A Churchillian Moment

The gears inside the global machinery of economics and finance turn in abrupt and unpredictable ways, raising the possibility investors’ portfolios might get caught and grind down. This is why we have dialed down risk exposure, for now.

For some time, our economic forecast has been that US real GDP growth would slow sequentially from 3% over the past 1½ years, to 2%, so that the expansion may be sustained. Guided by Federal Reserve (Fed) Chair Powell in 2018, we thought Fed tightening in 2019 would provide the necessary headwinds to get that result. President Trump’s willingness to fight aggressively on many trade fronts is an unexpected source of drag on demand, and risks a more adverse outcome. Into this breech, Fed officials now believe policy must remain even more accommodative than previously thought.

We do not think this is forever. By our reckoning of the presidential political calculus, the necessity of the electoral calendar will promote compromise later this year, lessening the drag and risk from trade. The removal of an activity drag should provide a boost to growth. Because trade matters more to our trading partners than to us, the rebound is likely to be more pronounced abroad.