Alamar analysts give their thoughts on the national economy
Editor’s note: Continuing our Q1 investor panel discussion, Taking Stock visited with George Tharakan, chief investment officer, and John Murphy, CEO, at Alamar Capital, for this email exchange on March 13. These answers were lightly edited for content. To suggest future topics, email us at [email protected]
Q. We’re starting to see some signs of real weakness in the economy — and a lot of it relates to tariffs and trade. Are we managing our way into a recession? Stagflation?
Alamar: It is undeniable that a looming trade war presents challenges to what has been a resilient US Economy in recent years. However, the impact is nearly impossible to calculate, given that the time period that the tariffs may or may not be in place remains unknown. Is leadership in it for the long haul, or looking to “make a deal?” According to the non-partisan Congressional Budget Office (CBO), the economy was already slated to cool off a bit with growth projections of 1.9% real GDP growth beyond 2025. This reflects a deceleration from the higher growth rates achieved coming out of the COVID-19 pandemic. To calculate a rough impact under a worst-case scenario, trade with Canada and Mexico currently accounts for approximately 5% of GDP. If we were to assume that 50% of trade is tariff-impacted over a period of two to three years, then we can estimate annual damage in the .5% to .8% range. That’s a considerable sum on an already cooling economy, though not recessionary. Finally, U.S. trade represents a material percentage of both Canada and Mexico’s economies, resulting in a much larger impact, and acting as an incentive to bring both parties to the negotiating table.
Q. The fact that government interest payments are higher than the defense budget has been described as a red flag. What would it take to have a sustainable fiscal future?
Alamar: An environment in which US interest payments exceed the defense budget, which we are now in, is a recipe for disaster. Interest payments on our debt act as an impediment to economic growth and an unfair headwind for future generations. Additionally, increased payments on the debt plus growing mandatory outlays through Social Security and Medicare force reductions in discretionary spending. Interestingly, discretionary spending increased in both the previous Trump and Biden administrations. The CBO recently reported that Government spending for 2025 is estimated to be $7 trillion, with $5.2 trillion in supporting revenue, resulting in a deficit of $1.9 trillion, or 6.2% of GDP. On our current trajectory, the deficit will increase to $2.7 trillion by 2035, resulting in federal debt held by the public as a percentage of GDP increasing from 100% to 118%. This surpasses the previous post-World War II high of 106% of GDP in 1946! In our view an approach that reduces spending is helpful, but its effectiveness is hampered by subsequent tax cuts. It’s not a popular take, but irrespective of party leadership, a policy approach that includes reducing spending as well as increasing government revenue — read higher taxes — is the much more likely solution. Until we are able to collectively ingest a dose of this painful medicine, we will continue passing our problems on to our children.
Q. What makes sense to you from an asset allocation standpoint given the uncertainties that lie ahead?
Alamar: We have grown concerned about the extent to which many passive indices have come to be dominated by just a few companies. At present the top 10 names by market capitalization currently represent nearly 40% of the S&P 500. Furthermore, with so much of the investment performance coming out of so few companies, we believe that many asset allocation approaches have become redundant and complacent. For example, we see many statements from prospective clients that include exposure to the large-cap growth sector, ownership of additional technology funds and ETFs andadditional in-favor individual names like Nvidia, Apple, etc. This approach can feel painful when investors look for the exits. We prefer to thoughtfully own a portfolio of individual companies with attractive growth potential and at reasonable prices that are not heavily owned in benchmarks. We can then combine these with additional outside asset classes to achieve true diversification that will meet our client’s investment needs over time.
