The rise of uncertainty: Navigating Trump 2.0 and the economy

BRIAN HESS: Hello, everyone. Welcome to our first macro webinar of 2025. I'm Brian Hess, Investment Strategist on the Solutions team at Natixis, and joining me today, as usual, are Jack Janasiewicz and Garrett Melson. Jack is Lead Portfolio Strategist for Natixis and also a portfolio manager on our multi-asset models. Garrett is a portfolio strategist and member of the investment committee.

Jack, why don't you kick us off by highlighting one of the major themes driving markets so far this year? And that's the rise of uncertainty. We're just seeing a lot of political uncertainty, economic uncertainty, and it's definitely manifesting in markets. How are you handling the volatility in day-to-day headlines?

JACK JANASIEWICZ: I think if we try to sequence what's going on, if we think back to even, I think, last summer, as we started to really get a lot of the polling data shifting, and it was becoming clear that President Trump was really starting to get ahead in the polls, we certainly saw the reaction in the stock market.

And that just continued, obviously, into the end of the year. It certainly felt like a win-win situation for both the economy and the stock market. We had discussions about tax cuts, deregulation. I guess in end, really unleashing those animal spirits. We also are aware of the idea that there was potential for risks like tariffs. But I think a lot of people were still looking at those as a bargaining tool.

There are obviously still some concerns over the potential of the deficit. And when you also lump in the idea that you start to see the red sweep coming into play, things really set up positively. I think the market started to believe that there would really be a precise balance between some of the inflation and anti-growth policies like tariffs and deportations, if you will, on the immigration front.

But the pro-growth side of the agenda, like deregulations and tax cuts, would simply be enough to offset each other. And I think if you look at where we are today, we've probably had a lot more of the former and not enough of the latter to balance it out. I think that's creating a lot of this volatility that we're seeing more recently. But I think a couple things are worth highlighting here.

Let's take a step back and compare where we've been to where we are today. If you think about the last, let's call it 52 days of the presidency, we've been just getting hammered with executive orders left and right. And UCal Santa Barbara, I think, has a count out there where they've totaled thus far 89 executive orders by President Trump.

So if you annualize that number and extrapolate that over the full four year term for a president, that's almost 2,500 executive orders. Now obviously that pace will slow, but just to provide a little bit of context. And if we think about where previous presidents have-- FDR, I think, was the one that had the most, and he basically was running that through World War II. That basically would even eclipse what-- or Trump would actually be eclipsing what we saw from FDR at that point.

So again, pretty big numbers in terms of the onslaught of executive orders coming right off the bat here. I could almost make the argument that we're basically drinking headlines here through a fire hose, and that's, I think, making this very difficult to digest. You're hearing constant talk of immigration, cost cutting, tariffs, strategic crypto reserve, funding the government, the debt ceiling. The list goes on and on here. It's almost like a shock and awe strategy where you just announce things left and right at a consistent drumbeat here.

It's quite hard to keep up with it and even harder for us as strategist and portfolio managers to think about the longer-term impacts on that. So, a lot going on here, and I think that just feeds into this uncertainty. I think it's maybe worth highlighting a few things right now that we're getting from our clients because, again, not surprising that they have a lot of questions based on some of the policies that have been coming through.

So, take a couple minutes here just to walk through some of those themes that we're hearing or questions that we're hearing, and maybe provide a real quick outlook to how we're thinking about things. So obviously, the first one that's been coming up quite a bit is the immigration story. A lot of people are concerned about the potential inflationary impacts from that.

I think really concise answers here, but our response to this backdrop, I think a lot of the deportations are going to be actually quite difficult to execute on. So, the numbers that you are hearing from the Trump administration, I think those are pretty lofty targets, and I think that'll be difficult to actually attain. I think a lot of that is just from a simple fact that the cost associated with this, the manpower required to do this, the infrastructure to handle this, it's just not in place.

