By: Brent Schutte, Northwestern Mutual, CFA
The major equity indices notched modest gains in turbulent trading last week as investors continue to grapple with signs of a slowing economy, the fluid nature of trade policy and the uncertain effect tariffs will have on inflation and the pace of economic growth. The uncertainty investors have felt of late can be seen in the recent readings of the American Association of Individual Investors (AAII) sentiment survey, which shows that bullish perceptions of the market for the coming six months have hovered around 20 percent or less in each of the past four weeks, while bearish sentiment has averaged just shy of 59 percent during the same period. For context, bullish readings have averaged 37.5 percent since its start in 1987, and bearish readings have averaged just 31 percent.
However, it’s not just investors who are feeling uncertain about how things will play out. Last week the Federal Open Markets Committee (FOMC) released its Summary of Economic Projections (SEP), or so-called “dot plot.” While the SEP has limited value for predicting actual Fed activity, it can be useful as a real-time snapshot of how members of the FOMC view conditions now and their base case of how things might evolve.
Last week’s release showed that the committee still expects to cut interest rates twice this year; however, that view is not unanimous. The number of members who expect to hold rates steady has risen from just one in the SEP last December to four in the most recent version. Indeed, Fed Chair Jerome Powell’s comments during his press conference also underscored the challenge the Fed faces in forecasting how inflation and the economy will evolve in the coming months given the uncertainty surrounding the economic impact of announced tariffs and the risk for further trade escalation with major trading partners. Although the latest SEP showed inflation ending 2025 higher and the pace of economic growth lower than the FOMC projected at the end of last year, Chair Powell noted that the projections are “based on what each participant judges to be the most likely scenario going forward—an admittedly challenging exercise at this time.”
As we noted in last week’s commentary, investors have been holding out hope that either the Federal Reserve or President Trump would act to prop up the economy and markets should selling pressure gain momentum. These so-called “put options” would take the form of either rate cuts by the Federal Reserve or the president dialing back on his tariff plans. With Chair Powell’s comments last week that the Fed still has room to stay on the sidelines while it monitors how the Trump administration’s trade policy plays out, we believe it is unlikely the “Fed put” will materialize anytime soon. Furthermore, while President Trump noted late last week that there could be some flexibility in plans for reciprocal tariffs charged on imports, no details were included with the statement, so it remains unclear whether potential tweaks to trade policy will provide the relief investors have been seeking. For these reasons, we believe elevated uncertainty is likely to persist during the coming months.
While uncertainty can be uncomfortable, it doesn’t mean investors need to pull out of the market due to fears of a worst-case scenario. Instead, the current environment serves as a valuable reminder that an unpredictable future will lead to unpredictable opportunities for investors in the intermediate and long terms. And capitalizing on these unforeseen opportunities is best done through diversification.
Conversely, investors who sell during periods of volatility help to create opportunities for extra returns for those who stay true to their asset allocation. While we believe uncertainty will remain elevated for a while, we also believe the best way to address it is by focusing on the long term and staying diversified to avoid concentrating too much on any one market segment or asset class.
About the Author:
Brent Schutte, CFA, is chief investment officer of the Northwestern Mutual Wealth Management Company.
