Latest / UBS Trending / Economic tides are turning — who's vulnerable?

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Economic tides are turning — who's vulnerable? · UBS Trending

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  In sailing,
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  a slack tide is that brief moment
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  when waters are completely still.
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  Before the current changes direction.
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  Today's markets might be experiencing their own slack tide
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  caught between strong fourth
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  quarter growth and the potential headwinds of Trump's policies.
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  So while investors do remain optimistic, tariffs, immigration
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  restrictions and spending cuts
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  could be about to change the economic current.
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  So why might the market be underestimating these risks?
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  We're going to get into that and a whole lot more right now.
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  On UBS trending.
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  Hi, everyone, and thank you for joining us.
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  My name is Anthony Pastore.
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  I'm the host of UBS Trending.
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  Thanks for being here.
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  Connor Fitzgerald
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  he's a Fixed Income Portfolio Manager from Hartford Funds
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  is here in the studio with me today. Connor, nice to have you.
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  Thanks for having me back. Good. Yeah. Yeah.
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  Good to have you back.
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  I think, I can't even remember exactly when you were here
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  the last time, but things were very different.
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  And I kind of referenced,
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  a recent white paper
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  that you wrote called sitting in the Slack Tide of U.S.
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  Fiscal Stimulus. And so we're going to get into that and more.
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  But I wanted to start with the idea
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  that the markets do seem pretty optimistic.
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  Whether you're looking at equities or treasuries,
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  there's a lot of optimism out there,
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  but also still a lot of uncertainty that we're talking about.
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  Why do you think that that is the case right now.
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  So I think the market's optimistic
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  because I think the baseline level of growth,
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  which you referenced a few minutes ago, still pretty strong.
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  Still think household
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  balance sheets, really strong corporate sector balance sheet.
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  Balance sheets really strong.
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  And we came into this year, I think, with a lot of excitement
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  about that cycle being able to continue because of positive
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  or positive animal spirits,
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  because of things like deregulation and just this general idea
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  that Trump is pro-business,
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  pro the stock market,
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  and that we could run a little bit further with that.
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  So I think you summarize it
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  while we're a little bit of a push pull
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  with the economy's doing fine as it stands today.
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  But now we're really grappling with,
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  you know, some policies that may or may not be enacted.
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  And I think there's also this idea
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  that, you know,
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  these are negotiating tactics which he's alluded to in the past.
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  So it's hard to really speculate on
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  what could come to pass until we actually see what's implemented.
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  But for now, I think the economy's arguably doing doing okay.
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  Yeah.
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  I mean, going back to November of 2024,
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  after the election results came through, the markets rallied
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  on this pro-business stance
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  that Trump took on the campaign trail.
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  I think what's happening now,
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  and of course,
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  this is what you're writing about,
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  is the uncertainty of tariffs and spending cuts and immigration.
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  I think it's everybody's sort of messing with investors minds.
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  So if you look at the potential negative side of things,
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  what areas of the market that you're tracking
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  could really be affected by that?
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  So I think the way we've
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  tried to lay it out is that I think coming into this year,
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  the market was more focused on tax cuts and pro-growth policies.
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  But what we've seen them move
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  faster on are things
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  like the Department of Government Efficiency.
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  I think has moved far more aggressive
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  than we would have expected.
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  Immigration, I think in hindsight seems obvious,
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  but they've moved very aggressively on that.
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  I think immigration is a very strong, positive force
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  for an economy.
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  I think lower immigration,
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  less growth, more so than important on the inflation side.
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  So in terms of sectors, I don't have one
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  specific sector that I would necessarily call out.
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  I think it's really just the general economy.
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  And I would specifically point
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  to the amount of hiring that we've had in government sectors
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  and health
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  care sectors
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  where I think going back three years, it's about 43% of hiring.
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  So any sectors
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  or companies that are exposed to federal government contracts,
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  I think are, you know, pretty much under scrutiny.
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  And I think in general,
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  the rest of the labor market is is okay and sort of in balance.
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  There's not a lot of hiring. There's not a lot of firing.
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  But if the main job growth engine is now going the other way,
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  I think you could move the unemployment rate up pretty quickly.
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  And I think that's something the fed would pay attention to.