So, the idea of these deportations and the potential impact to the labor market, I think that's probably a little bit overstated. I will say, though, that the greater risk here is really from the flow of legal immigration slowing. And we are starting to see some of that. But if we extrapolate that slowing of legal immigration, that's probably something that's going to evolve over a couple of years, not necessarily immediately right off the bat. So maybe the inflation impulse from immigration might be a little bit overstated as we look as things evolve.

We've also got a lot of questions about the DOGE and that fork in the road program that was announced, again, that we're talking about the potential for trying to streamline the federal government here and the potential for that spilling over into the labor market as well as consumption.

But just to wrap some numbers around that. If you assume that maybe 300,000 federal workers are at risk here, and let's assume 100,000 people take that fork in the road package and another 200,000, which are those considered to be probationary, those are let go. And again, this backs into that 300,000 number there. Put that in some context. The full labor market in the United States is about 168 million people. So, if you just compare 300,000 to 168 million, you're looking at a number that's less than 2/10 of 1%.

So, if we assume that 300,000 people literally don't ever find another job, you probably would see the unemployment rate tick from one point-- or 4.1% up to 4.3%. So again, that's a pretty harsh assessment that 300,000 people just will not find a job. But again, just to show the extremes here, yeah, it's a modest uptick in terms of the unemployment rate.

Obviously, I think the more idiosyncratic risks will emerge where you can start to see the labor side of the equation in areas like DC getting hit a little harder. But taking a step back at the broader economy, I think this is somewhat of a rounding error. And on the consumption front, again, if you assume 300,000 people. On average, federal workers are making about $100,000 a year, so that's about $30 billion in potential spending. We're spending close to $20 trillion a year.

So, if you just simply apply $30 billion to $20 trillion, you're talking about, again, less than 2/10 of 1%. So, on the consumption side, it's really a rounding error. And again, assuming none of those people spend, period, which I think is a pretty aggressive assumption. So, I think some of the DOGE headlines that we're seeing really, I think, are maybe over extrapolated in terms of the fears on the spillover from the market. And then the last one really is on the tariff front.

And those are on again, off again. I think the consensus has built in the idea that tariffs are a negotiating tool, but at some point, you're going to have to make some of these stick, right? Because it's the old adage of the little boy who cries wolf. You keep crying wolf, people aren't going to believe you if the wolf doesn't show up. Same thing. You can keep threatening tariffs, but if you don't actually drop the hammer and you start using those tariffs, they're really going to lose their validity there.

So, is it a potential for a belated reaction and finally something sticks? I think so. And maybe a little bit of that backdrop is starting to set in with the markets right now, and that delayed reaction function might be taking place. So those three things, I think, are important in tying this back to that sort of uncertainty backdrop that we just started the webinar with.

We're seeing it manifest in some other places.

And when you start reading through some of the ISM reports, there's commentary in those reports where they take quotes from the respondents in there, from the corporate side. They're mentioning the uncertainty starting to impact their thought process, their CapEx plans on the consumption side. Same thing with the Beige Book. And even more recently, we're hearing a little bit on the same on corporates when they start going through their earnings calls.

So we are starting to see some signs that this is making its way into the broader economy. I think that's going to be the key risk in here is, will it continue to seep in? And so, a couple of quick charts here worth walking through. This first chart here is just simply the political uncertainty index that comes from Baker, Bloom, and Davis.

And all they're simply doing is they're scanning websites looking for keywords, things like uncertain, uncertainty, uncertainties, and then key topics that are associated with some of these headline narratives. War, debt ceiling, tariffs, those sorts of things, and putting them into this index. And you can certainly see that we are basically back to the pandemic levels here. So not surprising just to trying to quantify the idea of political uncertainty. We're certainly seeing it in this index from Baker, Bloom, and Davis.

And if I fast forward and start to dissect the two concerns that I had just talked about, one being the consumer and two being the corporate side, if we look at small businesses and small businesses surveys, you can see this idea of the economic policy uncertainty index. And so small business survey that goes out, you can respond uncertain for some of the questions, and they start to add the number of times uncertainty shows up in a response. 

