Macro Pulse for July 20: Trading in The Fog - Navigating Tariffs and Policy Risk

How will the U.S. economy evolve from here?

The next few quarters hinge on how tariffs, labor supply, and business behavior play out. We’ve developed a timeline to help unpack how the economy is likely to evolve. 

Tariffs and inflation

Tariff-related price pressures are beginning to show up in the data, but the impact so far has been mixed. June inflation was modest, with isolated increases in categories like electronics and apparel, offset by declines in shelter and vehicles. That said, we see risks building as we move into the fall. Prices of consumer goods, which are sensitive to tariffs, are firming. The upcoming inflation prints – especially in July and August – will be critical for shaping the Fed’s next move.

Tax and deregulation

Tax cuts and deregulation will likely give business sentiment a lift in the near term. But there’s a risk that the spending and hiring, which may have resulted from tax cuts and deregulation, are put on hold due to potential cost pressures and policy uncertainty.

Immigration and labor

Labor market data is starting to reflect the impact of tighter immigration policy. Job growth has slowed, and labor force participation is softening. At the same time, reduced labor supply is helping keep wage growth firm. These dynamics may cap overall GDP growth, but they also raise the risk of persistent wage inflation – adding another layer of complexity for the Fed as it weighs when to cut.

We think the Fed could step in with a rate cut by September or October, but that will depend on how sticky inflation proves to be and whether labor conditions ease further.

Portfolio strategy

Uncertainty – from tariff-driven inflation, shifting Fed expectations, and a tightening labor supply – has become the defining market backdrop. Rather than sitting on cash and “waiting for clarity,” we think investors can use three guiding principles to keep portfolios both resilient and return-seeking.

1.      Let income do the heavy lifting

• Stay rate-aware, not rate-phobic. With the 10-year Treasury yield near the middle of our 4.0% - 5% range, we think the 10-year Treasury is fairly valued at this level but see opportunities for tactically trading duration when it moves. We still prefer owning that duration in the steeper upward-sloping parts of muni and IG credit curves.
• Harvest spreads without chasing risk. U.S. high yield and short-duration credit continue to screen well on the quality-yield-duration trade-off; default risk remains tame and income helps buffer price volatility.
• Lean into convertibles for an equity-plus profile. They have outperformed both the U.S. bond market and the S&P 500 year-to-date, offering a built-in hedge if equity volatility resurfaces – while still carrying some of the risks inherent to both stocks and bonds. Plus, the asset class typically tracks M&A activity, which could get a boost from deregulatory efforts.

2.      Build inflation and volatility resilience

• Add an inflation-aware sleeve. Gold, broad industrial metals, and infrastructure equities/bonds have the potential to offer ballast if tariff pass-through or wage pressure surprises the market.
• Lean into equity income: This is also the time to consider leaning into income-generating equities – particularly those with sustainable dividends and pricing power. In our view, in a world of rate volatility and softening growth, high-quality dividend payers can offer both resilience and return potential.

3.      Diversify beyond the conventional (i.e. U.S. public markets)

• Re-open the international playbook. Non-U.S. stock markets and core bonds are having a strong year, helped by less uncertainty and faster rate-cut cycles abroad. We see room to reduce the structural U.S. overweight.
• Treat FX as a portfolio-construction choice, not a coin-flip. 
  • Non-U.S. investors: rising hedge costs argue for partial – not zero – hedging, especially in fixed income. 
  • U.S. investors: As questions emerge around the dollar’s traditional role as a safe haven, maintaining selective unhedged currency exposures may serve as a potential tool for portfolio diversification and a performance lever. 
• Private markets, lower-middle-market focus. Liquidity is thawing and deal flow is improving just as megatrend spending (energy security, digital infrastructure) gathers pace. We favor smaller, less-crowded funds with stronger covenants.