MW 'This is not a time to be making big bets.' This market pro is following Warren Buffett's lead.

By Jonathan Burton

Strategist David Rosenberg says 'It's a time to hunker down.' Cash, defensive stocks and non-U.S. markets are the best choices now, he says.

'This is the mother of all momentum-based stock markets.'

One thing for certain is that financial markets face more uncertainty than usual right now. So it's tougher to forecast economic and political trends, and to model investment and business risk based on those expectations, at a time that seems more of a major upheaval than a momentary shift.

Sure, there are opportunities in uncertainty. After all, "Be greedy when others are fearful" is legendary investor Warren Buffett's famous investing advice. Of course, judging from Berkshire Hathaway's $(BRK.A)$ $(BRK.B)$ currently huge cash position - more than its ownership of U.S. stocks - Buffett evidently seems to be following the first part of that adage: "Be fearful when others are greedy." Though in Buffett's case, it's likely that he's patiently waiting for a falling stock market to deliver a fat pitch.

Strategist David Rosenberg surveys this landscape and doesn't like what he sees for investors in U.S. securities. His three biggest concerns about the U.S. economy and financial markets, he says without irony, are "uncertainty, uncertainty and uncertainty."

Rosenberg, a former Merrill Lynch economist who now runs his own market-research firm, Toronto-based Rosenberg Research, has been called a "permabear" on stocks, but in truth he's a realist who states his convictions - even if it ruffles Wall Street, which it frequently does.

Rosenberg sees the same economic news that any investor can see. Markets are facing unknowns and headwinds. There's the impact of U.S. trade tariffs on the global economy, coupled with America's rising threats and tension with both its allies and adversaries? In the U.S., corporate America is cutting expenses for business expansion and innovation - including hiring. Meanwhile, the U.S. government - the nation's largest employer - is making deep spending cuts and conducting mass layoffs.

Looking at the stock market's current valuation against this backdrop, Rosenberg concludes that it's smart to take a page from Buffett's playbook. "The world's most renowned value investor is having trouble finding value," Rosenberg says about Buffett. "So there's a message here as to how you should be managing your portfolio: de-risking."

The appropriate response in these times, Rosenberg says, is to beef up your portfolio's defensiveness and keep your powder dry. Overweight shares of companies that make what people need versus what they want; diversify into the stocks and bonds of markets outside of the U.S. that tariffs and geopolitical instability will impact less; direct some of your money to gold, and have cash - lots of it - to deploy once asset prices are lower.

Says Rosenberg: "This is not a time to be making big bets. It's a time to hunker down."

In this recent telephone interview, which has been edited for length and clarity, Rosenberg discusses the cards that investors are being dealt and how he is playing them.

MarketWatch: Let's look at the U.S. economy's health and condition. What's the prognosis for the patient right now?

Rosenberg: Making decisions on committing capital to the economy is going to be an extremely arduous task. You're starting to see it in some of the forward-looking economic indicators. The second-tier survey indicators are flashing a pullback in business capital-spending intentions. The problem for the economy is that when companies are cutting back on capital spending, there's a flow-through impact on hiring plans.

Hiring plans follow business spending on capex. That means that we will be seeing erosion creeping into the labor market over the next several months.

MarketWatch: "Erosion" here means layoffs and hiring freezes. At times like that, consumers tend to tighten their belts and spend less, focusing on essentials, and save more.

Rosenberg: Consumers are going to do the same thing that businesses are doing, which is to stand still. The U.S. personal savings rate is now only 4%. A rise in the personal savings rate means a reduction in the growth in consumer spending - and that is roughly 70% of GDP. That's where the rubber meets the road.

The only reason a U.S. economic recession never happened was because the consumer kept drumming along, even as other segments of the economy, like housing, like the industrial sector, like commercial construction, like exports, were in various stages of recession on their own.

That is going to be put to the test. The reduction in capital spending feeds into the job market, at a time when uncertainty is going to create the condition for a rise in personal savings rate.

