Perspectives: The Next Four Years

March, 2025

Most investors would agree that financial markets can be highly unpredictable, generally more so in the near-term than the long run. Many factors influence the prices of securities, some on an individual basis, others at a macro level. A new Presidential administration intending to make major structural changes certainly falls into the latter category. The degree to which numerous campaign proposals will become reality remains murky. To decipher what the future may look like, it helps to begin by examining where we stand now.

President Trump enters office from a position of economic strength for the U.S. Our economy grew 2.5% in 2024, far ahead of forecasters’ expectations when the year began. Projections for GDP growth in 2025 and 2026 by the International Monetary Fund are 2.7% and 2.1% respectively. Both of those forecasts are upward revisions from prior estimates.

Predictably, a strong economy and a robust labor market go hand-in-hand. Jobs are up and wages are rising. The unemployment rate is as low as it was prior to the pandemic and near its best levels historically.

Inflation is the one major area that remains an economic work-in-progress. The core rate for the Consumer Price Index (CPI), which excludes volatile food and energy costs, increased by 0.2% in its most recent reading from the prior month. That was slightly lower than forecast and a decrease from January. Total CPI increased 2.8% year-over-year and remains above the Federal Reserve’s 2% target.

Interest rates continue to be elevated and are highly dependent on the level and trajectory of inflation. Additional progress for the CPI would open the door for further rate cuts by the Fed, building on the three reductions already made late last year. However, investors don’t expect that to occur until later this year.

This brings us to some of the major proposed changes by the new administration and the impacts they could have. Tariffs are high on the list and could conceivably slow growth, ignite inflation and/or lead to trade wars. Deportations and changes to immigration may create labor shortages and negatively impact growth and inflation. Further tax reductions could also be inflationary, especially given the current strength in the economy. These are some of the known unknowns about how and when these new policies, and others, will be implemented and their ramifications as they filter through the economy.

When it comes to the new directives, there are some important details to keep in mind.

Implementation is not an all-or-none situation. Adjustments can and will be made to meet political objectives without severely damaging the economy.
Trump watches the financial markets closely and views stock market gains as a barometer of his success. Investors can sway his thinking.
High-level positions with significant financial clout, such as Treasury Secretary and Federal Reserve Chairman, remain in the hands of well-respected and highly capable individuals.

There remains much uncertainty about what may happen in the next four years and that has generated increased stock market volatility. However, bear markets tend to be associated with economic recessions. A dramatic downturn in the economy doesn’t appear to be on the horizon. Major policy changes should in the aggregate benefit the economy and businesses over time.