And you can see here, that's what you're looking at, the total number of respondents that are basically saying uncertain. And again, we're back to making multiple highs in here. So, you're certainly seeing it come through on the corporate side. And then shifting gears looking at the consumer side. Again, these are going to be your consumer confidence numbers. You can see in purple it's the Conference Board. In light blue, it's the University of Michigan.

We've seen a little bit more softness in the University of Michigan. We're a little bit hesitant to rely too much on Michigan because really, a smaller sample size. When you actually look at the decomposition of some of the respondents based on political affiliations, you get some massive skews. So, if your political party's in the White House, you tend to have a much more favorable reading if you are-- than those who are on the opposite side of the spectrum. 

And so, I think you're really getting a pretty significant political wedge that's coming in. So, we're discounting a little bit of what's coming out of Michigan, but I think the Conference Board survey is the key to point out here. And certainly, they're both of them not going in the right direction is the bottom line for us here. So, we're certainly hearing what's being seen in some of these surveys being echoed in a lot more of the harder data recently. And so again, we're starting to see that uncertainty spill over.

And then this last one here, this is the CFO or CEO uncertainty index. This comes straight from the CEO magazine where they're basically doing a word association. You give your comments and that word association is then giving a rough score. And again, where you're seeing here, a real sharp downtick in the last version of the index. And obviously, we're morphing from basically good towards weak, and you're actually eclipsing the COVID levels that we had seen back in 2000, 2001-- or 2020, 2021.

So again, plenty of reasons here to demonstrate the fact that we are starting to see confidence at both the business sector side and the consumer side drifting lower. And it's not surprising that this potentially can spill over into the stock market. And one of the things we found interesting-- and again, I note the dates on this chart here. I only brought this up through the end of February because as we get into the March months, we start to see sell-offs really becoming a little bit more commonplace.

But it was interesting because during the first two months of the year, you basically saw Friday risk off, right? Almost 80% of Fridays, you basically saw the market selling off. And so you can see here, on average, the market was trading off between 30 and 40 basis points with a pretty high hit rate there. And the idea is simply people didn't want to carry risk over the weekends.

You didn't know what you were going to come into on Monday morning based on some of the potential policy announcements over the weekend. And as a result, you wanted to de-risk on Friday. And if, worst case scenario, things are still pretty benign, you can buy it back on Monday. I think that's a pretty obvious trend that we had seen in here. So I thought that was pretty interesting, something to show.

But I think the last piece to point and to tie this all together is simply that the risk for the market is that a lot of this uncertainty, whether it be from the business confidence perspective or the consumer confidence perspective, that ends up basically forcing a retrenchment of spending and CapEx and investment. And if that starts to continue and ultimately seep into the stock market, you could eventually see a stock market induced recession.

Now, let's be clear here. This is obviously something that we're highlighting as a potential risk. It's probably the worst-case bear scenario that we're talking about here, but it's also certainly not our base-case scenario. But it's just worth trying to draw the connections here between that sort of uncertainty, the confidence, the stock market, and how that relates back to the real economy. So, noting some key risks that we're paying attention to here but certainly not our base case.

BRIAN HESS: So, Jack, if I summarize what you were saying, it sounds to me like when it comes to the immigration issue, you're not too worried about that impacting the economics so much. I think you're highlighting the size of it is probably not big enough, and the execution risks will prevent it from becoming big enough.

And then DOGE, it seems same thing, where you're not too worried about that being destabilizing from a macro standpoint. But the tariffs themselves could be more important, especially the knock-on effects they're having on consumer confidence with some of these headlines, and actually business confidence, which is maybe even more troubling. We got one question, our first question of the day. 

And it's a little bit politically charged so I'm not going to ask it verbatim, but I'm kind of curious. If the Trump administration is successful in reorienting global trade, which seems to be their objective, and they're willing to take some short-term pain to do it, do you think there's a medium term dividend that could be paid to the US economy as part of that? Like, do you think we could be better off down the road after these tariffs start to change the flows of goods and the production, bringing things back to the US?

