Navigating Policy Shifts: An Investor’s Perspective

The last four trading sessions have underscored that volatility is back. It always is when accompanied by lots of uncertainty. But this uncertainty hasn’t been about whether the Fed will cut rates or whether earnings will beat estimates.

I’ve spoken with two well-known economists in the last two weeks, one of which is a former economist at the Federal Reserve and the other a global strategist for a large bank. Both were concerned about policy. It’s not just one. It’s several. And they’re interconnected – diplomacy & security, DOGE, trade & tariffs, taxes & regulation, immigration, and the AI buildout.

I will try to unpack this with the least amount of political bias as possible. At the end of the day, we’re all Americans and we’re all investors. Based on historical market performance, we shouldn’t be any more or less invested under Trump than we were under Biden. But sometimes we may need to make adjustments based on policies and economic or market conditions.

Diplomacy & Security 

The old playbook for how countries work with each other seems to have been thrown out. It’s a reset. This could be seen as a healthy restart, but it could also strain relationships that were built on years of collaboration and trust. At the end of the day, for investors this means we must look more carefully at things like entanglement risk – the risk that company’s supply chain is tied up in countries that may be at risk for imposing new restrictions. This mainly applies to globally connected companies or companies that rely on inputs from across the world. As it relates to global security and geopolitics, I think we need to wait until the dust settles. Will there be new alliances? Will old alliances crumble? Will peace be at greater risk? Do the risks of WWIII increase or decrease in the short term and the long term? All of these are still yet to be determined, in my opinion.

DOGE 

We could also call this the “great shakedown.” While Elon Musk doesn’t have congressional authority to change budgets, he can shine a light on areas that may have excess or worse, the potential for fraud. But the approach seems to be more akin to a wrecking ball than a scalpel. Massive cuts in areas without much deliberation could create angst or unintended consequences. For investors, we need to pay attention to the deficit and to second and third-order effects. Are the savings from cuts being used to pay down the debt or being spent in other areas? If spent in other areas, can investors benefit from it or will they be hurt? For second and third-order effects, we need to look at consumer behavior and corporate behavior. Will consumers spend less because they are worried about job security? Will companies look to implement similar shakedowns, enforcing return to work policies and reducing lower performer head count? The answers to both could mean a weakening labor force and lower growth (reduced spending). Too much could cause a recession. We believe we will only have lower growth.

Trade & Tariffs 

We do not know how long the tariffs will last and we also don’t know what areas will be exempted. This much we do know – it will be a tax on consumers to the extent that consumers cannot substitute for another product. If consumers cut back on spending, this could reduce growth. To the extent that buyers just keep buying and tariffs stay with us for longer, higher inflation may be the result. To the extent that more jobs are created in the US, this is an obvious positive.

Taxes & Regulation

Extending the current tax cuts is really the only area that is less uncertain. And keeping the tax cuts will be better for investors than letting them expire. The real question is how they will be funded. Will they be funded from DOGE? What other cuts are we likely to see and what other sources of revenue will pay for the cuts? Revenue from tariffs may pay for some, but we don’t know how long and how deep the tariffs will be in the long term. Ending taxes on tips and overtime pay could be stimulatory but also put upward pressure on wages, leading to some inflation. Reducing unnecessary regulations can be good, reducing expenses and increasing margins. Investors should consider smaller companies and highly regulated industries that would likely benefit the most from lower regulation.

Immigration 

Looking at this not from a security standpoint, but purely economically, we could see upward pressure on wages due to a) a tighter labor supply (fewer workers); and b) less “under the table” payments that are below market rates. This would put pressure on wages, which could increase prices. The biggest challenge is fewer in the labor force. We will need better technology to be more productive with fewer people, because we’re getting older and not having as many children. 

Race for AI Supremacy 

The race for the best technologies will continue and it won’t necessarily be won by those with the most amount of money to throw at it. It will likely be a combination of resources, knowledge, and creativity. Given the current policy, the US still has the edge but will need to be careful about exporting it. For investors, we need to examine things like chip restrictions, trade deals, and the changing landscape of the technologies themselves. We recommend investors pay attention to profits, economic moat, and the longevity of the technology. I would be remiss if I didn’t mention energy. AI data centers and EVs will require more energy than what we currently have. Energy or utility companies that can effectively solve for this may experience healthy growth, but these companies may be as volatile as the tech companies themselves.