Tariffs

Most economists calculate a 1% hit to gross domestic product (GDP) and a +0.80% price increase to inflation as a likely outcome. Since the policy is fluid, the estimates can change, but for now, this is what we are anticipating. Both consumers and corporations will adjust buying patterns in response to tariffs.

Labor

The labor market is softening, but jobs are still being added. On average, 168,000 monthly jobs were added over the trailing 12 months. The federal government layoffs are up to 120,840; technically, 75,000 were buyouts and are being paid through September. We become more efficient and productive in the long term when the private sector absorbs public employment layoffs. The last time this scenario happened was in the 2011-2013 period. While we may not like the disrespectful way these terminations have been handled, Federal and State employment is indeed bloated.

Federal Reserve Policy

The Fed meets on March 19th and is focused on protecting labor. Since tariffs ultimately hurt economic growth, the odds of easing interest rates increase, and the consensus now is that interest rates could be cut three times in 2025. In a sense, is Trump’s play about tariffs or about bringing down US interest rates? It’s also possible it is about both. Lowering rates can stimulate economic growth by making borrowing cheaper, yet it might risk reigniting inflation. High rates can slow growth and increase recession risks. It’s a delicate balance.

Productivity

Productivity is the secret sauce in the US. Productivity surged over the past two years, the best since the late 1990s, due to US corporations’ consistent investment (capital expenditures). US large- cap companies are the best in the world at adapting to their changing landscape, and we expect this to continue.

Banking

This sector was rightfully regulated following 2008. Now, the US banking sector is considered the backbone of the economy. With some deregulation and a more normal interest rate backdrop, banks are poised to lend. We expect mid-sized companies to be the beneficiaries.

Summary

In the short term, tariff policies can create significant uncertainty, especially when they are implemented unpredictably. Businesses may hesitate to invest or expand when they’re unsure how costs will evolve. This type of environment can also lead to supply chain disruptions, making it harder for companies to manage inventory and pricing strategies.

The long-term outlook is more optimistic:

1) Onshoring (moving manufacturing back to the US) would pick up, helping support US goods- producing jobs.

2) Deal-making could lead other countries to cut tariffs on barriers to US imports.

3) Away from tariffs, the policy of sharp deregulation (specifically banking regulation, which went way too far in the past) could be a massive tailwind for medium-sized companies, boosting GDP growth and, in turn, the standard of living for Americans.

Investment Markets

Stock returns are a function of earnings growth, and the price-to-earnings (P/E) ratio is a key metric used to evaluate a company’s stock valuation. While we don’t expect the P/E ratio to rise from here, we expect large companies’ earnings to be decent. Inevitably, stocks follow earnings. Small and middle-sized companies are growing slower and, consequently, are a smaller portion of our portfolios. In the last quarter, S&P 500 companies grew their top line by 5% while earnings grew by 13%, which was excellent execution. US companies know how to adapt to their surroundings. Factors like innovation, access to capital, and a relatively flexible regulatory environment often give businesses the edge. Tandem sees the US as a better place to do business vs. international markets.

Most of the difficult work in the bond market was done in 2021 and 2022, as the Fed normalized rates from zero to our current level. Historically, the 10-year Treasury yield trades in the 3.5% – 5% range, exactly where we are now. Bonds are now in a better position to produce positive returns.

In general, stocks can be positive if GDP expands and all else is equal. The most critical factors in maximizing long-term returns are 1) diversification and 2) time in the market. In other words, own stocks and bonds, diversify stock holdings across economic sectors and avoid moving in and out of cash.

Finally, figures like Joseph Biden or Donald Trump can impact the nation’s trajectory, but their influence is often transient. Historically, the capacity for innovation and adaptability has enabled US institutions to navigate and rise above most economic challenges. Our economy’s ability to adapt — through technological advancements, entrepreneurial spirit, and market flexibility — tends to drive long-term growth more than any single administration’s actions.