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  So that's really the number one thing
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  that we're
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  we're focused on is just slower growth and slower hiring.
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  Yeah. And I'm glad you brought up the fed.
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  I mean with the recent statement that came out where they did
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  keep rates unchanged as expected,
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  they did say in that statement that there's
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  some uncertainty on the economy.
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  Obviously, what you just rally and,
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  you know, rattled off, there certainly is a big part of,
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  I'm sure, what
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  those conversations were in that room with the FOMC members.
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  On the flip side, obviously there are
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  some really positive areas in the fixed income markets here
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  at UBS.
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  We're still saying you got to put that cash to work, don't
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  sit on the sidelines even in volatility.
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  And we kind of like that 5 to 7 year part of the curve.
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  What are you thinking about where the opportunities are.
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  Whether it's the yield curve a particular asset class.
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  Very much in agreement with that I think intermediate treasuries
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  we would describe as you know, a good place to anchor portfolios.
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  We still think credit fundamentals are strong,
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  but given how compressed valuations are,
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  I wouldn't necessarily recommend a huge allocation to high yield
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  focus more on investment grade,
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  where I think you can get a pretty reasonable spread still,
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  especially relative to, history and relative to other parts of
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  the curve.
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  And I do think, you know,
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  to go back to this idea
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  of like the policies that they're trying to enact,
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  if you just look at the impact on growth
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  from spending from the federal government,
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  I think we can all agree it's
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  been significant over the past few years.
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  If that's reversing, I think we might after, you know, rerating
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  trend growth and neutral rates or terminal rates
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  higher in the fourth quarter last year,
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  we might have to move that back, maybe
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  closer to where they were in the middle of last year,
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  which I think gives the fed,
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  you know, potentially room
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  when they get some data in hand to maybe tweak policy rates
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  a little bit lower.
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  And I think that intermediate
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  part of the curve will probably be the best,
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  the largest beneficiary of that move, if neutral
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  and terminal rates move a little bit lower versus expectations.
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  Yeah.
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  And the expectation for us here at CIO, UBS
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  is still a 50 basis point cut this year from the fed.
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  Obviously with the fed saying what they said
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  in the recent statement,
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  it seems like they know what direction they need to go in,
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  but there's a possibility that they could kind of stall out,
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  which we were talking a little earlier,
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  that could certainly impact treasuries, especially yields.
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  We could see another inversion of the yield curve,
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  which I think a lot of people equate that to, oh, we're in
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  we're in for a recession.
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  I don't know if that's something that you're tracking.
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  Yeah.
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  I just I think it will depend on how much the fed wants
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  to lean against the inflationary side of the impact from tariffs.
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  Right.
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  And I think
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  yesterday they were more clear than I would have expected that
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  I think it's a short term factor.
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  And they at no point referenced potentially tweaking policy
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  higher as it was more of
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  like stay the same or potentially move rates lower.
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  So I think that kind of shows where the,
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  the skew of outcomes is, is in their mind at least.
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  Right, right.
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  And we were saying also like the fed,
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  there's a lot of smart people in that room who understand markets
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  and what could potentially happen
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  if they decide to sort of really shift, either stay the same or
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  I mean, I don't think this is in the cards,
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  but raise rates that would just, you know, be something
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  I don't think we would expect.
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  I want to go back to what you're
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  what you were writing about
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  in this recent note about the slack tide,
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  because you sort of do this outcome A, an outcome
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  B, and outcome B is more about like the sort of unexpected.
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  And how do you plan for that?
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  And when you think about uncertainty,
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  do you have an outlook for whether it's the medium to long term?
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  So I think
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  coming into this year, I was very constructive on the U.S.
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  economy.
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  And I've I'd say I've grown less constructive because I do think
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  Trump 2.0 administration is very committed to
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  what they feel like they got elected
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  to do in terms of the mandate.
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  And I can tell you the last time I heard a politician
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  say a phrase akin to no pain, no gain.
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  I think typically politicians are more focused on the short term.
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  They seem to have a long term plan.
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  And that long term plan, I think, does necessitate,
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  you know, lowering spending at the federal government level.
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  And I think
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  we all can agree that deficits are kind of at levels where,
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  you know,
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  maybe they're sustainable for a period of time here,
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  but ultimately they need to fix that.