JACK JANASIEWICZ: Yeah. I think it's going to be somewhat idiosyncratic because, at the end of the day, the issue comes back to those low-cost providers, right? And it all comes back down to the labor force and wages. And that low wage level that we're seeing in countries like China, for example, you can't replicate that, really, here in the United States. 

And so the problem, when you start to think of it in terms of shifting a lot of that production back here to the United States, that's just going to basically push up those input costs. As a result, we tend to move down the value add chain in the cost pressures that actually push up. And so I think in the end, that actually ends up, I think, hurting the overall standard of living here in the United States because of that.

So we need to be careful in terms of how we think through this. It's great to add jobs. It's great to see that the America First, bringing a lot of that back onshore. But again, I think there's some bigger picture things here that we need to consider. A lot of that just goes back to the cost structure here. So, there's certainly plenty of moving pieces to this argument.

BRIAN HESS: There are. There are a lot of moving parts. But it's creating a rich macro environment. And so, for macro investors like us, this is an exciting time, and it's likely to stay exciting, I would say for a while. So that's good for active management. Volatility tends to create opportunity for us to add value. Right now is a volatile time period. And so Garrett, let's bring you in and let's talk about the ongoing correction in markets. What do you think has been driving it? And then the possibility of a growth scare taking hold, which maybe could be a catalyst for additional weakness. Garrett, what do you think? 

GARRETT MELSON:  Yeah, absolutely. I think everything that Jack just walked through, it certainly is top of mind. And I would say that the uncertainty side of things, what we continue to hear quite a bit from market participants and clients is that it's exactly what Jack just walked through, which is that the uncertainty is weighing-- or the policy uncertainty is weighing on confidence, kind of eroding those animal spirits, and that's ultimately starting to bleed into behaviors and starting to signal maybe a slowdown in growth.

While I think that certainly is the case and it's absolutely part of the narrative, Brian, you kind of alluded to the fact that there seems to be a little bit of a growth scare brewing. And it's not so much that kind of mechanism that's really driving it, but it's been something of a process that's been underway for a couple months here. And I think you can kind of trace the roots back to where we were just probably six or seven months ago. We go back to the end of the summer.

We had another growth scare. Maybe it was more of a startle. It wasn't quite an outright scare. But there was certainly pervasive fear of a slowdown and imminent collapse in the labor markets. And ultimately, that proved not to be playing out. We got optimism around the election outcome and we kind of went off and running in the opposite direction. And that's set us up for today.

And so I think the easiest place to start is that right now, the refrain we've kind of repeated for months entering this year is that markets and the Fed have been overly sanguine on the growth outlook, and they've been overly pessimistic on the inflation backdrop as well. And so that, I think, is really important to consider as the backdrop. Just go back to last Friday, Powell spoke and certainly spoke of basically confidence, that they don't need to be in a hurry to continue recalibrating policy.

And meanwhile, when you start to take a look at what the market is telling you here on the first slide, I think you can see that complacency very, very evidently in market expectations for growth here. This is just your consensus GDP growth estimates going back to 2023. And there's been a common theme here, which is that expectations started out too low. They got steadily revised higher. And that's really carried on over into this year as well.

So you can see where the consensus is sitting right now. Close to about 2.5% real GDP growth for 2025. Yeah, you've seen that come off the boil a little bit here. But the bottom line is the Fed and the markets clearly still remain overly sanguine on growth. Now I think you can argue that the markets are obviously discounting what they think is going to be playing out. Investors are voting with their money, and so markets are maybe starting to discount this in advance of actual revisions to the data.

But going back to everything that Jack spoke about, yes, the uncertainty is part of the narrative. And the longer it persists, the more it can erode animal spirits, and the longer that you can have-- or the greater the downside risks start to brew in terms of actual activity. But when you actually take a look at market performance, I don't think that's really evident in the data just yet.

