Great minds think alike.
That’s what I thought when I read Wide Moat Research analyst Nick Ward’s article on Friday, including this bit:
[Trump’s] recent policy choices – or blunders, as Mr. Market would say – have destroyed trillions in stock market value. And now the word “recession” is on the tip of every prognosticator’s tongue.
He also mirrored my growing suspicions that President Trump is purposely engineering a recession:
Depending on how you look at the data, the U.S. government has anywhere from $3 trillion to $9 trillion worth of debt maturities that it’s going to have to deal with this year.
Refinancing this debt at current levels is simply not sustainable. Think about it. Take the high range of that estimate – $9 trillion. At 4.8%, that implies roughly $432 billion in net interest per year. But finance that same $9 trillion at 3%, and net interest falls to $270 billion.
Still a big number. But it’s more manageable.
If you haven’t already read Nick’s full commentary on the subject, I highly suggest you do. It was an excellent write-up.
It was also a reminder that there’s usually another angle to look at a situation: a pro and a con. Today’s market drops – though uncomfortable now – could lead to national benefits we’re all benefiting from by the end of the year.
I want to follow up on that line of thinking today. Because there are other benefits to be found. The smart money understands that where there’s volatility, there’s opportunity.
This goes beyond what I explained last week: how this “is not the time to panic – not when you have a strong portfolio filled with wide-moat positions.” It’s also a time to recognize that wide-moat positions might be selling cheap.
In which case, now is the time to benefit from the chaos.
Recognizing How the Markets Operate
A good friend of mine and fellow value investor, Chuck Carnevale, once said:
Earnings determine market price in the long run, always have and always will. Emotions may determine market price over the short run, but the short run always gives way to the long run…
It’s another way of saying that, so long as earnings continue to rise, the market always eventually goes up. No matter what.
Yes, whether he’s doing it on purpose or not, it’s clear that President Trump’s tariff wars have sparked short-term volatility. Perhaps we’re even in for a “garden style” recession as a result.
Political machinations do sometimes lead to such things. It’s just the way things work in our connective economy.
But it’s critical for investors to understand that while this may lead to daily, monthly, or even annual share price drops, there’s a bigger picture to keep in sight.
That bigger picture is that corporate earnings drive shareholder returns.
This is why our team at Wide Moat Research spends so much time meeting with members of management. We recognize the importance of competent and disciplined leadership.
If they strategically conserve and construct during both good times and bad times… If they’re always on the offensive, looking for ways to expand, while simultaneously playing defense, looking for ways to save…
This translates to higher earnings that then translates into growing dividends that translates into higher share prices over time.
I know there are people out there who think President Trump could be the one to break the proverbial bank. That he’s shaking things up enough to change the game.
But remember all the chaos the markets have gone through so far this century.
The graph below illustrates the earnings and price correlation of the S&P 500 (SPY) going back to 2005. This means it spans the Bush, Obama, Trump, and Biden administrations, including the first few months of Trump 2.0.
(Note: Bush’s term was 2001 to 2009 but the graph below only went as far back as 2005).
Source: FAST Graphs
Breaking Down the Markets, President by President
Take the Bush years, which saw the tech bubble burst, 9/11, and two recessions, including the onset of the “Great” one. The 2008 crash was catastrophic in so many ways, including on a personal level. That’s why I turned from a real estate investor into a Wall Street writer.
Yet the markets ultimately headed higher, bouncing back under Obama. They even boasted attractive valuations and good earnings growth through 2014.
In fact, the markets’ valuation was higher in the later part of Obama’s term. Although earnings growth evened out to 0% in 2015 and rose to 3% in 2016.
Then, for most of the first Trump administration, we saw strong double-digit earnings growth – averaging 16% in 2017 and 2018 – and a very strong market with valuations remaining high… until COVID-19 sparked a pandemic that sent the S&P 500’s earnings sliding by 12% (in 2020).
Yet the markets came out of that disaster too.
Moving on to the Biden years, the S&P 500 returned around 28.5% in 2021, with earnings up 48%. It then fell 18.5% in 2022, with earnings growing by 5%… rose around 26% in 2023 despite featuring flat earnings… and 24.6% in 2024, where earnings grew by 9%.
Do you see my point?
There was plenty of turmoil, change, and confusion through these years. Yet the market still headed higher over the long term.
Much higher.
Now with Trump in office almost two months, shares in the S&P 500 have returned -5.9%. Yet the consensus growth estimates remain intact.
Analysts began the year calling for 12% earnings-per-share growth in 2025 and 14% in 2026 (just as they did in Trump’s first term). And, believe it or not, they haven’t changed their minds.
Nor have I.
You see, we’re not fixated on the short term. You wouldn’t be either if you knew what we knew.
Like how if you had bought SPY back in January 2005, your shares would have returned an average of 8.8% annually. Remember that includes the Great Recession and a global pandemic.
You could have made substantially more if you had embraced the volatility and bought shares in high-quality stocks.
So here’s my main point for today: Regardless of which president is in office… regardless of what decisions they make… and regardless of what political, economic, or societal curveballs come along…
There will always be opportunities. And when you have volatility like we’re experiencing, those opportunities start to sport very low prices.
So stay tuned this week! I’m launching my YouTube channel, The Wide Moat Show, in which Nick Ward and I will be helping our followers navigate the market volatility in order to sleep well at night.
Happy SWAN (sleep well at night) investing!
Regards,
Brad Thomas
Editor, Wide Moat Daily
MAILBAG
What are some ways you are navigating the market volatility? Write us at feedback@widemoatresearch.com.