April 4, 2025
Summary
The market is worried about how recent White House policies will effect the economy. And we agree that there is potential for the economy to slow, potentially into a recession. However, it’s too early for any economic data to reflect the actual effects. Predicting what the policy will actually be – even after it’s initially announced – and the economic results is far too difficult to do accurately. We’re watching closely for economic data to confirm whether this is a becoming a real slowdown or whether this is another false growth scare like just seven months ago in July-August of 2024. Thus far, it’s been a market pullback based on uncertainty around policy, which could be reversed as quickly as it’s been proposed. We’ve taken some measures to derisk back to a more neutral stance and will remain nimble based on which direction economic data and market indicators suggest.
Market Sentiment and Policy Concerns
Over the past 6 weeks, the markets have become increasingly wary of pending policy initiatives out of the White House. The focus of the current administration has been to reduce the deficit, take a tougher stance on global trade and reduce immigration inflows. Uncertainty about both the magnitude of these orders and the potential impacts to the US economy has put the market on edge.
The deficit, national debt and annual interest expense has ballooned in recent years and many economists agree that the expansion should be moderated. However, one key risk to the economy and markets we’ve highlighted going into 2025 is whether the current administration would go too far, too fast in addressing these issues.
The economic Impact of Tarff’s and Fiscal Cuts
The White House’s goal of cutting government spending, raising tariffs and reducing immigration focused on reining in the fiscal situation. The market, however, is signaling that it fears these efforts will carry too many negative side effects for the economy to handle and potentially putting us on a path to a recession.
The difficulty in the early stages of these changes is that economic data hasn’t had time to begin reflecting the impacts of new policy. The most marked negative data points happen to be in what’s considered soft data, sentiment surveys such as consumer confidence. Hard data such as ISM’s Manufacturing and Services PMI’s have held fairly steady and still suggest a growing economy.
Political and Policy Uncertainty
Furthering the uncertainty is that these proposals and negotiations are evolving hour by hour. Following Wednesday’s outline of proposed tariffs, we now know what could lay ahead. But the majority of the tariffs don’t go into effect until April 9th. This leaves the possibility that some may be renegotiated in the near future. Later Wednesday evening, four senate republicans also voted in favor of legislation to block the emergency measures to impose tariffs on Canada. While it’s reported to be highly unlikely that legislation would pass through the house, the message is clear that there is some dissent within the GOP regarding trade policy.
There’s historical precedence for an incoming president to front-load economic austerity early in their term, while they can blame a slowing economy on the prior administration. This allows the president to stimulate the economy later on and tout their achievements to bolster their party’s performance in mid-term elections. The question may become how long the current administration can stifle the economy before risking losing their majority in Congress during the mid-term elections.
Debt Management and interest Rates
An additional thought on the current policy revolves around the amount of Treasury debt is maturing this year, which needs to be rolled into new bond issuance. With about $9.2 trillion of government debt maturing in 2025, lowering interest rates would go a long way in trimming the current deficit. While the Fed can influence the very short-end of the yield curve, bond market demand is ultimately what dictates the interest rates on 5, 10 and longer maturities. Historically, when the market is concerned about a potential recession there is a rotation out of stocks and into bonds, which can push interest rates lower.
2025 Outlook
Our expectations for 2025 were for the US economy to moderate slightly, but settle near it’s historic average in the low 2% range of real GDP growth. However, that view is certainly subject to change.
Particularly with the ongoing fluidity of political events, we think it’s unwise to attempt to predict either potential policy outcomes or their economic effects. Predicting both of these precisely is nearly impossible to do.
Conclusion and Next Steps
We’ll be closely monitoring economic data, labor reports and other market indicators such as credit spreads. And if the data changes, so will our outlook and portfolio positioning. But we should also be reminded that economic growth scares that turn out to be false flags happen from time to time. The last one occurred just seven months ago in July-August 2024, and the market soon realized that the US economy remained resilient and the market rebounded quickly.
We’ll close by summarizing that we feel it’s too early to say which direction we may head in. But we want to assure you that we’re watching closely. We’ve made several adjustments in recent weeks to trim some stocks that bounced off the lows and added into treasury bonds. This was a move to bring us closer to what we’d consider a more neutral position relative to your target asset allocation. And depending on incoming data, we aim to be nimble in our ability to adjust in either direction.
Please feel free to reach out with any questions on either the current state of affairs or your portfolio and how it impacts your plan in particular.