MarketWatch: The Trump administration has come out hard and fast with mass layoffs of government workers and spending cuts. What are some consequences for the economy from these moves?

Rosenberg: The administration might be playing with fire on the economic side because the first thing they're doing is the spending restraint and DOGE [Elon Musk's Department of Government Efficiency]. We'll see how many crumbs there are in the cupboard to cut. But tax relief is coming second. What's coming first is the spending restraint and the prospect of a global trade war.

Keep in mind that what kept the U.S. economic engine running has been virtually unprecedented fiscal stimulus. I mean, we've had five years where the deficit-to-GDP ratio has been over 5%. Even in the Great Depression of the 1930s, the U.S. economy was not running on the fiscal fumes that it has over the past half-decade. So the spending cuts are another complicating factor behind the economic outlook.

'The U.S. consumer faces a triple whammy.'

MarketWatch: Trade and tariffs also are a concern for business, consumers and investors. What do you expect the impact of Trump's trade policies to be?

Rosenberg: It's wishful thinking that all of the tariff pain is going to land on the foreign producer. A good chunk of it will land on the U.S. consumer. It's not a recurring shock, but it will be a significant one-time shock that will erode real income.

These tariffs - a global trade war carries with it the risk of a global recession, which then impacts U.S. exports. And exports have a very powerful multiplier impact on the rest of the U.S. economy. So it's complicated, but all the macro risks are to the downside.

For example, a 25% tariff on most everything from Canada and Mexico into the U.S., will cause a bad recession in North America - a very bad recession.

The U.S. will probably have it the least bad. Canada's economy will be decimated. But U.S. does not get a "get-out-of jail-free" card. And the biggest headache for the U.S. will be the auto sector. This is going to totally impair the automotive industry.

So the U.S. consumer faces a triple-whammy. Business capex turns down, morphing into deteriorating labor-market conditions; uncertainty impacts savings rates - the question will be magnitude, not direction - and then the squeeze on real income from the tariff shock.

'Portfolio managers in the mutual fund industry have almost no cash. Who's going to be on the other side of the trade?'

MarketWatch: What happens to stock prices under these conditions? It doesn't sound good for most investors.

Rosenberg: The stock market and the economy have never had such a tight, symbiotic relationship. So you get a bad bear market out of this. And that reinforces the upward trajectory in the savings rate. So spending will be seriously impaired.

The stock market is very key here. Currently 70% of the U. S. household financial asset mix is in equities. It's never been this high. People have 20% cash, 10% bonds, and 70% in equities. This is higher than it was during the dot-com craze in late 1990s.

And what equities do most people own? Passive index funds. So the U.S. household balance sheet is concentrated in equities, and those equity holdings themselves are concentrated in a handful of technology stocks.

In fact, the earnings-revision momentum for 2025 peaked last May and the market is up 20% since then. This is the mother of all momentum-based stock markets. The thing about momentum is that it runs in both directions.

'Diversification has become a dirty 15-letter word.'

MarketWatch: There doesn't seem to be a realistic acknowledgment of what could go wrong. Or if there is, Wall Street as usual doesn't want to talk about it.

Rosenberg: People have really lost their minds. There's people who believe that we have repealed the business cycle; the recession never came and will never come. I hear that all the time. And that there will never be another bear market in our lifetime.

The problem is that nobody is positioned for a bear market. So if we get a really bad stock market, then that is going to create, even without the tariffs, a severe recession.

Diversification has become a dirty 15-letter word. Nobody has taken profits. Nobody has readjusted or recalibrated their portfolio. And that makes me very nervous. Portfolio managers in the mutual-fund industry have sliced their cash ratio to the lowest level on record, barely more than 1%. They have almost no cash. Who's going to be on the other side of the trade, except maybe Warren Buffett? Maybe he will save the day. I tell this to people and I get these glossy looks.

