After a strong start to the year, markets have recently stumbled. From February 19th through March 13th, the S&P 500 fell just over 10%, which qualifies as a correction. The tech-heavy NASDAQ decline was somewhat steeper, at 13%. What began as a brief honeymoon for the new administration quickly deteriorated into a selloff driven by on-again, off-again tariff talk and concerns about the rapidity and magnitude of policy change. Simply put, elevated uncertainty tends to create elevated volatility.
At the same time new policy has been taking shape, GDP growth has clearly decelerated. After nine consecutive quarters of GDP growth, the current estimate for Q1 2025 GDP has dropped from >3% to -1.8%, per the Atlanta GDP Now forecast. Confidence among both consumers and businesses has declined, seemingly driven by a wait and see approach to the new rules of the road. It is important to note, however, that GDP is taking a short-term hit from accelerated imports in advance of the implementation of tariffs. Most economists are still forecasting positive GDP for the year. A reversal of the ratio between imports and exports alone would currently be enough to post a positive GDP print.
Every new administration is faced with choices. And those choices are generally arrived at by weighing a series of tradeoffs. Clearly, the approach of this administration is different than their predecessors. Like it or not, the Silicon Valley method of “moving fast and breaking things” seems to be the name of the game. An argument could be made that a measured and clear roadmap would have been a better approach. But given the intransigence of Washington DC, it is possible that true change required some amount of shock and awe. Regardless, we expect the tariff picture to become clearer as we move towards the April 2nd date for the USMCA (US-Mexico-Canada Agreement). In our view, a more balanced budget should indeed be an economic priority. But focusing on federal employee headcount isn’t likely to move the needle. Long-term entitlement reforms are needed to bring the US financial house in order.
In our analysis of the new administration, we are paying special attention to those involved in economic policy. The chair of the president’s Council of Economic Advisers, Stephen Miran, wrote last year that “the root of the economic balances lies in the persistent dollar overvaluation…driven by inelastic demand for reserve assets. As global GDP grows, it becomes increasingly burdensome for the United States to finance the provision of reserve assets and the defense umbrella, as the manufacturing and tradeable sectors bears the brunt of costs.” We interpret this statement to mean that a weaker dollar and the revival of manufacturing and trade are primary goals of the new administration. Their economic policy framework seems to have a few additional key pillars. These include lower taxes and deregulation which are intended to raise animal spirits and catalyze growth, lower energy prices to bring down inflation, and shrinking the federal government. It also seems clear that the administration is willing (for now) to put up with short-term pain to achieve their long-term goals.
The Economic Policy Uncertainty Index (yes, this is a real thing) is at a higher level than it was during COVID. Markets tend to struggle when uncertainty rises. Interest rate policy is also unclear. It is difficult for the Federal Reserve to incorporate the impact of policies that have yet to be implemented. We continue to think the Fed will cut rates 2-3 times this year, but these are likely to be weighted towards the back half of the year. Historically, when we have had declines of this magnitude and spikes in the Policy Uncertainty Index, forward returns have been meaningfully positive. While there is currently an elevated amount of uncertainty, we think that markets will find their footing as a clearer policy framework takes shape.
It is far too early to say whether this correction is a short-term blip or the beginning of a more serious market decline. Fortunately, long-term investment success isn’t predicated on predicting the economy, nor the stock market. The best we can do is have a solid plan, maintain appropriate asset allocations, and not get in the way of compounding. It seems plausible that both trade and interest rate policy will become clearer over the balance of the year. In the meantime, we continue to exercise patience and act judiciously.
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