As client portfolio managers, we have a unique perspective on what’s top of mind for investors.
The primary topic of focus for the first half of the year has been tariffs. We’ve also heard murmurs about the potential for U.S. stagflation, monitoring some variations in the housing market, all the while with the Fed being front and center.
Tariff is the word, have you heard?
The initial reaction to the Trump administration’s global effort on tariffs was that things were going to be inflationary, and consumers were going to take the hit. It could lead to some retrenchment by consumers, which could cause a lot of uncertainty at the business level as well, particularly when it comes to corporate decision-making and capital expenditures.
This could be the most dramatic trade policy that we’ve had in the past century. Although the investment world knew it was coming, the rollout was quite orthodox. What’s been most impressive is how well behaved the markets have been, in particularly the credit markets, in what would ordinarily be a pretty good flight to quality. We’ve seen just the opposite. And while it’s not known what the final phase will be, the market has been amazingly balanced based on a pretty dramatic event.
This feels a little bit like a hurricane, where there are times when you have a warning that a storm’s coming in and then the storm passes over. And there are other times where even though everybody knows a storm’s coming and people prepare, things go badly. Essentially, everyone knew this was coming since the election.
China’s the real end game here, and it probably won’t go away after the first 90 days. There will be both residual economic and military issues involved. But compared what we are up against, the relationship between the U.S. and China is remarkably well-behaved, even though it’s obviously adversarial. And that’s a positive for the markets, but most of it has yet to be played out.
Is stagflation a possibility?
A second topic that falls into this category of unpredictable or unproven fears is whether stagflation is a possibility. It would take some significant events to get back to stagflation, which we haven’t seen since the 1970s. It occurs from the combination of rising inflation, high unemployment, and slower economic growth.
History Shows the Inflation Fight May Be Far from Over
In the 1970s, inflation rose again despite initial success
Source: Bloomberg
Unemployment is in a good place right now, and economic growth isn’t clearly weak. But investors are concerned about the medium-term growth outlook, with inflation, tariffs, and economic realignment.
State of the U.S. housing market
Housing is always interesting, but we probably need lower interest rates to really get the market going again. However, it’s possible that we might not have the labor supply to build more houses again. A lot of people feel stricken. The ones who benefited from purchasing a home for a low price are locked into low mortgages, and they don’t want to trade out of it. That’s why you’re not seeing a lot of action. Although it is a recent trend, you are seeing more homes come on the market, although this real estate market doesn’t feel like what we were up against in 2007-08. This market doesn’t seem to be a house of cards. There’s a lot more equity in the homes. A lot of the younger generation is having trouble accessing homes and loans. But it seems like there’s going to be some changes in the next 12 months.
U.S. Existing Home Sales (% Change, year over year)
Source: National Association of Realtors as of 31 May 2025.
The central positioning of the Fed
The Fed has two mandates: employment and economic growth. The question continues to be, is the Fed going to cut rates or is it going to stay put? We see their summary of projections below from the last meeting in mid-June. There’s a lot of uncertainty in their decision-making going on right now as well. They’re not sure how tariffs are going to impact things. That’s keeping them on hold for a little bit longer.
Fed Dot Plot
Source: Federal Open Market Committee. Each shaded circle indicates the value (rounded to the nearest 1/8 percentage point) of an individual participant’s judgment of the midpoint of the appropriate target range for the federal funds rate or the appropriate target level for the federal funds rate at the end of the specified calendar year or over the longer run.
Where We Might Be Headed
Companies might have the ability to start planning a little bit stronger. They’ll have the ability to forecast their capital expenditures a little bit better and stepping away from just that uncertainty from potentially tariffs and administration. One other thing that could lead to some acceleration in growth is the continued increase in worker productivity. You started to see a lot of that evidence last year. And much of that comes from technology. Without getting deep in the weeds on AI helping drive things, more efficiency for companies, and for individual workers to get more done. That can certainly accelerate growth a bit. Again, not popping within the next quarter or two, but just longer upward momentum that staves off the potential for recession, keeps us chugging along. We saw the Fed adjust, raising its inflation and bringing its GDP growth numbers down a little bit. But perhaps we stay on a high 1% or even a low two-handle on GDP growth.
To hear more about these topics, please listen to the Thornburg Investment Insights Podcast at the link below or your favorite podcast platforms.
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