Macro Minute: Week of February 10, 2025
Today, I want to cover a topic that is a point of consternation for many – the government. Before I start, I feel the need to reiterate a point that I have said before. As investors, we must be able to look at things with indifference or apathy when it comes to politics. I believe that you have to check your biases at the door to be a good investor, including, but not limited to, political bias. That being said, it is impossible to remove all aspects of the government from our decisions. After all, any who have tried to avoid paying taxes or fail to obey traffic codes learn that the government is unavoidable. However, now there are some ongoing policies that are being enacted that require us to consider how they will impact the market and economy.
The very first thing I want to cover is the ongoing efforts of the new Trump administration to downsize and deregulate government agencies. To start on this topic, I want to give my heartfelt sympathy to anyone that this affects. We can call it many things, but ultimately, this means job loss. The increased severance offering is an effort to promote government employees to transition on their own and, depending on your situation, it may be a good option. It really depends on your own situation and circumstances. What I am looking at from a market and economic impact is the unemployment rate. How large will this be in the numbers that come out monthly? We have had strong job numbers for a while, and the government was a significant employer in 2024. If that trend stops or reverses, it could have spillover effects. While the methods are seemingly brash and crude at times, Trump ran on a promise of downsizing the government. It is unclear how big this impact will be on employment and government services, but it is definitely something that I am watching very closely.
The next thing that is causing market turbulences are tariffs. Trump is using tariffs as a negative incentive to begin negotiations with other countries. He is starting with what have traditionally been international partners, Canada and Mexico. In the case of Mexico, he is wanting increased border help to stop illegal immigration and drug trafficking into America. As of this writing, it may have been at least partially successful, with Mexico pledging 10,000 troops along the border and delaying the threatened tariffs. As for Canada, it may have been taken as a trade war instead of negotiating tactics. These have caused a market reaction. I expect this to continue for as long as Trump feels tariffs are an effective tool to use as leverage in negotiations. As long as these blunt measures are used and threatened, markets will have no choice but to react and try to adjust to what will/could be. This will increase volatility and have uncertain outcome at times. What I am looking out for is a lasting and significant impact on global trade. This could be positive or negative. We could have an increase in inflation or foreign investment into new plants or infrastructure in the United States. I, along with markets, will have to weigh the totality of these situations to gauge if investment changes need to be made. One beneficiary to all this increased volatility should be managed futures. Trends will emerge among all this uncertainty that will allow them to find new trades.
Where does this leave us as investors? I go back to my thoughts on the 2025 outlook and remain cautiously optimistic. The economy is chugging along. As I write this on February 3, 2025, the Atlanta GDP Nowcast shows the economy expanding at 3.9%. Corporate earnings season is underway, and so far, 36% of S&P 500 companies have reported. Of those, 79% are beating estimates. In a nutshell, a strong earnings season in a year of expected strong corporate earnings. The Congressional Budget Office expects the U.S. to run a $1.9 trillion dollar budget deficit this year. Remember that the government deficit is the private sector’s surplus. I go back to my expectations of: strong GDP growth, strong corporate profits, and deficit spending, all the building blocks are in place for this cycle to continue.
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