Uncertainty

Don't you hate uncertainty? Uncertainty is disturbing because it does not allow us to make black-and-white judgments because we simply don't know the future. We are currently living in a time of unprecedented uncertainty.

Here's just a few of the questions that I have been receiving.

1. What will tariffs do to the economy?
2. How will the markets react to tariffs?
3. Will the Federal Reserve be lowering interest rates or raising rates?
4. What will the unemployment rate look like after massive Federal employee terminations?
5. What will happen to inflation if tax cuts are implemented?
6. Are we headed towards stagflation like in the 70s?

I could go on and on. There are balanced answers to each one of these questions. Still, not having clarity as to what the future may hold does increase volatility in markets and increases anxiety for investors. One might be tempted to just close your eyes and not think about these things. We think that's probably not wise as conditions may very well impact investment strategy.

We answer questions and make our best judgment based on probability of outcomes. We decision tree and map out what the various scenarios are and what the consequences are for investments and investment strategy. 

Uncertainty equals volatility. And 2025 is sure to be a very uncertain year.

Now, here's a brief answer to the questions I mentioned previously. It's the short version and I'm happy to elaborate if you care to have more details.

1. What will tariffs do to the economy?

We expect tariffs to slow economic growth and increase prices. This assumes that they are put in place for a long period of time rather than just a negotiating tactic.

2. How will the markets react to tariffs?

At present, the market is shrugging off these tariffs because of the belief that they won't last. If it becomes clear that the economy is being impacted by tariffs, the market will react and likely not positively.

3. Will the Federal Reserve be lowering interest rates or raising rates?

At this point, I don't see rates falling and I think the probability is that they will likely rise slightly. But if the economy begins to slow down, that's another story; the Fed will do what it needs to do to stimulate the economy.

4. What will the unemployment rate look like after massive Federal employee terminations?

Higher, but probably not meaningful, so we're probably talking about a couple hundred thousand jobs which in the big picture of employment doesn't move the needle on a national basis. But locally, especially for areas such as Maryland or Washington D.C., it may be pretty catastrophic.

5. What will happen to inflation if tax cuts are implemented?

It depends on many factors. But generally, tax cuts stimulate growth and growth tends to result in higher inflation. Higher inflation tends to prompt the Federal Reserve to increase interest rates.

6. Are we headed towards stagflation like in the 70s?

I hope not. But I am concerned about this.

We will continue to watch and assess. Our judgments adjust based on data and there is plenty of data to sort through.