The Upshot
Macro is a continual story. In raging bull markets, however, the psychology of investors treats each individual development as unique and unprecedented. It’s important to revisit some of the priors we have established:
The cyclical economy and the lower income cohort of the U.S. economy has been doing poorly for some time.
The secular economy, which represents a large portion of the market capitalization, is currently roughly halfway through a cycle of capex spending that sees no sign of slowing. This is the primary driver of equity returns on indices. Outside of this, the rest of the economy continues to look relatively precarious.
The past two points, in combination, have resulted in a dynamic we refer to as the Macroeconomic Ouroboros. In this dynamic, the significantly skewed consumer spending volume made up by high net worth/high income households results in the K-shaped economy that is primarily driven by the wealth effect and equity prices.
Additionally, our house view at CitriniResearch has long been that we are deeply in the era of Fiscal Primacy. Regardless of the political party in charge of the White House, the US has embraced a populist bent since COVID that means government spending will backstop certain industries along partisan lines.
Because of this dynamic, as well as Fiscal Dominance (Fiscal driving monetary policy), we see an environment that means the administration will take whatever steps necessary to support the economy until midterm elections – where the house is hanging on by a thread for the Republicans. Whether through stimulus checks like the proposed “tariff refund” or the targeting of mortgage rates through lifting the cap on the amount of MBS the GSEs can hold, the administration will try to keep asset prices elevated for as long as possible.
Tariffs, as presented on April 2nd (which, obviously, has not occurred) would lead the U.S. economy into a period of Stagflation. The administration is aware of this and is currently balancing that reality with their stated trade policy and foreign policy goals.
Considering the above, we take the nuanced view that:
a) Trump’s desire to restructure trade and tariffs is not going away. This will remain a primary driver of equity volatility for the duration of his term.
b) To accomplish this, Trump will repeatedly bring us to the brink – progressively heightening trade tensions, but utilizing shiny objects and promises of deescalation or stimulus in an attempt to prevent collapse.
This is a view distinct from the mainstream “TACO” narrative. At the risk of being deemed reactive or trigger-happy, we think each individual development in the ongoing tariff drama should be weighed along a spectrum and trend – negotiating tactics, to be sure, but threats that still entail risk. Both sides, the US and China, will ramp up rhetoric and repeatedly search for off-ramps without putting themselves in a weaker position.
The best way to assess when and how these episodes wax and wane is to have a strong understanding of the constraints which are currently: Debt, Demographics, Recession-Risk, Midterm Elections and Defense.
With the caveat that this is simply another paragraph in the longer story, let’s describe the current status. For the past couple months it has felt like macro, especially the Fed, no longer mattered. Since the September rate cut decision, there were momentary doubts over the wisdom of the resumption of rate cuts.
In our last Macro Memo, we predicted:
Cyclical economic slowdown and labor market weakness (despite data-obscurity in the wake of the government shutdown, we believe private data supports this continuing)
The Trump Administration to attempt to lower mortgage rates utilizing GSE privatization and deregulation (a tactic we believe we’ll see used by Q1 2026)
Self-fulfilling seasonally turbulent asset markets for the months of September and October (half-right, potentially)
Increasing short-term inflation concerns (likely to reaccelerate with renewed tariff concerns)
Fed rate cut in September but uncertainty further out as Fed board composition hangs in balance (the Fed cut in September and, it appears, will cut again at the next meeting. December remains less clear)
Our take now: “it’s not oct-over”