Jack Ablin on Tariffs, Large Caps, and Investment Strategy for the Second Half

Impact of Tariffs on the Economy

• 📈 Tariffs collected in May exceeded $24 billion, tripling the run rate from March, suggesting a potential offset to economic impacts.
• 📉 However, capital expenditure spending plans are showing declines in some regions like the Northeast, while increasing in others, possibly related to energy production.
• ⚠️ Tariffs are viewed as a consumption tax, leading to higher costs for consumers and a significant cutback in imports from China (down over 30% year-over-year).
• 💰 Businesses are attempting to pass costs on, but it's uncertain if they can fully succeed, potentially acting like a 10-point corporate tax hike.

Investment Strategy Shift

• 💡 Cresset Capital shifted its strategy at the beginning of the year, anticipating lower future returns from the S&P 500 (5.2% expected) compared to triple-B bonds (5.3% yield).
• 📊 The decision was based on a preference for lower volatility offered by bonds (5% volatility) over stocks (20% volatility), despite similar expected returns.
• 🚫 This led to an out of stocks and into bonds positioning, contrary to many market participants at the time.

Focus on Cash Flow and Dividends

• 💰 With tighter liquidity and the Fed maintaining restrictive policies, the focus is on cash flow generating companies.
• 📈 The strategy prioritizes high-quality companies that are actively paying and growing their dividends.

Attractive Stock Picks

• ⚙️ IBM is highlighted for being an early AI player, generating significant cash flow, and offering a solid 2.3% dividend yield.
• 🏭 Nucor is favored for its domestic steel production, enabling price increases as competitors face challenges, and offers a 1.6% dividend yield growing at 1.8%.
• 🏠 Chubb is recognized as a property and casualty insurer with strong cash flow, a 1.4% dividend yield, and dividend growth projected at 8%.