Rocky Winds Due to Government Policy

Government Policy is Creating Uncertainty

Government policy uncertainty has served as the primary catalyst for the current correction in the S&P 500 over the last six weeks.  But in some ways, particularly after the previous two strong market years, we are a bit spoiled.  We should be mindful that correctios do occur (in fact, once every 1.2 years on average since 1980).  But turbulence like this tend to be temporary.

Despite concerns in the financial press that tariffs could lead to some of the economic challenges of the past, the global economy has evolved significantly since the 1930s.  Today’s interconnected markets and diversified supply chains provide resilience against prolonged downturns.  While businesses and investors are grappling with the uncertainty, markets typically adjust as policies stabilize and trade relationships recalibrate. 

President Trump’s tariff strategy, so far, has certainly been unpredictable, and the initial shock has created a lot of negative sentiment.  But market corrections are part of the economic cycle.  Businesses will adapt, and investors will refocus on long-term fundamentals rather than short-term swings and news cycles.   Historically, disruptions like these (even under Trump I) have led to policy refinements, economic adjustments and ultimately, market recovery.

One big question remains: What will be the overall effect of the new trade policy on inflation? Since the initial burst of “transitory inflation” after Covid in 2021-22 the Powell Fed in our view, has done an admirable job of controlling inflation while simultaneously supporting economic activity.  However, if inflation flares up again due to new tariffs and the Fed is forced to hike interest rates in response, the result could be a longer-term economic malaise.  We consider this to be a low-but-not-zero probability.

We are amid some of the most uncertain times in recent memory.  But at times like these, it has been R.O.I.’s habit to go back to basics.  What do the fundamentals. say?

First, Interest rates are relatively low, and the next move(s) by the Fed is/are likely to be a cut(s). 

Second, consumer sentiment has taken a hit.  But how much of this is direct result of the daily news reports of policy turmoil?  As we go to press, there is a mismatch between consumer activity and historically poor sentiment.

Third, Employment, business spending, and several consumer spending metrics are still pointing to an economic soft-landing.

We feel if the consumer will hang in there it is extremely difficult for the economy to fall into recession.