MarketWatch: But doesn't the stock market climb a "wall of worry"? Contrarian investing - bearish is bullish - might pay off.

MW 'This is not a time to be making big bets.' This market pro is following Warren Buffett's lead.

By Jonathan Burton

Strategist David Rosenberg says 'It's a time to hunker down.' Cash, defensive stocks and non-U.S. markets are the best choices now, he says.

'This is the mother of all momentum-based stock markets.'

One thing for certain is that financial markets face more uncertainty than usual right now. So it's tougher to forecast economic and political trends, and to model investment and business risk based on those expectations, at a time that seems more of a major upheaval than a momentary shift.

Sure, there are opportunities in uncertainty. After all, "Be greedy when others are fearful" is legendary investor Warren Buffett's famous investing advice. Of course, judging from Berkshire Hathaway's (BRK.A) (BRK.B) currently huge cash position - more than its ownership of U.S. stocks - Buffett evidently seems to be following the first part of that adage: "Be fearful when others are greedy." Though in Buffett's case, it's likely that he's patiently waiting for a falling stock market to deliver a fat pitch.

Strategist David Rosenberg surveys this landscape and doesn't like what he sees for investors in U.S. securities. His three biggest concerns about the U.S. economy and financial markets, he says without irony, are "uncertainty, uncertainty and uncertainty."

Rosenberg, a former Merrill Lynch economist who now runs his own market-research firm, Toronto-based Rosenberg Research, has been called a "permabear" on stocks, but in truth he's a realist who states his convictions - even if it ruffles Wall Street, which it frequently does.

Rosenberg sees the same economic news that any investor can see. Markets are facing unknowns and headwinds. There's the impact of U.S. trade tariffs on the global economy, coupled with America's rising threats and tension with both its allies and adversaries? In the U.S., corporate America is cutting expenses for business expansion and innovation - including hiring. Meanwhile, the U.S. government - the nation's largest employer - is making deep spending cuts and conducting mass layoffs.

Looking at the stock market's current valuation against this backdrop, Rosenberg concludes that it's smart to take a page from Buffett's playbook. "The world's most renowned value investor is having trouble finding value," Rosenberg says about Buffett. "So there's a message here as to how you should be managing your portfolio: de-risking."

The appropriate response in these times, Rosenberg says, is to beef up your portfolio's defensiveness and keep your powder dry. Overweight shares of companies that make what people need versus what they want; diversify into the stocks and bonds of markets outside of the U.S. that tariffs and geopolitical instability will impact less; direct some of your money to gold, and have cash - lots of it - to deploy once asset prices are lower.

Says Rosenberg: "This is not a time to be making big bets. It's a time to hunker down."

In this recent telephone interview, which has been edited for length and clarity, Rosenberg discusses the cards that investors are being dealt and how he is playing them.

MarketWatch: Let's look at the U.S. economy's health and condition. What's the prognosis for the patient right now?

Rosenberg: Making decisions on committing capital to the economy is going to be an extremely arduous task. You're starting to see it in some of the forward-looking economic indicators. The second-tier survey indicators are flashing a pullback in business capital-spending intentions. The problem for the economy is that when companies are cutting back on capital spending, there's a flow-through impact on hiring plans.

Hiring plans follow business spending on capex. That means that we will be seeing erosion creeping into the labor market over the next several months.

MarketWatch: "Erosion" here means layoffs and hiring freezes. At times like that, consumers tend to tighten their belts and spend less, focusing on essentials, and save more.

Rosenberg: Consumers are going to do the same thing that businesses are doing, which is to stand still. The U.S. personal savings rate is now only 4%. A rise in the personal savings rate means a reduction in the growth in consumer spending - and that is roughly 70% of GDP. That's where the rubber meets the road.

The only reason a U.S. economic recession never happened was because the consumer kept drumming along, even as other segments of the economy, like housing, like the industrial sector, like commercial construction, like exports, were in various stages of recession on their own.

