Chief Investment Strategist, The Freeport Society
I’m “Navigating” this morning from Dubrovnik, Croatia, where I’m tragically wrapping up a beach vacation. I’ll be back in the office tomorrow, fighting jet lag and hitting the coffee pot harder than usual.
Alas, money never sleeps… and last week’s significant economic news – the positive GDP report and the hugely revised unemployment report – all but guarantees what the Fed will do next.
So today, let’s discuss why markets reacted the way they did on Friday, with the S&P 500 and the Dow both losing more than 1.2% and the Nasdaq and Russell 200 tanking about 2% each. Then I’ll explain what all of this means for our portfolios.
The Sigh of Relief?
The economy grew at a 3% clip last quarter (April – June), which is pretty darn good. That’s roughly in line with the second and third quarters of 2024, and it’s a solid number by the standards of the past 20 years.
It’s also a major sigh of relief after GDP shrank by half a percent in the first quarter.
Wait! Wait! Not so fast…
The biggest contributing factor to the GDP bump was a massive surge in net exports.
But exports actually fell last quarter.
How is that possible?
How can exports have been lower and yet boost GDP growth?
In the GDP calculations, exports increase GDP while imports decrease it. Never mind that imports don’t make our economy smaller.
(The mind boggles.)
So, exports fell 1.8%. But imports fell a lot more, collapsing over 30%.
That sounds apocalyptically awful, but it’s not.
Remember there was a major jump in imports in the first quarter as American retailers tried to buy up as much inventory as possible ahead of the tariffs.
The drop in imports that followed in April, May, and June was expected. By itself, it’s not alarming.
The Broken Window Fallacy
Kids playing baseball on your street accidentally send a ball through your living room window. That’s rough. But at least the window repairman gets paid. The cost of fixing the window increases GDP.
But if you intentionally broke windows in order to boost GDP by fixing them… that’s not growth.
The only thing growing is the glazier’s bank account.
Yes, our “net export” position may improve because we import less. But we’re also exporting less.
We’re getting less poor than our former trading partners… but we’re still getting poorer.
Less trade means less competition.
Less competition means less innovation.
Less innovation means less progress.
And none of that makes us richer.
Okay… but what about the rest of the GDP report?
Any Cause for Celebration?
Consumer spending is the backbone of the economy, making up about 70% of GDP. Americans get and spend. It’s what we do.
Unfortunately, we’re not spending with quite the same enthusiasm as before.
Consumer spending grew by only 1.4% (versus the 0.5% growth of the first quarter).
What’s the story here?
It’s rarely just one thing…
Some of it is the long hangover from the high inflation of the past several years.
Some is due to a weakening job market.
Some is probably due to the disruption of the federal workforce by DOGE.
Some is just the normal ebb and flow of the economy.
And some might be pure noise.
Whatever the cause, Americans aren’t spending with the reckless abandon we typically see in a boom.
The story gets worse when we look at “gross private domestic investment,” which is a catch all category that includes everything from home construction to industrial equipment. Here, investment dropped over 15%.
Some of it is likely due to uncertainty about the tariff rollout. With everything in flux, a lot of companies probably opted to wait and see how the dust settled before committing to major new projects.
Some of this might be fear over AI leading to excessive conservatism.
Regardless, companies are investing less.
Look, there is so much noise in the data, we should take every GDP report for the next year or two with a massive grain of salt.
Still, these numbers are hiding a warning. If it weren’t for the massive drop in imports, GDP growth would have been negative last quarter.
What Happens Now?
Fed Chairman Jerome Powell will almost certainly cut interest rates next month.
Futures traders are pricing in an 89% likelihood of a 0.25% cut at the Fed’s September meeting.
All else equal, that’s good.
Lower interest rates tend to make Wall Street happy. But a quarter point isn’t going to move the needle much, and Powell has given every indication that he intends to move slowly here.
Powell is terrible at his job, but even he is smart enough to realize that keeping rates artificially low over the past 25 years did wonders for the stock market but not a whole hell of a lot for the economy, jobs, or the financial stability of over 300 million Americans.
He’s still concerned about inflation. He’s not going to risk a resurgence of inflation just to keep a few Wall Street traders happy.
We’re also entering the seasonally most volatile time of the year. August, September and October are often wildly volatile months, and many of the worst crashes in history happened in that window of time – like Black Monday in 1987, the Great Crash of 1929, and 2008 Financial Crisis to name just three.
What Does This Mean For Your Portfolio?
I’m not saying the market is guaranteed to crash tomorrow. But it makes sense to keep a little extra cash on hand and crisis hedges like gold and Bitcoin in your portfolio.
We’ve been invested in both of those assets since we launched our flagship newsletter Freeport Investor at the end of 2023. We’re up 66% in Gold and 176% in Bitcoin. And I have no intention of selling those out of our model portfolio any time soon.
It’s also a fantastic time to soften your exposure to some of the most popular names out there right now – like Amazon (AMZN) and Nvidia (NVDA).
Don’t sell them out of your portfolio entirely, but consider buying other stocks that are better positioned to help you grow your wealth right now.
Legendary global macro investor Eric Fry uses a “Buy This, Sell That” signal that tells him where he should be invested for the best returns possible. He’s been turning volatility to his favor for decades… finding more than 41 winning stocks that have gone on to soar 1,000% or more.
He’s now warning that there is a little appreciated company that could become the next Amazon-like investment for investors. As he says,
It’s a virtually unknown, fast-growing online retailer that could be like buying Amazon twenty years ago, but with an even bigger competitive advantage. Projections are showing that it could become 700% more profitable by 2027.
He’ll share the details with you in this brand-new, free special broadcast.
He also shares stocks that he believes every investor should buy now – and what stocks everyone should drop immediately.
This Age of Chaos requires that we stay flexible… and skeptical of the numbers government agencies feed us. With us now in the craziest time of the year for markets, we must be skeptical of what mainstream analysts are pitching as well.
They’re all screaming, “Buy Amazon” or “Buy Nvidia.”
They may be right, but there are also countless other opportunities that would serve your wealth growing efforts far better.
To life, liberty, and the pursuit of wealth.