Charles Tan

We believe economic pressures from tariffs, still-high interest rates and persistent above-target inflation will stall the US economy over the next several months. For these reasons, we put the odds of a slowdown sharply higher than other possible economic scenarios.

• Slowdown/Recession: Although we continue to believe below-trend growth (flat to slightly positive) is a likely near-term outcome, we also think recession is a growing possibility. We remain concerned about mounting consumer headwinds, including rising auto loan and credit card delinquencies, and sagging consumer sentiment.
• Stagflation: The potential for higher inflation and weak economic growth has slipped back into our forecast. However, we think stagflation is much less likely than a slowdown or a recession.
• Growth Surprise: We believe the chance of growth surprising to the upside has decreased significantly in recent weeks. We gauge this scenario, including above-trend economic growth, above-target inflation and tight financial conditions, as less likely than stagflation.

What would a slowdown/recession scenario mean for investors?

As the economy slows, U.S. Treasury yields will likely fall. We also expect credit spreads to widen.

While inflation should slowly moderate, we still expect tariffs to create temporary price bumps in the road. Overall, we believe the slowing economy will outweigh temporary price hikes, prompting the Federal Reserve (Fed) to resume its easing program by mid-year. We estimate the Fed will cut rates three or four times by year-end.

Slowdown/Recession: Potential Investment Implications

Fixed Income

In a slowdown/recession, investors should consider:

• Shifting to shorter duration. We believe short-duration assets may help manage near-term interest rate volatility. Furthermore, along with generally offering higher yields than cash equivalents, short-duration assets also tend to offer price appreciation potential in a declining rate environment.
• Balancing duration exposure. Core bond strategies with intermediate-duration exposure may offer diversification and potential performance advantages as rates broadly decline and equity market volatility rises.
• Staying high in credit quality. In addition to delivering diversification to investor portfolios, a modest allocation to high-quality investment-grade credit may now provide more attractive yields. However, we believe credit selection is critical to avoid weaker, economically sensitive issuers.
• Maintaining inflation protection. We believe inflation strategies still appear attractive, given that inflation expectations remain higher than average, largely due to tariff policy uncertainty.

Equities and real assets

In a slowdown/recession, investors should consider:

• Emphasising quality stocks. Quality companies with higher profitability and healthy balance sheets may offer attractive potential. Investors tend to favor quality companies in more defensive sectors, such as utilities, health care and consumer staples. Additionally, we think select dividend-paying stocks that tend to provide consistent income streams are attractive.
• Looking to sustainable growth. Companies with dependable, sustainable earnings growth have tended to outperform competitors with weaker earnings profiles during economic slowdowns. Economically sensitive value sectors, such as financials, industrials and energy, have tended to lag alongside lower growth expectations.
• Treading carefully in the commodities market. As consumer and industrial demand wanes, commodities typically lose their luster. However, we believe gold may continue to shine amid falling interest rates and heightened economic and market uncertainty.
• Maintaining selective exposure to real estate stocks. Lower interest rates may boost the attractiveness of real estate investment trusts (REITs) if growth doesn’t slow to recession levels. In such a scenario, we prefer to rely on our REIT managers to identify the best opportunities.

What would stagflation mean for investors?

In our view, stagflation would push the 10-year Treasury yield higher amid significant volatility as slow growth and high inflation collide. We also believe the two-year Treasury yield could increase as the Fed maintains tight financial conditions. Meanwhile, credit spreads may widen amid weak economic growth, particularly in the high-yield sector.

Stagflation: Potential Investment Implications

We believe stagflation is unlikely but slightly more possible than a growth surprise.

Fixed Income

If stagflation emerges, investors should consider:

• Maintaining inflation protection. We believe inflation-protection securities, particularly with short durations, are attractive as rates rise and inflation remains elevated.
• Focusing on quality credits. Higher-quality short-duration strategies may offer benefits if yield outweighs the effects of spread widening. Given the pressures on corporate fundamentals from inflation, rising rates and muted growth, a focus on credit quality will be important.

Equities and Real Assets

If stagflation emerges, investors should consider:

• Focusing on traditional value sectors. The energy and basic materials sectors have typically benefited from higher commodity prices. Utilities have generally provided dependable cash flows and dividends despite higher inflation and interest rates.
• Favouring quality stocks. In this challenging environment, we believe higher-quality companies with less debt, higher profit margins and reliable cash flows from operations should hold up better. We expect the market to reward firms with pricing power and unique competitive advantages.
• Gauging commodities. Commodities have historically provided high average returns during periods of elevated and rising inflation. However, we believe astute management is required because geopolitics and supply chain issues may heavily influence performance.
• Limiting exposure to real estate. As mortgage rates rise and the housing market slows, REITs may underperform their long-term averages.

