Mid-year review & outlook: troubled waters

The headwinds of disjointed trade policy, slowing growth, and rising inflation

Cue the music as we pay homage to The Eagles’ classic “Hotel California.” Where the “dark desert highway” leads to a shimmering light cascading on an economic labyrinth that could be heaven or hell!

Enter the Tiffany-twisted consumer and her pretty, pretty boys dancing in the courtyard. In our own twisted way of thinking, we see economic datapoints dancing in the sweet summer sweat, some data to remember, some data to forget.

Then we come face to face with Captain Trump’s fantasy-filled tariff policy and giant tax-and-spend bill. The fantasy is that all good things come to those who wait, but the Captain can’t bring me my wine because “we haven’t had that spirit here since nineteen sixty-nine.”

Welcome to our Mid-2025 Economic Outlook where the phrase “moderate growth” is somehow both comforting and suspicious. And to provide some perspective, we will attempt to explain why your pocketbook looks at the grocery bill and thinks it is attending a high-end spa.

While there are many ways to describe world economies over the last six months, the most common theme is uncertainty. Disjointed trade policy, slowing growth, and rising inflation are self-inflicted wounds. Lack of clarity has caused many companies to stop issuing forward guidance while at the same time delaying capital expenditures and reducing headcounts.

Growth projections are declining as the International Monetary Fund (IMF) has issued downward revisions for the U.S., Canada, Europe, Japan, and many emerging markets. According to the White House, trade negotiations involving the U.S., Canada, Europe, and China are moving forward…albeit at a slower pace than expected by the White House.

Most companies are retrenching because management has no certainty about where tariff rates will settle. In Trump world, trade deficits imply that the U.S. is being treated unfairly. He wants a bigger piece of the trade pie. Unfortunately, that view flies in the face of economics 101.

Trump’s vision is predicated on the view that the size of the pie is fixed. Economic theory posits the value of growing the pie. The underlying principle is that it is better to have a smaller piece of a bigger pie than a bigger piece of a smaller pie. The risk with Trump’s position is that it could push world economies into a recession even if the tariff rates are ultimately lowered. Either way, it will have an impact.

Corporate management has taken the position that uncertainty is an economic data point that must be considered in much the same as we look at hard data like employment, consumer spending, and business investment.

The impact on the economy is slower growth, the impact on financial markets is increased volatility. As for the market impact, markets fell sharply on Liberation Day followed by powerful rallies premised on the all-too-familiar pattern that maybe Trump is right.

By the end of May, the S&P 500 Index had recovered nearly all the post-Liberation Day losses as Trump extended his initial July deadline to August 1, so that his trade negotiators could sign 90 deals in 90 days. To this point, the tally something less than that, save for a framework to engage in ongoing discussions with the U.K. and Vietnam.

Having said that, the data suggest that we probably reached the highest level of uncertainty when Trump released his tariff strategy on April 2. The Volatility Index – the market’s fear gauge – peaked during the first week of April (see chart below). If we get some encouraging progress, it could result in a smoother ride in the second half of the year.

Richard Croft is Founder, Chief Investment Officer, and Portfolio Manager of R.N. Croft Financial Group Inc.

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