 25.

Let’s be generous and say the magic of America’s dynamic, tech-heavy stock market justifies a higher multiple of 20 times. In 10 years, assuming economic growth stays at recent levels, the S&P would produce an annualized return of around 3% a year including dividends—a far cry from the 13.3% average of the 10 years through 2024.

One can always throw in a fudge-factor like a productivity miracle from AI. So far, though, it has mainly boosted the Magnificent Seven stocks. Earnings per share for the other 493 companies in the S&P 500 fell by 4% in 2023 and grew by less than 5% last year, according to FactSet.

If technology can’t replace cheap stuff and capital, a less-globalized economy bodes poorly for stock prices.

Stay safe and make today great!