What would a growth surprise mean for investors?

If economic growth surprises to the upside, inflation would likely remain above the Fed’s target. A growth surprise scenario could keep financial conditions tight and trigger renewed Fed rate hikes.

Growth surprise: potential investment implications

We believe there’s a slim chance economic growth will improve.

Fixed Income

If growth accelerates, investors should consider:

• Focusing on credit-sensitive assets. Riskier fixed-income securities, including high-yield corporate bonds and bank loans, may offer attractive return potential when the economy is growing.
• Maintaining inflation protection. We believe inflation-protection securities, particularly with short durations, are attractive as rates rise and inflation remains elevated.
• Avoiding longer-duration assets. With the Fed in tightening mode, we expect longer-duration securities to underperform as interest rates rise.

Equities and real assets

If growth accelerates, investors should consider:

• Focusing on traditional value sectors. The energy and basic materials sectors have typically benefited from higher commodity prices. Utilities have generally provided dependable cash flows and dividends despite higher inflation and interest rates.
• Favouring cyclical stocks. Economically sensitive sectors, such as financials, communication services and industrials, have tended to benefit from strong economic activity.
• Gauging commodities. Commodities have historically provided attractive returns during periods of economic growth and elevated inflation. However, we believe astute management is required because geopolitics and supply chain issues may heavily influence performance.
• Adding exposure to real estate. REITs may outperform their long-term averages as the economy remains robust.

Tariffs: long-term goals vs. short-term economic effects

The Trump administration’s trade policy overhaul seeks three key longer-term goals:

• Seeking economic security by reducing the nation’s dependence on foreign goods and promoting domestic production.
• Establishing fair trade through policies that protect American industry and employees from unjust practices, including currency manipulation and bans on U.S. goods.
• Reducing taxes and paying down the nation’s record-high debt by generating revenue through tariffs.

While these goals seem reasonable, some economists remain sceptical that the plan for achieving them will work. And many worry about the broader implications, including reduced imports and retaliation from trading partners.

In our view, even a relatively low level of tariffs could flatten U.S. economic growth and inflate prices. We also believe other aspects of Trump’s policy agenda, including tax cuts and deregulation, may not be enough to counteract the recessionary effects of tariffs.

Given the scenario that’s unfolded so far, Trump may back off some tariffs. He could also strike deals with key trading partners to lower tariffs, secure free trade and relocate more manufacturing to the U.S.

Meanwhile, speculation, economic uncertainty and market volatility will likely persist as tariff negotiations continue. But we believe it’s still possible to get through this upheaval without a major trade war.

What a stalling economy may mean for portfolio allocations

We believe maintaining a broadly diversified portfolio is a prudent policy as the economy slows or potentially contracts. In our experience, investors who maintain their long-term strategies may persevere as markets gyrate. However, we also believe specific investment characteristics deserve consideration in this environment.

For example, given mounting recession worries, we believe overweighting duration relative to market benchmarks may deliver advantages if interest rates fall and a flight to quality ensues. Additionally, select agency mortgage-backed securities (MBS) and collateralized mortgage obligations (CMOs) offer defensive characteristics and attractive yields.

Among stocks, rather than focusing on growth versus value, we generally favour quality, such as dividend-paying companies in defensive sectors (health care, utilities, consumer staples). Additionally, sustainable growth companies with stable earnings and strong competitive advantages will likely be more resilient to trade disruptions and tariffs.

By Charles Tan (CIO, global fixed income), Richard Weiss (CIO, multi-asset strategies) and Nancy Pilotte (senior client portfolio manager, multi-asset strategies)

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[1] Fitch Ratings, April 23, 2025.

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With this in mind, it is useful to understand how tariffs work in practice

Tariffs, or duties, are essentially taxes imposed on imported goods, generating revenue for the governments that implement them. When goods from countries targeted by tariffs arrive at ports of entry, the importing firms pay the duties. 

Who ultimately pays for the cost of tariffs is more complicated. The importer initially pays this tax directly. Then, the importer may increase customer prices to cover some or all of the tariff’s costs. Exporters don’t pay tariffs directly. If tariffs make their goods more expensive for prospective import buyers, exporters might lower their prices or cut production costs to compensate.

There is also an argument made that tariffs can help protect jobs, although this is open to debate.

