Knowables: Economic & Political Factors 05.13.25

Navigating the investment landscape in 2025 has proved to be a challenging task. Investors are most concerned about a confluence of political and economic factors that create uncertainty and potential risks to their portfolios. Below we identify key topics on investors’ minds and the outcomes that arise.

Economic Concerns

Inflation: While inflation has cooled somewhat from its peak, it remains a key concern.

• We are monitoring inflation data closely to gauge the Federal Reserve's future monetary policy decisions and the potential for continued price pressures to erode corporate earnings and consumer spending.

Interest Rates and Monetary Policy: The trajectory of interest rates set by the Federal Reserve and other central banks is a major focus.

• The unpredictability of the U.S. Treasury yield curve, accompanied by higher volatility has caused us to be cautious, as it pertains to the fixed income markets.

• Rather than subject client portfolio to the added risk associated with attempting to anticipate the direction and magnitude of any interest rate changes, we prefer to mitigate that risk by staying with short maturity fixed income investments, supplemented by high yield bonds and bank loans.

• We are trying to forecast how interest changes will affect borrowing costs, bond yields, and equity valuations, not only if interest rates drop, but also for the potential of the Fed keeping rates higher for longer than expected, namely if inflation proves persistent.

Economic Growth and Potential Recession: Concerns abound regarding a potential slowdown in economic growth, with some analysts increasing the probability of a recession in the coming year.

• Factors like high interest rates, reduced consumer spending, and geopolitical uncertainties could contribute to a weaker economic outlook, impacting corporate profitability and market returns.

Corporate Earnings: We monitor corporate earnings to assess the financial health of companies in the current economic environment.

• More and more companies have withdrawn earnings guidance because of economic and political uncertainty. Corporate leaders are increasingly anxious about customer demand, considering the potential for prices to rise, artificially.

Government Debt and Fiscal Policy: Persistently high and/or increasing levels of government debt will, if not already, influence potential changes in fiscal policy (government spending and taxation).

• Rising concerns about the long-term sustainability of debt levels and the potential impact of fiscal measures on economic growth and inflation are moving up in importance.

Supply Chain Issues: Although lingering supply chain disruptions in certain sectors have eased since the pandemic, the potential for new disruptions has drastically risen due to geopolitical events that remain a concern for their impact on production costs and inflation.

Political Concerns

Geopolitical Risks and International Relations: Escalating tensions between major global powers, such as the U.S. and China, remain a significant worry.

• This includes trade disputes, technology competition (especially in AI), and potential conflicts or instability in various regions (e.g., the ongoing impacts of the war in Ukraine, tensions in the Middle East, and South China Sea).

• These risks can disrupt supply chains, increase commodity prices, and negatively impact investor sentiment.

Trade Policies and Tariffs: The potential for new or increased tariffs and trade barriers is a major concern.

• The current administration's stance on trade, including tariffs on goods from China and other countries, is being closely watched for its potential to increase inflation, harm corporate earnings, and slow economic growth.

• Market investors are wary of retaliatory measures from other nations.

Immigration Policies: More restrictive immigration policies are raising concerns about potential labor shortages and slower economic growth.

• Reduced immigration could lead to fewer consumers and a smaller workforce, impacting various sectors.

Political Instability and Elections: Upcoming elections in various countries and the rise of populist or extremist parties in some regions contribute to political uncertainty.

• We continue to assess how potential shifts in government could impact economic policies, regulations, and international relations.

Regulatory Landscape: Changes in regulations across different sectors, including technology, healthcare, and finance, can significantly impact investment decisions and market performance.

• We are monitoring potential shifts in areas like antitrust, environmental regulations, and data privacy.

Currently, we are confronted by a complex landscape of interconnected political and economic uncertainties. Geopolitical risks and domestic policy shifts are intertwined with concerns about inflation, interest rates, and the potential for an economic slowdown, all of which are shaping investment strategies and market sentiment.

Next week’s Controllables newsletter, we’ll address how prudent investors may wish to respond to the current economic climate. 

As always, we're here to support your portfolio needs—don’t hesitate to reach out at any time.

Disclosure:

The information provided in this newsletter is for informational purposes only and does not constitute investment advice. The recommendations and strategies mentioned may not be suitable for all investors. Each investor needs to review an investment strategy for their own particular situation before making any investment decision. Past performance is not indicative of future results. All investments involve risk, including the loss of principal.