The new Trump administration took office this quarter, and the policy changes have come quickly, and have already begun having visible effects on business decisions and the financial markets. We reviewed some of the high level areas of policy change in our previous quarterly update, and we’ve seen much of this begin to take shape. The focus here will be on policy areas that are anticipated to have the biggest effects on financial markets and the economy.
Immigration policy has swung to a more restrictive stance. This has had a dramatic downward effect on border crossings, and has also caused illegal immigrant communities within the US to be more fearful and potentially less engaged in the economy. While this could dampen economic activity in some areas, it may also take some pressure off of inflation readings.
On regulatory policy, the new administration is quickly moving to reverse Biden administration regulatory policy, and to generally deregulate across all industries. Energy and banking are major focuses. On energy, moves have been made to roll back recent regulations on oil and gas, power plants, EVs, wastewater, and LNG terminals. On banking, plans are being made to consolidate banking regulators, roll back CFPB regulations, and even to privatize Fannie & Freddie.
From a tax policy perspective, bills are currently moving through Congress to renew, extend, and expand the current tax policy regime. The Trump administration has also come out against the OECD Pillar 1 global tax regime effectively keeping other countries from charging “fill up” taxes against US corporations.
Finally, trade policy has garnered the most attention. The Trump administration has proposed new tariffs on friends and foes alike, ranging from Mexico and Canada, to China and the EU. These have been threatened, implemented, delayed, and put back on. The back and forth on this front has caused considerable backlash in financial markets as market participants try to figure out where the final policy will land. The uncertainty has caused businesses to delay investment plans and slow activity in the affected industries. The stock market entered correction territory based on the big three indexes.
There is a big debate taking place in the country over this tariff policy, and whether one agrees or disagrees with the long-term merits, it is clear to most that the uncertainty and disruption that this type of quick and dramatic policy change brings will cause some short-term pain. The question is, how long does the uncertainty last and can major economic disruption be avoided in the short-term?
From an overall perspective, these policy changes will have varied effects on the economy (some positive and some negative, in our view). The net effect is harder to discern. There is also a significant amount of noise in the environment as many have strong opinions about all things Trump. Much of the hype in the media is based on speculation. It is incumbent upon us to make sure we are watching the actual economic data versus the opinions of pundits.
When we have a higher level of uncertainty, we feel it is prudent to focus portfolios on more established, mature, dividend paying companies that tend to fit into the value category of investing. These have held up relatively well during the last quarter’s volatility.
It is paramount to keep our fundamental investing principals top of mind. Corrections and pull backs in the broader market can produce buying opportunities and a cheaper entry point for certain positions. When that happens, we want to be able to buy into those dips (buy low, sell high). For periodic contributions to your accounts, this will allow you to take advantage of dollar-cost averaging in your account.
We are long-term investors, so it is important to stay the course and not be overly reactive to volatile market movements. It can be difficult to separate the signal from the noise, especially in the age of Trump 2.0 and all the differing opinions that brings. In times like this, rely on your fundamentals!
Federal Reserve Policy. The Fed maintained its key interest rate benchmark at 4.25-4.50%. The Fed reduced the amount of bond rolloff in its portfolio, effectively loosening monetary policy and signaled it is keeping a close eye on inflation go guide policy going forward.
Economic Growth – GDP. Growth came in at 2.3% for Q4. Q1 growth is currently projected to be negative (according to Atlanta Fed GDPNow). This is largely due to trade inflows before the start of new tariffs, and, is largely expected to be temporary.
Labor Markets. Job growth continued in Q1, albeit at a slower pace than 2024, averaging just shy of 150k per month. The unemployment rate ticked down to 4.1%. U6 unemployment ticked up and currently sits at 8.0%. The Labor Force Participation Rate has also declined a bit to 62.40%.
Inflation. Inflation progress largely stalled in the second half of 2024. Initial readings for Q1 of 2025 have been mixed with both upside and downside surprises. Data over the coming months is expected to give more clarity on the direction of Fed interest rate cuts. The most recent PCE reading was 2.5%, which is above the Fed’s 2.0% target.
Consumer Sentiment & Spending. Retail sales are still increasing, however they have been close to the level of inflation meaning that consumers are not taking much more home for the amount they are spending. The recent retail sales report for February showed a 3.1% year-over-year increase. More concerning are large drops in the consumer confidence indexes during Q1. The overall index dropped for the 4th consecutive month in February to 92.9, a four year low; while the expectations index dropped to 65.2, a 12 year low, and below the level of 80 that many consider to be a recession indicator. This is largely believed to be based on fears for tariffs and trade wars.
Housing & Real Estate. The real estate sector was hoping for a shot in the arm with the advent of lower interest rates. However, as the Fed has lowered rates, key lending rates have actually increased. This has continued to hold back certain real estate activity, and while there was a short burst of activity in the mortgage refi market, that has relaxed as rates increased.
Business Investment & Manufacturing. The manufacturing side of the economy may finally be exiting an extended period of contraction. As of the latest reading of ISM survey results, we have two consecutive months of growth. That followed a period where 25 of 26 readings signaled contraction. The service side of the economy continues to hum along with healthy growth readings under the same ISM survey results, sitting at 53.5 on February’s reading.
Regulatory Environment. CTA put on hold by the Treasury department. EPA takes 31 official actions to roll back prior rules on oil and gas, power plants, EV mandates, and wastewater. Tariffs on China take affect. LNG export pause has been lifted and four new LNG terminals have been approved. CFPB head fired and process for rolling back regulations and consolidating banking regulators started.
Global Economy. Talks have started between the US, Ukraine, and Russia to bring an end to the war. Due to perceived US pull back from the region, multiple European governments including Germany, France, and UK have begun to orient their budgets towards their militaries. Each have made moves to significantly increase military budgets, usually with a paring back of entitlement programs. The ceasefire between Israel-Hamas has officially come to an end as the two sides could not agree on next steps to end the war and return all hostages. At the same time, the US has put the Houthis and Iran on notice that it is prepared to take military action if the assaults on global shipping lanes does not cease.