Trump appears to have several reasons for introducing tariffs, including protecting domestic producers from foreign competition, and also to advance policy goals such as interrupting the drug trade.  Whether he will achieve these goals is unknown.

What is clear, however, is that tariffs have implications for economic stability and growth which are a cause for concern. 

Almost all economists agree that tariffs tend to limit economic growth.  And while most countries already had some tariffs in place, there is no doubt that the extent of those being introduced by Trump – and the reciprocal tariffs by other countries – is unprecedented in recent times.  It is impossible to predict the implications.

One thing that seems likely is that consumers and businesses will be hurt by higher prices and a trade war could arise if countries retaliate against Trump’s tariffs. We have already seen that after President Trump’s global tariffs on steel and aluminium took effect, the European Union and Canada in March announced billions of dollars in levies on American goods.

By limiting competition, tariffs tend to reduce the quantities of goods and services available for US businesses and consumers. They can also limit the variety and quality of products, reducing consumers’ options. Trump’s proposals have included a universal tariff applied to all goods from targeted countries and this has significant implications for the broader economy.  As a result, investors’ long-term expectations for broader inflation have increased since Trump’s election victory in November 2024.

Of course, consumers can seek cheaper alternatives to avoid paying higher prices for imported goods subject to tariffs. However, by limiting competition, tariffs also mean that prices for these alternative goods will also likely rise.

The US has used tariffs since 1789. Before the Civil War, tariffs comprised 90 per cent of the US government’s revenue. This percentage dropped to less than a third by 1915 after the US instituted a federal income tax and by 2016, tariffs accounted for less than 1 per cent of revenue. Now, that figure is set to rise under the new tariffs being imposed by President Trump.

Nor are American jobs likely to be protected. A 2024 working paper by economists at the Massachusetts Institute of Technology, University of Zurich, Harvard University and the World Bank^[1] concluded that Trump’s first-term tariffs “neither raised nor lowered U.S. employment”.

Despite Trump’s 2018 tariffs on imported steel, for example, the number of jobs at US steel plants hardly changed. Meanwhile, the retaliatory tariffs China and other nations imposed on US goods had overall ‘negative employment impacts,’ notably for farmers, according to that study.

Most recently, the nonpartisan Tax Foundation estimated that Trump’s latest tariffs would reduce US employment by the equivalent of 142,000 full-time jobs. 

So, tariffs are by no means a good thing for the American or indeed the global economy.  Investors would be wise to carefully monitor the situation and seek to understand the potential impact on their particular investments.

By Nancy Pilotte, senior client portfolio manager

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At a high level, we believe plans for higher tariffs and reduced immigration could lead to slower growth, higher inflation and higher interest rates in the coming years.

At the same time, however, the stimulus effect of tax reductions could offset some of these headwinds. Republicans won control of the Senate, but Trump will need a legislative majority in both chambers of Congress to fully implement the proposed tax code reforms. Control of the House hadn’t been determined at the time of this writing.

Even if Republicans win a House majority, legislative approval of all Trump tax and spending proposals isn’t certain. Concerns over the pace of rising budget deficits could weaken support among the most fiscally conservative legislators.

With or without a cooperative Congress, Trump can execute certain tariff, trade and immigration policies through executive orders. He also can wield power through cabinet department staffing and the authority to pull the levers of government.

Highlights of his proposals include the following:

Taxes

Trump’s tax policy priorities include corporate and individual tax reforms that would require legislative approval. He proposes to reduce the corporate tax rate to 20%, with an even lower rate of 15% for companies that manufacture their products in the U.S. He also wants to permanently extend the quicker capital expenditure depreciation rules enacted in the 2017 Tax Cuts and Jobs Act (TCJA).

Trump intends to permanently extend the tax rates established in the TCJA for individuals. He also proposes eliminating income taxes on tips, overtime pay and Social Security benefits. Additionally, he proposes reinstating the deduction for local and state income taxes, making auto loan interest tax-deductible and expanding the child tax credit to $5,000. He would allow the expanded Affordable Care Act (ACA) health insurance tax subsidies to lapse.

Tariffs and trade

Trade is an area where Trump has considerable leeway to act without congressional approval. He has pledged to implement a 60% tariff on goods from China and increase investment restrictions on key Chinese sectors tied to national security. He also aims to increase restrictions on semiconductor exports to China and would seek legislation to revoke China’s most favored nation trade status. Additionally, Trump proposes phasing out imports of essential Chinese goods.