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  I think that's a huge focus of, Treasury Secretary Scott Bass.
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  And but they need to find a way to like, thread
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  the needle where they, they can't pull back spending.
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  That's growing the economy so fast that we go into a recession,
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  because then the deficit will explode
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  because the revenue side of the equation collapses.
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  But I do think we've kind of
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  that was sort of the point of the slack tide analogy.
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  We've kind of reached like the upper bounds
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  of what we can do in fiscal,
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  which makes me think I can only go one way.
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  And I do think that that like,
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  if there's one thing I do to point to why 2022 wasn't a recession
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  the way many folks
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  expect it, it's
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  because there was a
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  7 to 8% budget deficit running in the background.
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  We've never really experienced that in you know, non crisis,
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  non war time period and that really supported the economy.
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  So if we're going to take that back
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  all else equal I think growth has to slow.
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  So I think that's what the market has started to engage with.
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  But now I think there's a lot of debates of like
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  well how much can it slow. And that's usually how things go.
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  And you start start pushing towards slower growth.
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  But I think to me
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  that's the challenge that market participants face.
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  So I'd say I'm a little bit less constructive short term.
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  I think some of the policies
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  they're pursuing are actually quite positive
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  long term in terms of less government
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  spending, more private sector.
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  I think there's good data to support that.
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  But there's going to be a transitional period
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  with a lot of volatility.
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  I think that's our our core view. Yeah, for sure.
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  Especially the short
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  term pains as you talk about no pain, no gain.
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  And you know, given the fact that there is a lot of uncertainty,
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  of course, one of the things we subscribe to is long
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  term investing
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  and obviously having a very well diversified portfolio.
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  So given that,
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  I think one of the most important things
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  that, you know, we want,
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  I want to talk about with you
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  is this kind of idea of making sure
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  that active management is really is
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  sort of playing a role
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  because especially with the uncertainty that we're seeing.
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  Just talk about your approach to active management.
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  I think our approach, active
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  management really centers on this idea
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  that the world's always changing.
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  And we had a couple of charts up here,
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  but like even
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  just the interpretation of Trump going into the election
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  visa v
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  what people think
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  now is done a full 180 and we've unwound all those,
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  you know Republican sweet basket trades.
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  I would even point to certainly not an expert.
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  But like what happened with DPC and how quickly that upset the
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  AI theme.
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  So I just think we're in a period
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  where, you know, whether it was regime change
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  from no longer buying, having central banks, buying bonds,
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  and now you have a very like pro-us, inward focused
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  administration who's trying to tackle the deficit
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  and is even talking about where ten year Treasury yields are.
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  I mean,
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  these are things
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  that certainly have never been talked about in my career.
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  So I just think that we're going to have a period
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  of a lot of volatility.
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  I think there's a lot of room for people
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  who are willing
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  to think creatively about how things can unfold in the future.
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  I think there's a lot of value
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  to be subscribed to that, that type of thinking.
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  So I think it's just
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  there's going to be a lot of change in the next couple of years.
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  The status quo likely won't persist along many dimensions,
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  and I think there's a lot of room
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  for active management to succeed.
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  And there's going to be a lot of volatility.
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  And so that volatility can, you know, create opportunity
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  the same way it can create risks.
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  So that's that's sort of what we're excited about.
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  I mean, we get excited to go to work
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  and try to figure these things out.
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  And that's, that's what we've been doing
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  the last couple of weeks.
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  Good stuff. Obviously.
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  You have to
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  I mean, it's
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  been, certainly
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  like a bit of a roller coaster,
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  but thanks for doing what you do, Connor.
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  Thanks for joining me. Good conversation. Appreciate you.
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  Thanks a lot.
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  Thank you, Connor from Hartford Funds.
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  And for more information on everything
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  that Connor and I talked about,
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  you can check out our insights website at ubs.com/views.
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  Check us out at @UBSTrending on Instagram.
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  And as always,
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  if you have any questions about what we spoke about today,
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  make sure you're continuing this conversation
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  with a financial advisor.
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  Until next time, I'm Anthony Pastore.
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  Have a great rest of your day, everybody,
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  and remember to keep your eyes on what's trending.
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  We'll see you soon.