March 2025 Update: Economic Uncertainty

Economic policy uncertainty leads to more uncertainty, which begets more uncertainty . . . the stock market hates uncertainty.

The on-again, off-again tariffs and trade wars have created a high degree of uncertainty in the economy and the markets.  When corporations and consumers are uncertain about the near term, they often stop spending until the future is clearer.  These actions can add friction to an already slowing economy that could be the difference between avoiding or entering a recession.  According to Bloomberg, JP Morgan has raised its risk of an economic downturn from 17% to 31%.  Tariffs lead to increased prices, which can cause the economy to slow.  With additional growing uncertainty around federal government cuts by the Department of Government Efficiency (DOGE), and concerns about the inviolability of Medicaid, Medicare, and Social Security, economists are increasingly worried about the health of the US economy under the new administration.

The bigger worry is stagflation – higher prices (inflation), slower economic growth (recession), and higher unemployment.  Stagflation is a difficult ill to cure because the traditional tools used to combat inflation, raising interest rates, can further slow economic growth and increase unemployment.  Conversely, measures used to stimulate economic growth, like lowering interest rates, can exacerbate inflation. 

As we have written in the past, periods of stagflation will likely create winners (commodities, consumer staples, utilities, and real estate) and losers (consumer discretionary, financials, industrials, and technology stocks).  Longer-term bonds, which can be great investments when the economy is slowing and interest rates are falling, perform poorly during periods of stagflation. 

What are investors to do during such a complex and volatile time?  In addition to staying balanced and diversified, it may make sense to tweak portfolios to reduce potential harm should stagflation become an issue.  We are monitoring the economic outlook and will let you know if we make any significant changes to our investment strategy.

Please feel welcome to call or email us with any questions or concerns.

Take care,

The Bond&Devick Team