Really, it's not a growth scare that's been driving this. To us, it's really more just an unwind of crowded trades. I think the two most crowded trades going back over the last year were basically just investors clambering into what's worked. That's momentum. Names that have been going up. Sentiment goes higher. Investors chase after those names and they continue powering higher. And then in the wake of the election outcome, beta. So investors just getting exposure to those high beta names.

Generally a little bit more of a cyclical tilt that should do well in a stronger economy, which is absolutely the narrative as of the end of last year and early this year. And you got to some pretty extended extremes in terms of their performance. You can see beta in purple here and momentum in the light blue topping out in the 99th and the 90th percentile respectively in terms of 65 day rolling returns, so pretty strong and sharp outperformance.

And you fast forward to where we are today, and you're now basically bottoming out in close to 0 for beta, and then certainly within the first or the lowest decile for momentum. So a lot of damage has been done pretty quickly, but I'd say a lot of that's been really focused in these trades that got crowded. When you start to look more broadly, sure, you can see discretionaries, some of the cyclical areas of the market lagging behind.

But again, there's not a whole lot of evidence that the market is really aggressively pricing in a growth scare. And I would just say the tone of the sell off has been pretty linear. It's just been a steady grind lower. It's been painful, but it hasn't really felt all that panicky yet. And so to me, it's just basically been an unwind so far. And what does that mean?

It sets up a risk that this could start to evolve into more of an outright growth scare and continue to push the indices a little bit lower from here. I think that's what's really starting to emerge. Now, going back to uncertainty versus that underlying trend of cooling and growth, there's a couple things that we continue to focus on in terms of what's fueling it, and I don't think it's about uncertainty. I think it masks what's really been a cooling trajectory in the economy going back to late last year.

And the first one is-- pillar to this is basically government spending, but it's not federal government spending. It's actually state and local government spending. So as we walk through a couple of these next slides quickly here, basically, if you followed our calls for the last couple years, we've really been bullish on growth because of these pillars that have been supporting stronger than expected growth and have been driving those revisions higher.

But you can basically take every single one of those and put them on their heads, and they're working against us. Now, not to the degree where we think recessionary dynamics are about to set in, but the first one, looking at state and local governments. They've been contributing about 40 basis points to quarterly GDP growth on average over the last 10 quarters.

That's about double the pace of what you've gotten out of the federal government. So while we hear a lot about federal deficits really fueling growth, it's actually been about state and local governments. And that's basically a function of the pandemic era, the policy response and support that drove much higher revenues and ultimately translated to some pretty robust investment and expenditure from state and local governments. That is flipping, though. 

And when you hear a lot of the state budget offices, you're already seeing signs that the budget is contracting somewhere on the order of 5%, 6%. And so what you're looking at on this slide is just simply your contribution to growth from state and local government spending in purple. And then we've overlaid that with the Brookings Institution Fiscal Impulse Estimate. Basically, that's just saying, hey, where do we see state and local government contributions to growth going out to the end of 2026?

You're moving from a really sizable contributor to basically a neutral or maybe even a modest drag on growth. So a pretty sizable shift there that's going to start weighing on growth. But shifting away from the government side of things, I think the bigger story is that the composition of growth has kind of been deteriorating. And it's true that when you look at of core growth, that's this concept of real final private domestic sales. It's a mouthful. 

But what it basically means is strip out government spending, strip out inventory investments, and strip out exports, and that's going to give you a really good sense of what your underlying momentum is in the economy. And it's been robust. We've been averaging about 3.2% over the last eight quarters. But if you take a look at the composition of those bars, you'll notice a trend that it's increasingly dominated by those light blue bars. And that's consumer spending.

I think that's the key here. If you think about the other sources of growth, CapEx outside of the AI space, it's really been grinding to a halt. That kind of follows an accelerator effect. So if growth prospects are cooling, you're probably going to see that growth expectations and CapEx intentions are slowing, and that certainly is playing out. In the housing market we talked quite a bit about this, but as long as rates remain elevated and affordability is low, that's basically in stasis and not doing a whole lot.

