It would be seemingly disingenuous to discuss markets without addressing tariffs. They dominate headlines and fill our mental bandwidth with their unpredictability. However, it is important to avoid the temptation to chase the latest tariff headline and instead focus on the broader economic signals at work. In doing so, we must first revisit the fundamental role of government in shaping the economy.

The US government influences economic outcomes primarily through two levers: fiscal policy and monetary policy. Fiscal policy, dictated by government spending and taxation, directly affects gross domestic product (GDP) with government spending and indirectly affects consumption. Monetary policy aims to balance full employment and price stability by adjusting interest rates and money supply. Higher interest rates, for example, are used to curb inflation, while lower rates encourage borrowing and investment.

So, what does Trumpenomics look like in practice? The administration is seeking a tight fiscal policy and a loose monetary policy approach.

• Tight fiscal policy: The administration seeks to reduce government spending (e.g., DOGE) while increasing revenue (e.g., tariffs). In isolation and in the short term, this would slow economic growth as the government spends less, reducing its economic impact, and consumption slows modestly, as unemployment increases.
• Loose monetary policy: Lower interest rates and deregulated banking would, all else equal, stimulate growth by encouraging consumption and investment.

The administration’s wager is that monetary stimulus will more than offset fiscal restraint, sustaining economic expansion with a more balanced budget. It is possible—after all, government spending has accounted for ~20% of GDP since 2000, meaning a decline in public expenditures could, in theory, be counterbalanced by modest increased private sector activity that accounts for the remaining 80% of GDP. But here is the rub: the administration only controls one of these levers.

While fiscal policy falls under the purview of the executive and legislative branches, monetary policy is dictated by the Federal Reserve (the Fed). The Trump administration has moved swiftly to implement its fiscal vision, but the Fed is operating from a different playbook. Collectively, Fed governors have shifted their view from pre-election (September of last year) to this March, predicting that growth will slow inflation will rise. This suggests that Fed officials believe it is prudent to maintain a restrictive monetary policy.

Instead of the administration’s preferred mix of “tight fiscal, loose monetary,” we have “tight fiscal, tight monetary,” producing a restrictive economic policy stance. The disconnect has helped fuel the recent growth scare as an economic slowdown becomes an increasingly plausible outcome.

A fragile market—characterized by high valuations among many large cap growth stocks, a highly concentration market where the top 10 names in the S&P 500 account for almost 35% of the index and the persistent risk of rising inflation—tilts the odds toward heightened volatility. Additionally, with the increasing likelihood of simultaneously restrictive monetary and fiscal policy, coupled with tepid consumer spending, the probability of an economic slowdown has risen

That said, it is important to remember that market volatility and economic slowdowns are a natural part of investing. As of April 9, the S&P 500 had declined 11% from its peak, a move that may feel unsettling but is well within historical norms. Since 1990, the average intra-year drawdown is 9.7%.

While periods like this may seem atypical at the moment, history suggests that staying focused on the long term remains the most profitable approach. Markets have a way of transferring wealth from those who react impatiently to those who maintain discipline and perspective.

Disclosure: This content is for informational purposes only and does not constitute investment advice. Past performance is not indicative of future results. References to market indices are for illustrative purposes only and do not reflect client performance. Investing involves risk, including the potential loss of principal.