“The biggest risk of all is not taking one.”
–Mellody Hobson, Co-CEO of Ariel Investment
Volume 25
The Fed, Tariffs, and the Economic Balancing Act
Begin: Insights from Past and Present
The Ebb and Flow of Bubbles: Why Market Manias Never Last
What Happened in the Markets
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Imagine you’re trying to balance a budget at home. You’ve got bills to pay, savings to consider, and maybe even a few big purchases on the horizon. But every time you think about adjusting your spending, someone changes the price of groceries or tweaks the interest rate on your credit card. That’s pretty much what the US economy is dealing with right now—except instead of household expenses, we’re talking about the Federal Reserve interest rates and tariffs that could shake up global trade.
The Fed is currently in “wait-and-see” mode, keeping interest rates at 4.25-4.50% for now. Chair Powell has made it clear that they’re not rushing to cut rates, even though inflation has come down from its peak. Why? Because the Fed is still watching how inflation evolves, and there’s a big wild card in play—government policy.
A look at historical trends shows why the Fed is cautious. The graph below illustrates how interest rates (red) and inflation (blue) have moved together over time:
As seen above, past cycles of interest rate hikes have often been followed by declines in inflation, but the timing varies. For example:
With this historical backdrop, Powell’s hesitation makes sense. As the graph shows, previous rate hikes have helped cool inflation, but often at the cost of slowing the economy. If inflation stays stable or declines further, rate cuts could be on the table later this year. But if inflation resurges—especially due to policy changes like tariffs—the Fed might have to keep rates high longer than expected.
High interest rates are a double-edged sword. On one hand, they help keep inflation in check. On the other, they can slow down business investment, hurt housing demand, and make borrowing more expensive for everyone. The Fed’s decision to pause cuts means rate-sensitive sectors, like housing and manufacturing, could feel more pressure.
However, Powell also hinted at another factor keeping the Fed on edge: economic uncertainty, especially around trade policies and tariffs.
Tariffs are back in the headlines with President Trump’s potential 25% levies on Canada and Mexico. These trade restrictions will disrupt commerce with two of the US’s most prominent economic partners, potentially leading to higher prices for American consumers and retaliatory actions from affected nations. The full impact of the proposed tariffs is uncertain—but history warns us. The 2018-2019 trade war with China offers a glimpse of potential outcomes.
The chart highlights how the US-China trade war escalated, with each round of US tariffs were met by Chinese countermeasures.
As the chart illustrates, the trade war intensified over time, with the US imposing tariffs on hundreds of billions of dollars worth of Chinese imports (blue bars) and China responding with its own tariffs (red bars). By September 2019:
A look at previous tariff policies beyond China also raises concerns. For example, the 2018 washing machine tariffs were intended to protect US manufacturers from foreign competition. While they did result in some domestic job creation, they also had unexpected costs:
As new tariffs approach, risks increase, especially if Canada, Mexico, or other trading partners retaliate. Historical trends indicate that these tariffs could create broader economic ripple effects. If businesses raise prices for consumers, inflation may rise, potentially prompting the Fed to keep interest rates higher for longer. Additionally, other countries might impose their own trade barriers, complicating global supply chains. In summary, while tariffs can provide short-term leverage in negotiations, their long-term economic impacts are often extensive and unpredictable.
The start of 2025 has been encouraging, with markets demonstrating resilience despite ongoing volatility.
The S&P 500 began the year with a 2.8% gain, while small caps followed closely, returning 2.6%. Internationally, developed markets climbed 3.9%, and emerging markets posted a 1.9% gain.
The “January Barometer” indicates that January’s performance often influences the rest of the year. A positive January usually results in an average gain of 12% over the following 11 months, with an 86.4% chance of a positive year. Conversely, a negative January typically leads to an average gain of 2.1% and a 60% chance of a positive year.
Momentum influences market trends; for instance, the 19.6% rally from October 2023 to January 2024 often indicates further strength.
Historically, markets have continued to rise 84% of the time in similar situations, with a median annual gain of 16.2%.
Fixed income posted modest gains, with both US Treasuries and the Aggregate Bond Index returning 0.5%. High-yield bonds and bank
loans performed better, returning 0.6% and 1.4%, respectively.
Markets, like the tides, rise and fall. They surge on waves of innovation, investor enthusiasm, and economic growth. But just as the ocean never stays at high tide forever, markets naturally experience cycles of expansion and correction. While bubbles can be risky, they’re also a sign of progress—of bold new ideas pushing boundaries. The key isn’t to fear them but to understand them.
In his article On Bubble Watch, Howard Marks reminds us that while markets can get overheated, savvy investors who recognize patterns can navigate these cycles wisely. So, what makes a bubble, and how can we use that knowledge to invest more effectively?
Not every market surge is a bubble. Actual bubbles are driven by emotion more than fundamentals; key signs include:
Bubbles aren’t just irrational frenzies; they’re often born from genuine breakthroughs. The internet did change the world, even though many dot-com stocks collapsed. Housing remains essential despite the 2008 crisis. Today’s AI revolution will likely be transformative—even if some companies are overhyped.
Innovation often comes with periods of excessive enthusiasm, but that doesn’t mean every high-flying stock is doomed. The key is distinguishing between long-term value and short-term hype.
The market is experiencing another period of rapid innovation. The “Magnificent Seven” tech giants—Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta, and Tesla—now make up over 30% of the S&P 500’s value. AI excitement is driving investment, just as past technological breakthroughs did.
Does that mean we’re in a bubble? Not necessarily. Today’s valuations—while high—are not irrationally extreme. Investors are optimistic but not mindlessly so. The lesson? Staying mindful of valuations and maintaining a long-term perspective is more important than trying to predict the next crash.
Bubbles may burst, but innovation and economic progress persist. Market corrections can be opportunities for those who stay patient and invest wisely. The best investors don’t just try to ride waves—they position themselves to benefit from the longterm rise of the tide. So rather than worrying about whether the market is in a bubble, the better question is: Am I making thoughtful, informed investment decisions? In the end, understanding the market’s rhythm helps us navigate it—not just during the highs but through every cycle phase.
As the Chief Investment Officer, Stephen Swensen oversees investment management, research, portfolio design, and all investment-related operations at Atlas. He also chairs the Atlas Investment Committee, guiding strategic investment decisions.
Stephen’s career began as a Financial Analyst for Deseret Mutual Benefits Administration (DMBA), a role in which he managed investments for a private pension fund and insurance company. Subsequently, he served as an investment analyst and portfolio manager for local Registered Investment Advisors (RIAs). Before joining Atlas, Stephen contributed his expertise as an Outsourced Chief Investment Officer (OCIO) for the Carson Group, supporting advisors on the West Coast. Educationally, Stephen holds an MBA and an MS in Investment Management and Financial Analysis from Creighton University. He has earned the Series 65 Uniform Investment Advisor License and is actively pursuing the prestigious
Chartered Financial Analyst (CFA) designation.
Beyond his professional achievements, Stephen is an enthusiastic hockey fan, both on and off the ice. He finds joy in playing the piano, golfing, reading, and outdoor cooking. However, his greatest source of happiness comes from spending quality time with his wife and four children
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