And even on the activity front, you're seeing the units under construction, which is really what flows into activity and GDP. That's remaining under pressure, and units under construction are falling here. So that leaves the consumers really the lone source of contribution to growth in the economy. And here, we're certainly not betting against the US consumer, but on the next slide, there's really been a pervasive theme or persistent theme over the last year, which is that consumption in real terms has been outpacing, pretty materially, real consumer incomes.

So, this is very much an income driven cycle, and robust income growth has fueled robust consumption over the last couple years. But what you've seen-- and this is a chart that our viewers from the last call will recognize-- is that we've kind of had this dance, this oscillation where periods of above or higher consumption relative to incomes tend to mean revert, and they kind of oscillate back and forth.

So you have these periods of give back, and it looks like we're starting to set up for that. So over the past year, real consumption has grown by about 3%. Incomes in real terms have only grown about 1.5%. So the function of basically fueling that growth is boiled down to drawing down on savings rates. That's not really sustainable.

And so ultimately, I think what you're setting up for is a little bit of a period of slower consumption, regardless of what's going on in terms of headlines and tariff risks and uncertainty. So to us, I think the big risk is that this isn't necessarily recessionary, but it's coming from a point where markets are too complacent on growth.

The Fed, more importantly, is too complacent on the growth backdrop, and they're more concerned right now with upside risk to inflation than downside risk to growth. So I think the big issue with uncertainty is that the longer that persists, the more it kind of keeps the Fed on the sideline. And if you're in a slowing growth environment where the Fed is not easing policy rates, that just means you're passively tightening policy, which then exacerbates your downside on growth.

So that's really the issue here. And tying it back to the market, at the end of the day, the market's reaction function is a lot more nimble than the Fed's. And so I think that still opens you up for a little bit of further downside here before the Fed really starts to pivot more aggressively and start to put a floor under activity.

BRIAN HESS: Garrett, one question we got from a viewer is if you think the unusually cold weather during the first quarter, January and February, may have distorted the consumption data and pushed retail sales lower. Is that part of the story? You made a good case for why there's a reason for underlying weakness, but how much of it could be weather related?

GARRETT MELSON: Yeah, you know, it's hard to say for sure. It certainly does look like that's part of the story. The flip side is if you go back to that chart, you'll notice that there's a pretty sharp uptick in incomes. But keep in mind that's a January print, so you get your typical annual cost of living adjustments. It kind of distorts that figure.

So I would say incomes probably didn't rise as aggressively as it looks, at least on a sustainable kind of trend basis. Consumption might have been a little bit softer. But if you take a look at some of the indicators-- the Chicago Fed is a really good kind of tracker using high frequency data for that retail sales figure we'll get next week.

And that's tracking pretty soft for February as well. So yes, you could argue that maybe there's still some weather effects in February. But under the trend, I think the bigger theme is that nominal incomes continue to slow down, and that just means your firepower for consumption is continuing to slow.

BRIAN HESS: And you just spent a lot of time highlighting how really the consumer has been the linchpin of the cycle. We had strong government spending, true. But it's really been about the consumer. Housing, not doing much of anything, particularly existing home sales. Manufacturing's been sort stagnant with a weaker international backdrop.

So with the US consumer responsible for the growth, the labor market just becomes that much more important. And so I think for the next segment, let's dig into the US jobs market  a little bit and let us know what you're seeing there, because that could be the difference between us having a mid-cycle slowdown with a modest correction in risk assets versus something much more severe.

We know that bear markets associated with recessions tend to be far deeper and longer lasting than those associated with mere slowdowns. So what is the jobs market looking like? And I know we said recession is in our base case, but how are you thinking about the possibilities around that risk?