That is going to be put to the test. The reduction in capital spending feeds into the job market, at a time when uncertainty is going to create the condition for a rise in personal savings rate.

MarketWatch: The Trump administration has come out hard and fast with mass layoffs of government workers and spending cuts. What are some consequences for the economy from these moves?

Rosenberg: The administration might be playing with fire on the economic side because the first thing they're doing is the spending restraint and DOGE [Elon Musk's Department of Government Efficiency]. We'll see how many crumbs there are in the cupboard to cut. But tax relief is coming second. What's coming first is the spending restraint and the prospect of a global trade war.

Keep in mind that what kept the U.S. economic engine running has been virtually unprecedented fiscal stimulus. I mean, we've had five years where the deficit-to-GDP ratio has been over 5%. Even in the Great Depression of the 1930s, the U.S. economy was not running on the fiscal fumes that it has over the past half-decade. So the spending cuts are another complicating factor behind the economic outlook.

'The U.S. consumer faces a triple whammy.'

MarketWatch: Trade and tariffs also are a concern for business, consumers and investors. What do you expect the impact of Trump's trade policies to be?

Rosenberg: It's wishful thinking that all of the tariff pain is going to land on the foreign producer. A good chunk of it will land on the U.S. consumer. It's not a recurring shock, but it will be a significant one-time shock that will erode real income.

These tariffs - a global trade war carries with it the risk of a global recession, which then impacts U.S. exports. And exports have a very powerful multiplier impact on the rest of the U.S. economy. So it's complicated, but all the macro risks are to the downside.

For example, a 25% tariff on most everything from Canada and Mexico into the U.S., will cause a bad recession in North America - a very bad recession.

The U.S. will probably have it the least bad. Canada's economy will be decimated. But U.S. does not get a "get-out-of jail-free" card. And the biggest headache for the U.S. will be the auto sector. This is going to totally impair the automotive industry.

So the U.S. consumer faces a triple-whammy. Business capex turns down, morphing into deteriorating labor-market conditions; uncertainty impacts savings rates - the question will be magnitude, not direction - and then the squeeze on real income from the tariff shock.

'Portfolio managers in the mutual fund industry have almost no cash. Who's going to be on the other side of the trade?'

MarketWatch: What happens to stock prices under these conditions? It doesn't sound good for most investors.

Rosenberg: The stock market and the economy have never had such a tight, symbiotic relationship. So you get a bad bear market out of this. And that reinforces the upward trajectory in the savings rate. So spending will be seriously impaired.

The stock market is very key here. Currently 70% of the U. S. household financial asset mix is in equities. It's never been this high. People have 20% cash, 10% bonds, and 70% in equities. This is higher than it was during the dot-com craze in late 1990s.

And what equities do most people own? Passive index funds. So the U.S. household balance sheet is concentrated in equities, and those equity holdings themselves are concentrated in a handful of technology stocks.

In fact, the earnings-revision momentum for 2025 peaked last May and the market is up 20% since then. This is the mother of all momentum-based stock markets. The thing about momentum is that it runs in both directions.

'Diversification has become a dirty 15-letter word.'

MarketWatch: There doesn't seem to be a realistic acknowledgment of what could go wrong. Or if there is, Wall Street as usual doesn't want to talk about it.

Rosenberg: People have really lost their minds. There's people who believe that we have repealed the business cycle; the recession never came and will never come. I hear that all the time. And that there will never be another bear market in our lifetime.

The problem is that nobody is positioned for a bear market. So if we get a really bad stock market, then that is going to create, even without the tariffs, a severe recession.

Diversification has become a dirty 15-letter word. Nobody has taken profits. Nobody has readjusted or recalibrated their portfolio. And that makes me very nervous. Portfolio managers in the mutual-fund industry have sliced their cash ratio to the lowest level on record, barely more than 1%. They have almost no cash. Who's going to be on the other side of the trade, except maybe Warren Buffett? Maybe he will save the day. I tell this to people and I get these glossy looks.

