Imagine the U.S. economy as a massive highway system with businesses, investors, and consumers all driving toward their desired financial destinations. For decades, traffic has flowed rather smoothly. The system has had its fair share of accidents over the years, as would be expected with a massive highway system. A fender-bender here and there, and even a couple of massive car pile-ups. And let’s not forget 2020, when large sections of the highway system were completely shut down.
Overall, traffic has been allowed to flow freely at a good speed. Not too fast, not too slow. Just fast enough that we can all arrive at our chosen destination in a timely manner. And over those decades the highway system has continued to grow, allowing for more lanes to accommodate more drivers —cars, trucks, SUVS, and semis of every shape and size.
But recently, unexpected roadblocks have appeared, “Construction Zone” and “Detour” signs have popped up, toll booths are being installed at major on-ramps, and the road ahead is clouded over with fog. On top of that, your GPS system just went on the fritz.
How do you proceed? Do you slam on your brakes and get off at the nearest exit? What if you don’t know where the next on-ramp is located? Or worse, what if you missed the on-ramp altogether and ended up some place you never intended to be?
I’d argue it’s best to keep your seatbelt on and proceed cautiously towards your desired destination.
That’s kind of how it feels right now for a lot of investors.
One of the biggest roadblocks is the president’s tariffs. His aggressive stance on trade, particularly with our longstanding allies and largest trading partners, has led to economic road closures and detours. These tariffs act like toll booths suddenly popping up on major highways, increasing costs for businesses and consumers alike. Tariffs are a tax on goods that we, the consumers, ultimately pay. Not foreign trade partners.
While tariffs are intended to protect domestic industries, the result is higher prices and, as we have already seen, retaliatory tariffs, turning once-smooth routes into frustrating bottlenecks. And tariffs alone won’t shrink the trade deficit. Just because the United States has enacted tariffs, it doesn’t automatically translate into exporting more goods.
Now add to the tariffs a combination of lingering inflation concerns, interest rate uncertainties, abrupt slashing of government funding (with more to come), and geopolitical risks, and we end up with erratic movements in the markets—much like an unpredictable driver slamming on the brakes in the middle of a busy freeway, causing the other traffic to slow down. Market sell-offs are common after years of excessive speeding.
There’s a difference, though, between slowing down out of caution versus slamming on the brakes carelessly.
Another aggravating factor in this economic journey? Mixed signals are coming from the economic GPS. Currently, the soft data—surveys and sentiment indicators—reflect a decline in consumer sentiment and a cooling jobs market. All the while, the hard data—jobs numbers, retail sales, industrial production, unemployment rate, CPI—indicate the economy is still chugging along at a steady pace.
The Atlanta Federal Reserve maintains a GDPNow tracker that updates regularly as new hard data becomes available. We began the year with an advanced estimate of 2.9 percent annualized growth for the first quarter of this year. The latest reading, as of April 9, now estimates a contraction of -2.4 percent. A negative quarter alone doesn’t mean a recession is imminent. We had a negative quarter of GDP growth in the first quarter of 2022, and a recession did not materialize then—nor has one yet.
All the while, the Federal Reserve finds itself recalculating the speed limit, balancing its ongoing inflation-control efforts by trying to align interest rates with current economic conditions. Shifting policies from Washington only add to the confusion, leaving drivers unsure whether to accelerate, slow down, or make a U-turn.
Despite the changing economic road conditions, the U.S. economy remains resilient, while the American consumer remains rather insatiable. Consumer spending, the fuel of economic activity, continues to power businesses forward. While roadblocks from rising trade tensions and political contentions create challenges, the economy’s ongoing job growth, low unemployment, technological innovation, and productivity gains suggest that the highway is still quite functional.
For now, the best strategy is to stay focused on your destination. Rather than attempting to swerve around every obstacle or panic-braking, investors should focus on maintaining a well-balanced, long-term investment strategy, much like driving a well-maintained vehicle.
Doing so helps you arrive safely at your destination. As history has shown, even the worst traffic jams and road construction projects eventually end. It’s a matter of how well drivers adapt to the changing road conditions.
Kevin Ihrke is a CERTIFIED FINANCIAL PLANNER® professional. His firm, Investment Insights, LLC is located at 508 N 2nd Street, Suite 203, Fairfield, IA 52556. Securities offered through Cambridge Investment Research, Inc, a Broker/Dealer, Member FINRA/SIPC. Investment Advisor Representative, Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Investment Insights, LLC & Cambridge are not affiliated. Comments and questions can be sent to kevin@getyourinsight.com. These are the opinions of Kevin Ihrke and not necessarily those of Cambridge, are for informational purposes only, and should not be construed or acted upon as individualized investment advice. Investing involves risk. Depending on the types of investments, there may be varying degrees of risk. Investors should be prepared to bear loss, including total loss of principal. Past performance is no guarantee of future results.
Certified Financial Planner Board of Standards, Inc. (CFP Board) owns the CFP® certification mark, the CERTIFIED FINANCIAL PLANNER® certification mark, and the CFP® certification mark (with plaque design) logo in the United States, which it authorizes use of by individuals who successfully complete CFP Board’s initial and ongoing certification requirements.