“Ladies and gentlemen, the Captain has turned on the fasten seat belt sign. We are now crossing a zone of turbulence. Please return to your seats and keep your seat belts fastened. Thank you.”
With President Donald Trump taking the oath of office for his second term on January 20th and being sworn in as the 47th president, he immediately began signing a flurry of executive orders with sweeping reversals of the Biden agenda and began to transform the federal government. Along with the President’s cabinet nominees, border protection plans, a drilling vow to increase oil & gas production, a tax cut package, as well as his trade and tariff proposals (targeting Canada, Mexico & China); the specter of uncertainty has left many investors to take an optimistic, yet cautious tone with the markets so far in 2025.
Several market participants believe Trump’s new policies won’t be enacted quickly or go too far in their reach. Furthermore, that his proposed tax plan will mirror that of his 2017 Tax Cut and Jobs Act (TCJA), thus being good for stocks to rally on higher. However, the Trump administration’s Department of Government Efficiency (DOGE), described as “the Manhattan Project of our time,” has intentions of slashing the size of the federal government through dismantling bureaucracy, restructuring agencies, eliminating
wasteful expenditures, eliminating unfair subsidies and other ill-conceived government-imposed market distortions (e.g., that favor EVs).
Clearly within the crosshairs of DOGE is Uncle Sam’s spending more cash than it collects. According to the U.S. Congressional Budget Office, the federal government is looking at a $1.9 trillion deficit for fiscal-year 2025, that’s approximately 6.2% of the U.S. gross domestic product, per annum.
The near-term risks to the equity markets seem to be at opposing ends of the spectrum, adding to the overall zone of turbidity. On one end, if U.S. consumers remain stronger than expected and inflation accelerates, then the stock market would likely correct, driven by investors’ shifting expectations that the Fed might be forced to raise interest rates due to a position that has been too accommodative. On the opposite end of the spectrum, faltering consumer spending and lower employment would also likely cause a correction, as market participants would foresee a greater probability of a recession, blaming the Fed for waiting too long to cut interest rates.
Furthermore, the U.S. Federal Reserve Bank tends to take a wait-and-see approach when raising or lowering interest rates. True to form, the Fed paused on January 29th, thereby pairing back investors’ expectations for further interest rate cuts and adding to market uncertainty. The Federal Open Market Committee (known as the FOMC), which sets the fed funds rate, has highlighted the underwhelming economic growth indicators, while the diverging inflation measures appear to be reaccelerating. The Fed’s dual mandate of price stability (i.e., keeping inflation in check) and promoting maximum employment seem to be at odds with each other, perhaps causing the Fed to pause on any interest rate actions while it waits for more clear-cut metrics on what the future direction of interest rates might be.
The greatest uncertainty and therefore risk to many investors and market participants is if the inflation measures continue to run hotter than most economists anticipated. Bond investors, at this juncture, appear to be having difficulty pricing in the impact of what interest rate policy will have on the interest rate markets, let alone pricing equities.
Until the visibility improves, the markets will likely experience considerable volatility, reacting both positively and negatively to the various scenarios and information as it unfolds. That’s uncertainty in the markets and that can mean turbulence.
Turbulence can often be frightening while flying, the reality is that turbulence is caused by changes in airflow (i.e., in the wind, the jet stream, and flying above mountains). It’s not a cause for panic and people’s anxiety around turbulence comes from assuming the worst and thinking that turbulence will cause the aircraft to crash. Even when it’s at its most severe, turbulence is rarely dangerous.
Just as with flying, market turbulence is a normal, everyday, occurrence. Nevertheless, markets hate uncertainty and serve uncertainty is hated even more. So, for many captains piloting market assets, a cloudy mix of data has reduced visibility and heightened geo-politics promises to extend the zone of turbulence. While market turbulence isn’t likely to force market participants entirely out of their seats, momentarily they might be lifted and shifted in them. As when flying and investing, it’s advisable to fasten one’s seatbelt for safety.
Source: Bloomberg LP. Content should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the author as of the date of publication and are subject to change. Material presented is believed to be from reliable sources, however, we make no representations as to its accuracy or completeness. This document does not constitute advice or a recommendation or offer to sell or a solicitation to deal in any security or financial product.
