Fog Induced Vertigo

In my November newsletter I asked if you were a metathesiophobe, which is someone with an extreme fear of changes. At the time flexibility seemed in order, and is even more important today. Remaining flexible can help investors conduct ongoing portfolio reviews in a more rational manner while avoiding fear-induced behaviors such as freezing up or panic selling. Let me review some of the topics I discussed last time.

On the topic of immigration, I noted the impacts from administrative policy changes could be limited by logistical, legislative, legal, and funding hurdles. The current push for deportations can only move as quickly as the money flows. The recently passed federal budget continuing resolution increased the Immigration and Customs Enforcement (ICE) budget less than 5%. The slowing of immigration seems largely accomplished, while deportations will grind slightly higher with a bit more funding. Overall, I think we've achieved most of the objectives. No more big changes.

On the topic of tax cuts and government debt, the paths forward are difficult at best. The federal budget continuing resolution passed by Congress a few weeks ago cuts anticipated 2025 government spending by a minimal 0.4%. That level of savings can only support a token tax cut. The government would have to go even deeper into debt to pay for a larger tax cut. Another path is for Congress to give with one hand and take with the other. They could take money "saved" from potential program cuts (Medicaid for example) and give it out in the form of tax cuts. However, our current tax structure is already scheduled to go higher in 2026 without action by Congress. They are currently struggling just to find enough program cuts needed to stop that from happening. Finding yet more cuts to fund an actual tax reduction is a huge undertaking. Eventually Congress will be forced to pick a path. We can't have our cake and eat it too. Putting aside all rhetoric and spin, I don't expect much in the way of either tax cuts or deficit reduction. Maybe they'll find some magic formula, making me happy to be wrong.

On the topic of tariffs Yogi Berra comes to mind. He said, "It's tough to make predictions, especially about the future." I previously noted most economists think sweeping tariffs will result in rising prices and a drag on the economy, with bigger tariffs creating bigger impacts. In the last several months the on again, off again nature of tariffs has given investors a sense of vertigo. Thomas Barkin, president of the Richmond Federal Reserve recently said, "businesses are frozen or paralyzed with indecision and consumers are showing signs of caution because of all the rapid-fire changes in Washington, creating a fog over the economy. It’s not an everyday, forecasting is hard, type of fog. It’s a zero visibility, pull over and turn on your hazards type of fog". Recently announced reciprocal tariffs will only lift the fog to the extent you assume those are final figures. Negotiations with our trading partners may go on for a long time, thus deferring any sense of stability and certainty. Nobody likes investing in a fog.

Frank Rizzo,  CERTIFIED FINANCIAL PLANNER ^TM

The opinions in this material are for general information only and not intended to provide specific advice or recommendations for any individual. The economics and market forecasts set forth in this material may or may not develop as predicted and there can be no guarantee that strategies promoted will be successful. Investing includes risk, including fluctuating prices and loss of principal.