In terms of broader trade policies, Trump says he intends to implement across-the-board tariffs of 10% to 20% on products from all countries. He also plans to reinstitute tariffs on EU steel and aluminium. Furthermore, Trump is considering legislation to remove the U.S. from the World Trade Organization.

Health care

Trump aims to work through Congress to lower drug prices and accelerate efforts to privatize Medicare, including reducing hospital payments for outpatient care. He also supports legislation to cut Medicare Advantage payments to insurers and reduce Medicaid spending while implementing work requirements for Medicaid recipients. These measures are intended to decrease government spending on health care and encourage more private sector involvement in providing health services.

Immigration

Immigration was a major theme of Trump’s campaign. His priorities focus on significantly tightening immigration policies and enforcement. He can use executive powers to increase the deportation of undocumented individuals and implement more restrictive rules for legal work and student visas. Additionally, Trump will likely push for legislation to restore funding for the U.S./Mexico border wall.

Defence and Foreign Aid

Trump emphasises increasing national defence spending while reducing or eliminating financial and arms support for Ukraine in the war against Russia. He also prioritises strong U.S. support for Israel and would pressure NATO members to spend at least 2% of their gross domestic product (GDP) on defence.

What’s next on the path to Inauguration Day

In addition to overcoming any legal challenges, several hurdles must be cleared before Inauguration Day on January 20, 2025. The governor from each state must certify the outcome. From there, the Electoral College convenes on December 17 and must deliver its results to the U.S. Senate no later than December 25.

The electoral votes will be counted at a joint session of Congress on January 6, 2025. As president of the Senate, Vice President Kamala Harris will preside over the session in a ceremonial role. She has no constitutional authority to decide which votes to count.

Success depends on execution, not government policy

As investors, we view election results and policy proposals as inputs rather than drivers of our decision-making. Individual companies will manage through legislative and regulatory hurdles with varying degrees of success. As we build our portfolios, we’ll evaluate companies and management teams based on their ability to navigate this complex landscape.

We believe in staying focused on your long-term investment goals and not succumbing to the emotions of the moment. Also, keep in mind that stock market volatility isn’t unusual in the immediate aftermath of Election Day. However, it has historically dissipated shortly thereafter and returned to normal patterns after the inauguration.

We also know from history that the stock and bond markets rise more often than they fall over time. Many gains come during short periods that can’t be predicted, so trying to avoid volatility by jumping in and out of the market can put your long-term results at risk.

By Nancy Pilotte, CAIA

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Of course, the composition of Congress after this year’s election will considerably impact the extent to which the respective candidates can implement their priorities. Therefore, we’ve identified specific policies that the presidential election winner could implement without legislative approval. We’ve also specified those requiring congressional approval and those that wouldn’t.

Our policy comparison table roughly prioritizes policy topics in descending order by their degree of potential economic and financial market impacts. As always, we think investors should take a long-term view and avoid the temptation to base their portfolio decisions on unpredictable political winds.

Key policy differences

Tax policies

One significant difference between the two candidates is their approach to tax policy. Vice President Harris has indicated her desire to raise the top corporate tax rate to 28% from 21%, while former President Trump wants to reduce it to 15%-20% from 21%. On the individual side, Harris plans to raise the income tax rate to pre-2018 levels for individuals earning more than $400,000, which could be accomplished by letting tax cuts from the 2017 Tax Cuts and Jobs Act (TCJA) expire. On the other hand, Trump wants to permanently extend the tax rates established in the TCJA, which would require legislative action.

Trade policies

Trade policy is another area where the candidates differ. Both candidates have a protectionist tone, but their approach to China varies. Harris would employ tariffs targeted at industry and geopolitical rivals, including Chinese technology products, while Trump has proposed a 60% tariff on all goods from China.

Regulatory differences

We’re also watching the regulatory environment. Harris plans to raise the federal minimum wage to $15/hour from $7.25, expand student debt relief and expand antitrust initiatives and enforcement. Conversely, Trump wants to cut regulations substantially across the board, reduce barriers and long approval times for mergers and acquisitions, and categorize more civil workers as political appointees rather than employees.

Health care policies

Both candidates have indicated they’d like to reduce drug prices. Democrats have said they’d like to expand the number of drugs subject to new Medicare price negotiations and extend the Medicare inflation cap to private-sector drugs. Republicans, on the other hand, want to accelerate efforts to privatise Medicare, reduce payments to hospitals for outpatient care, and reduce Medicaid spending.

By Nancy Pilotte, vice president

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