Market commentary
Quarterly economic outlook
The new world (dis)order.
Quarterly economic outlook the new world (dis)order
SEI recently released its first-quarter Economic Outlook. Here is a summary of our key perspectives, focusing on global economic growth, monetary policy, inflation, geopolitics, elections across the globe, and equity markets.
- The optimism among U.S. investors that greeted Trump’s election has been completely unwound as concerns over tariffs and the deteriorating relationships with U.S. allies take centerstage.
- Trump views tariffs as a tool that serves multiple purposes including border control, compelling NATO allies to spend more money on their own defense, correcting economic imbalances, encouraging the reshoring of manufacturing, and generating revenue.
- Tariffs are an inefficient way to raise revenues and should cause prices to rise while restricting consumer choice.
- Although U.S. gross domestic product (GDP) will likely be weak in the first quarter, SEI still expects the economy to grow near 2% over the full year. This assessment is subject to a downward revision depending on the severity of the coming tariffs.
- Outside the U.S. there are signs that growth might be picking up. Germany’s loosening of fiscal constraints should lead other European countries to do the same, leading to higher spending on defense and infrastructure.
- Although Elon Musk’s war against government waste grabs headlines, the impact on overall U.S. government spending will likely be limited.
- Federal Reserve Chair Jerome Powell resurrected the term “transitory inflation” when describing the impact of tariffs on the price level. In theory, he is correct. But people are highly sensitized to rising prices, and a tightening labor market (the result of fewer migrants entering the labor force) could lead to a modest wage-price spiral that keeps inflation higher for longer.
- Central-bank policy divergence has been a long-running theme. It may continue, but a more aggressive fiscal policy in Europe could make the European Central Bank less eager to cut rates in the future.
- The drop in U.S. yields has gone too far given the inflationary pressures that we expect to develop from tariffs. We still expect the 10-year Treasury to trade mostly in a 4.25%-to-4.75% range this year.
- European stock markets have enjoyed a sharp first-quarter gain in reaction to the German elections and the expectation that fiscal policy would become more expansive. The outperformance of developed equity markets versus U.S. equities so far this year is based on investors’ perception that growth in earnings outside the U.S. will accelerate after a long period of relative stagnation.
- It has become easier for investors to defend both diversification outside the U.S. and a tilting toward value.
Jim Solloway, Chief Market Strategist and Senior Portfolio Manager, and Erin Hueber, Client Service Director, present our economic outlook.
Hello, I'm Erin Huber, Client Service Director at SCA. I'm here with Chief Market Strategist and Senior Portfolio Manager, Jim Soloway, who will be presenting our economic outlook as of the first quarter of 2025.
Jim, let's start off with the topic everyone is talking about, tariffs.
0:21
Thanks, Erin. Certainly, the optimism among US investors that greeted Trump's election has been completely unwound due to concerns over tariffs and deteriorating relationships with trade partners.
This has helped to push US equities into correction territory. Although the formal implementation of reciprocal tariffs didn't happen until after the close of the first quarter, they were the dominant story as March came to an end.
As a reminder, Trump's announced reciprocal tariffs, ranging between 10% and 50% on all US imports, are calculated based on the trade deficit between each country and the US.
1:06
The chart on the screen shows President Trump's reciprocal tariffs as announced on April 2nd, alongside tariff rate differentials and non tariff trade measures. It should come as no surprise that China is subject to the largest tariff rate, though Vietnam, Thailand and Taiwan are not far behind considering they are major suppliers of low cost goods to the US.
The President has argued that his tariff policy is intended, among several national security and economic measures to raise revenue to offset tax cuts.
1:41
Is this likely to help offset the impact to US consumers wallets?
1:45
Much is still up in the air about the effect that announced tariffs will have, both from an economic and political perspective. However, this is a good opportunity to look at why tariffs are an inefficient way to raise revenues, as they cause prices to rise while restricting consumer choice. For those who have taken an introductory macroeconomics course, you might remember learning about the dead weight loss that results from a tariff increase, which we illustrate in the chart on the screen.
Imports increase the quantity of goods supplied to the economy while lowering prices from where they otherwise would be. A tariff forces prices higher and reduces the quantity of goods available for consumption. The only winners are those companies and workers who are protected by the tariffs, as well as the government that benefits from the increase in revenues.
However, the consumer ultimately loses as prices climb and supply dwindles. Put simply, it's a dead weight loss.
2:50
Where are consumers likely to feel the biggest hit to their wallets?
2:54
Each industry will experience the tariffs differently. Companies that have structurally low margins will likely pass through the cost of a tariff increase or try to raise prices on other products not subject to the import duty. Companies that sport higher margins might absorb some of the tariff increase. Larger companies might be able to pressure some of their suppliers to swallow at least part of the cost.
The tariffs announced on April 2nd, however, are extraordinarily high. If implemented in full, the disruption will be severe across most industries.
3:31
You mentioned earlier that US equities have fallen into correction territory, reflecting a 10% decline from their high point. The Magnificent 7 is not nearly as magnificent as it was this time last year. Does the uncertainty around U.S. economic policy and its effects on equity markets have you looking elsewhere for opportunities?
3:50
It is always important to focus on economic fundamentals and not to make bets on how the policies of anyone administration will or will not affect markets in the short term. That said, the outperformance of developed equity markets versus US equities this year is based on investors perception that growth in earnings outside the US will accelerate after a long period of relative stagnation. No one knows if this trend will be sustained, but the US economic growth advantage appears to be narrowing.
The uncertainty caused by the Trump administration's policy moves could be the catalyst for a reversal in the long trend of U.S. equity outperformance that has been increasingly concentrated in a narrow grouping of extremely profitable companies.
Diversification outside the US and a tilt toward value have become easier to defend.
4:50
Thanks Jim, we always appreciate your insights. SEI is focused on the major issues that are of interest to our clients. We incorporate these discussions into our advisory process as the impact varies based on each client's goals. For more of SEI's Insights, read our latest economic outlook available on our website.
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