MarketWatch: But doesn't the stock market climb a "wall of worry"? Contrarian investing - bearish is bullish - might pay off.

(MORE TO FOLLOW) Dow Jones Newswires

March 03, 2025 07:30 ET (12:30 GMT)

MW 'This is not a time to be making big bets.' -2-

Rosenberg: There's the famous saying that the market can stay irrational longer than you can stay solvent. But there is a high degree of irrationality when the earnings when the equity-risk premium is zero. The United States is the only country in the world where the equity-risk premium is zero, where the earnings yield is exactly the same as the risk-free interest rate. If you believe in this bull market being extended any further, then you have to believe that the stock market today is as riskless as a U.S. Treasury bill.

That's the only way you can rationalize this. But the Treasury market does not have capital risk; the equity market does. Therefore, what the market is telling you, what investors are telling you today is they never expect the market to go down.

That's the only way this makes sense, because there is no differentiation in terms of the pricing of risk right now between Treasury bills and the S&P 500 SPX. I know that sounds insane, but we did have this condition back in the late 1990s. It could last it could last a year. It could last two years. But not usually more than that.

MarketWatch: Which investments and portfolio strategies are you pointing investors to now?

Rosenberg: You should have cash. At least cash is paying you something. And it's safe. You want to have liquidity. If I had to be fully invested in the equity market, I would be in the most defensive, non-cyclical sectors: consumer staples; health care, utilities. You will be hurt less badly being in those areas than other areas where there's a lot more economic sensitivity.

In your bond portfolio, be cautious about the amount of duration because of all the fiscal deficit uncertainty. I like the belly of the curve the most right now - five-year BX:TMUBMUSD05Y and 10-year BX:TMUBMUSD10Y Treasury notes. With equities, even without the elevated uncertainty, the fair value price-earnings multiple for the stock market should be a lot lower than it is.

By the way, price bubbles are defined by two standard-deviation events, and that's where we are right now on the multiple of the S&P 500. It's a two standard-deviation event. It is a price bubble.

'Gold, gold-mining stocks and silver are positively correlated with uncertainty.'

MarketWatch: So that's the defense. Where can investors be more aggressive and go on offense?

Rosenberg: Gold (GC00), gold-mining stocks and silver (SI00) are positively correlated with uncertainty. I think we'll go to new, higher highs. I don't think this uncertainty is going to dissipate anytime soon, and gold is a bastion of stability. The gold-mining stocks have a long way to play catch-up to the underlying price of bullion. The gold-mining stocks have 70% upside even if gold does nothing from here.

And I would say that Japanese financial stocks will do very well because the Bank of Japan is going to raise interest rates. That will give Japanese financials more margin. You also want to be long the Japanese yen. The Bank of Japan tightening policy will be good for the yen, and that'll be good for the financials, which, by the way, Warren Buffett already has a stake in.

In Europe, aerospace/defense stocks are a no-brainer. This is one area where Trump has had an impact. European government spending will be geared towards the defense sector because Trump's threats seem to be working and these countries are going to be compelled to fulfill their NATO obligations.

Also, I believe that the euro $(USDEUR.FOREX)$ and the yen $(USDJPY.FOREX)$ both have bottomed out, and the U.S. dollar(DX00) has peaked. That's added reason to favor precious metals.

So I am not telling anybody that you have to buy baked beans and canned tuna and a sawed-off shotgun and barbed wire. There are areas to put money to work in a period of uncertainty. Stick to a few themes you have relatively high conviction in, and buy what the world needs - not what it wants.

More: Jeremy Grantham on the meltdown coming for U.S. stocks and where he's putting his money now

Plus: Why the February jobs report may push a jittery stock market toward a correction

-Jonathan Burton

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(END) Dow Jones Newswires

March 03, 2025 07:30 ET (12:30 GMT)

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