Insights
By: Peter McLean
Investment Viewpoint: Constraints Matter - Peter McLean
THE FIRST 100 DAYS: CONSTRAINTS MATTER
As President Trump reaches the end of his first 100 days in office, uncertainty continues to grip investors, businesses, consumers, and policymakers. At times, it appears the President is acting as a renegade leader with little regard for the consequences of his actions. Sweeping tariffs on all other nations (including some with no human inhabitants) are a good example. Threatening to fire the Chair of the Federal Reserve for being “too slow” to cut rates is another. If such actions proceed unchecked, the likelihood of a global recession and geopolitical escalation is uncomfortably high.
The good news is that well established constraints are proving effective in reducing this risk. The ‘checks and balances’ of the American system are not easily circumvented. Unfortunately for President Trump, the Constitution, the financial markets, the economy and his political capital cannot be ignored.
YOU CAN’T TARIFF YOUR WAY PAST THE YIELD CURVE
On April 2nd, President Trump announced a sweeping tariff package echoing the protectionist playbook of the 1930s, and markets recoiled. Within days the 10-year Treasury yield surged to 4.5%, signalling a sudden repricing of risk.
Such a market movement is a real referendum on the credibility of fiscal and trade policy. Similar to Liz Truss’s brief and costly experiment in the UK, a sudden bond sell-off sends a clear message: the administration needs to change course. For any administration, disorderly rising yields are politically toxic. They crush mortgage demand, freeze corporate investment, and sap equity valuations.
“I used to think that if there was reincarnation, I wanted to come back as the president or the pope or as a 400-baseball hitter. But now I would like to come back as the bond market. You can intimidate everybody.”
James Carville – Political Advisor to President Clinton, 1994
Internally, it forces a recalibration, with Cabinet officials hearing from CEOs, Senators, and their donors. What began as a bold move quickly became a liability. We’ve seen this before; in late 2018, President Trump’s pressure on Fed Chair Jerome Powell, coupled with erratic trade war messaging, spooked markets already on edge over tightening liquidity. The reaction at the White House was also immediate, and Trump dialled back his anti-Powell rhetoric.
THE SYSTEM WILL HOLD
The US Constitution established a system of checks and balances such that no single branch of the government can wield unlimited power. As such, a president cannot spend Federal money, pass laws, or amend the Constitution without Congress. The Republican Party holds a slim majority in the Senate today, 53 seats vs 45 for the Democrats, limiting their political mandate.
Executive orders may represent a ‘loophole’ to bypass Congress, which President Trump has taken full advantage of. Yet they are quite limited; they cannot be used to raise funding and are also open to legal battle. In the meantime, the president faces the market, economic, and political impact of such actions.
There is little doubt that, if the president were successful in removing the Chair of the Federal Reserve, the stock market would revolt and bond yields would rise sharply, fearing runaway inflation and a loss of monetary stability. Moreover, the resulting recession would be devastating for the Republican Party in the mid-terms, not least the Presidential election in 2028.
A POLICY INDUCED SLOWDOWN
As we argued in our Quarterly Investment Outlook earlier this month, ‘Liberation Day’ marks what we believe is peak policy uncertainty. The economy has experienced a confidence shock. What follows is a gradual adjustment phase as the real economy catches up. The 90-day pause offers a window for trade negotiations and gives businesses and central banks an opportunity to cautiously emerge from their “wait-and-see” posture.
The economic consequences remain murky and it is too early to quantify the impact of the tariffs and associated uncertainty. What is clear is that confidence has taken a visible hit; capital expenditure intentions dropped last month, and forward guidance from corporates has turned cautious. We have high confidence that the global economy will soften this year.
Yet it is important not to extrapolate today’s uncertainty into dismal future investment returns. A key characteristic of this period of market and economic volatility is that it is a function of trade policy, not financial crisis or consumer over-indebtedness (unlike 2008). This means that the markets can look through temporary weakness in corporate activity if it is accompanied with the fog of tariff levels lifting.
Of course, a risk remains that President Trump escalates policy and rhetoric through a yet unknown path, damaging US credibility as a home for investment, perhaps in response to international tariff retaliation. Whilst we consider this a relatively unlikely development, it does not hold a zero probability. We retain key diversifying positions in recognition, and are ready to act should such a negative scenario appear more likely.
What is clear to us is that the business cycle matters; by paying close attention to the evolution of economic and business activity, asset allocation can be positioned to reflect a range of probable outcomes. Today, we anticipate a slowdown in global growth, recognising the uncertainty that faces business and consumers alike, and position with a defensive tilt towards risk assets. In particular, cash balances are typically higher than average, with lower allocations to sub-investment grade credit and cyclically sensitive equities. We continue to monitor developments and market action closely.
Chief Investment Officer Group 28 April 2025
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