Probable Sources of Market Volatility:
There’s an incessant flow of political and macro-related news hitting markets right now. I wanted to briefly discuss my thoughts on everything and how I plan to manage my portfolio in the coming weeks/months. This piece will cover political items. As always, I will purely comment on them from a financial markets point of view. I will not pick sides or express any other opinions. I have no interest in doing so.
There are several factors affecting market sentiment and fundamentals at the moment. First, the tanking GDP forecasts at the Atlanta Fed. This is not a structural concern to me. It’s driven by American corporations rationally pulling forward imports to beat expected tariffs. It’s enterprises stockpiling inventory to ensure they don’t have to pay these fees for as long as possible. That means lower net exports and a sizable GDP headwind, which can be seen below:
Furthermore, as my friend “Deer Point Macro” on X reminded me, this inventory loading is part of investments, not consumption when calculating GDP. The investments figure has not yet been updated since the import explosion started being reflected in the Atlanta data above.
At the same time, there are consumption growth revisions impacting GDP estimates as well. That is more material for forward-looking profit growth. In my mind, that is partially due to feared tariffs impacting consumer confidence, but even more to do with public sector layoffs placing upward pressure on unemployment metrics. These layoffs are part of a broad effort to curb government spending, limit deficit growth and ease the interest expense burden.
What That Means For Now:
For now, tariffs and budget control will mean pressure on GDP readings in Q1, some employment weakness (I think we stay comfortably below 5%) and potentially some inflationary impacts for companies passing tariff costs onto consumers. It’s worth noting that a firm’s ability to raise prices is directly correlated with consumer strength… so that inflationary hit will only come if consumers (~70% of our economy) are still feeling good. It’s also worth noting that the 5-year Treasury Inflation Protected Securities (TIPS) price has cooled off since this tariff drama started. This means bond investors are valuing inflation protection less highly than they were before this news (first chart). Interesting to note alongside tanking Truflation readings (second chart).