Good morning. It seems that Israel’s negotiated ceasefires with Gaza and Lebanon are only holding on by a thread, and may fall apart soon. At the same time, the world is waiting to see how Trump will handle Iran. Still, markets, including the oil market, are indifferent. Wilful denial, or a rational response? Email us: [email protected] and [email protected].
Immigration and the economy
In his first week in office, Donald Trump ordered the government to suspend the asylum process, halted refugee admissions, put pressure on states to comply with future deportation efforts, and moved to end birthright citizenship. It may be that the goal of these early actions is simply to discourage further immigration, and encourage illegal immigrants to “deport themselves.” But it may be that Trump is serious about significantly reducing the US workforce.
Record numbers of migrants came into the US after the pandemic, growing US consumption and the American labour force. This, many argue, was the key reason the US continued to grow, even as inflation fell quickly. Graph from Torsten Slok at Apollo:
By the end of 2024, illegal migration had already slowed from its earlier peaks; according to US Customs and Border Protection, the number of encounters at the Southern border — a proxy for illegal migration — steadily fell from 301,000 in December 2023 to 102,000 by September 2024. Legal migration in 2024 was about 820,000, according to the Congressional Budget Office, around the 25-year average.
Trump has pledged to limit both legal and illegal immigration. But does he have both the will and the means to follow through on his most aggressive goal — completely stopping illegal immigration, and deporting the illegal immigrants who are already here?
According to the Pew Research Center, in 2022 there were around 11mn illegal aliens in the US, or 5 per cent of the US workforce. Pushing out even a significant fraction of that population would have big implications for the agriculture, hospitality, and construction industries (just the threat of deportations has led to reports of farmworker shortages). The inflationary implications, at least in the short term, are easy to imagine. Deprived of cheap labour, those industries and others will either have to raise wages to attract more workers, and raise prices to protect profits, or cut down on production, restricting supply.
There is a lot of uncertainty here. We don’t know how far Trump will go, and it is likely that some states and municipalities will push back. Wendy Edelberg at the Brookings Institution modelled out two scenarios: one where Trump is able to reshape the immigration system entirely, and one where he only has limited success. In the first scenario, the US sees outmigration, or a net loss of civilians, starting in 2025; in the second, immigration slows, but the population still grows (the model assumes some normalisation after the Trump term):
Edelberg and her colleagues estimate that both scenarios slow real economic growth in 2025: by .4 per cent in the severe scenario, and .1 per cent in the restrained. They also say that inflation could go up by as much as 1.5 per cent over three years, but will be partially offset by a reduction in demand. In the longer term, when the population growth impacts will be felt, the shifts will be more severe: the level of real GDP in 2034 will be lower by 2.1 per cent in scenario 1, and 1.5 in scenario 2, as compared to the current outlook.
But the point is all the same: the US economy is built around access to cheap migrant labour. Retooling it for low immigration will be disruptive.
(Reiter and Armstrong)
What stocks will work in 2025?
Stockpickers — to the degree there are any stockpickers left in a world of index, factor, and quant investors — face a dilemma this year. The US economy looks strong, especially relative to the rest of the world; US stocks have momentum; and business sentiment is effervescent. A good time to add risk, then. At the same time, however, there is a massive change in economic policy underfoot, with unknown implications. In particular, it is pretty clear that something tariff-y this way comes. This will come on top of asset prices that are expensive and Fed monetary policy that seems — presidential protests aside — likely to stay tight. All this counsels a degree of defensive posturing.
Those of you who — like Unhedged — will enter the FT stockpicking contest operate under even more constraints. Once you choose your five long or short positions (by midnight on the 31st of this month) you are locked in for 11 months. No changing your mind after a policy surprise. And dividends don’t count, which eliminates a bunch of stocks that return their profits that way.
Unhedged works under another constraint. As a US-focused column, we select from the S&P 500. We want to pick stocks our readers may know and have their own views about.
Unhedged works under another handicap, too: we don’t know much about individual stocks. We write about them when they demonstrate important market trends, such as Magnificent 7 leadership. Stockpicking (as Unhedged’s disastrous results in the last two contests have shown) is really for people who follow companies closely. So there is a (fun but dangerous) element of guesswork here.
With all that said, below are some stocks that interest us. We’re keen to hear your thoughts:
-
A big Wall Street bank. We think markets will be active and volatile in 2025, which is good for trading desks. The IPO market might firm up as private equity owners seek liquidity. The yield curve has some slope again, which helps the commercial and retail lending businesses. Low unemployment puts a floor under the credit card business. It seems a bit obvious, but why not own JPMorgan Chase under these circumstances? Or Bank of America? Or (gulp) Citi?
-
An aggregates company. We love the business of turning big rocks into little rocks, for reasons we explained a few months ago. In a growing domestic economy, all the better. It’s hard to imagine an industry with less to do with international trade (the beauty of rock, economically, is that it’s too heavy and cheap to ship very far). So what about Vulcan or Martin Marietta? (We’re a little worried about interest rates’ effect on the real estate market, though).
-
The first stock I ever covered when I was a buy-side analyst was the drug distributor McKesson. It’s a well managed company in a stable industry with a very high return on capital and consistent growth, and if things get choppy out there, it should outperform. I am, however, a little worried about the shambolic state of the pharmacy industry and whether regulatory/reimbursement risk will touch the distributors.
-
Another embarrassingly basic idea: Alphabet. The Mag 7/AI narrative marches on, Alphabet has one of the less outrageous valuations in the group, and its revenues just keep growing. And maybe if a judge decides that Google can’t pay Apple billions of dollars for search traffic any more, that will be a good thing in investors’ eyes?
-
Might it be good to have one cyclical company to short, just in case? The big US paper companies, such as International Paper, are interesting here. They are structurally weak businesses that have had a good recent run and look a bit expensive. IP is integrating a merger, too, which could be bumpy. Thinking about it.
-
Some other random interesting names we’re thinking about: Booking Holdings, Honeywell, Uber, Micron.
Readers will notice that most of these ideas are very boring. That is the point. What we are looking for is very boring US businesses we understand, that are also growing faster than the economy. If you have some other suggestions, for goodness sake, email us. And enter the contest!
One Good Read
The business of desperation.
Read the full article here