GARRETT MELSON: Yeah, absolutely. So the whole point of the composition of growth shifting to basically being more reliant on consumption, to your point, is that we're just more sensitive to dynamics in the labor market. I think the broad way that we're thinking about the labor market really hasn't changed going on probably well over a year at this point, which is that you just continue to see the labor market still holding up, but it continues to cool.

The key, I would say, is that it doesn't look like it's crumbling here. So a couple things just to start with. Starting points always matter. It matters for where we're coming in terms of starting point and growth. It also matters in terms of where we're starting from in terms of payrolls growth. And that's what you're looking at on this slide. Basically trying to separate all the drivers out to private payrolls and also headline payrolls.

Again here, one thing I would just like to point out. For all the focus about DOGE and government employment, again, here, it's really state and local government employment that's been the bigger driver from at least government side of things. But the big driver, it just boils down to private sector employment. And that's what you see here on this chart. We're averaging about 170,000 jobs over the last three months for private payrolls. That's a little bit below the pre-pandemic average of about 188 or so.

So yeah, certainly we're a little bit closer. But that's still pretty healthy here. And so ultimately, we're just simply cooling down from some pretty healthy levels of employment. Now, the way that we've characterized the labor market is, much like the housing market is in stasis, I think that's basically the same characterization you can make for what's going on in labor markets.

And if you look at the next slide, the Kansas City Fed has a kind of aggregator or indicator that separates-- I think it's about 26 different labor market indicators out to try to gauge what the level of activity is in terms of labor markets, and then the momentum in the labor market. And what you can see here, we actually just got the most recent print out this morning. If you look at the purple line, momentum, it took a pretty big hook lower.

But the bottom line is you basically been kind of chopping around 0, which is just saying that there's very little momentum within the labor market right now. And so the way I would interpret that is momentum has ground to a halt, and the longer you stay with no momentum in the economy, in the labor market, that means that you continue to just see slowly slowing down in activity, and ultimately, gradual building of slack in the labor markets here. And that's kind of high level how we're thinking about it now.

What would make us more concerned? Well, obviously it's going to be a meaningful uptick in layoffs within the economy. And so basically, the big driver of slack has just been the fact that hiring rates have been low. But if you look at the next slide here, I do think that there's a little bit of a case to be made that could see some incremental layoff activity. You're already starting to see that.

Obviously government layoffs are the most notable in the headlines. But you have seen private sector layoff announcements starting to tick higher here. But I think the key is you need to have a reason for why that persists and develops into something more pernicious here. What you're looking at on this slide, going back to the slide that Jack showed on that small business survey coming from the National Federation of Independent Businesses, there's one line item from that survey that basically asks, what is the biggest problem your business is facing?

And if you pull out the responses that are saying poor sales are the biggest issue, historically, not much of a surprise here. It tracks pretty closely with the unemployment rate here. So what have you seen more recently? Well, it's grinding higher in that light blue line. More respondents are saying that it's poor sales are their biggest issue.

But it's basically been a normalization off of an extremely tight labor market and an extremely good revenue environment in the post-pandemic era. So yeah, you continue to see some upside here, and I think there is reason to suggest that if nominal incomes continue to cool off here, you're probably going to see that maybe revenues become under pressure a little bit. And that does raise your probability of some incremental layoffs and push some upside on the unemployment rate.

But not necessarily to a significant degree, or at least from what we're seeing right now, that we'd be concerned about this really spiraling out of control into a nonlinear increase in the unemployment rate. And part of that is because what's behind that growth and income. We like to gauge this by this idea of aggregate earnings. We kind of product the term that the household paycheck proxy.

Basically, if you just take the number of people that are employed in the economy, multiply that by the hours they're working, multiply that by average hourly earnings, that gives you a sense about how much the overall income for the US consumer is growing. We've been looking at this on a three-month annualized basis just to give us a little higher twitch look at what near term trends are, and it certainly has been slowing pretty dramatically.

But the key here is what's doing the heavy lifting in that slowdown is the gray bars. It's actually hours worked here. So there's two sides of that coin, right? If you're seeing a slowdown in demand, it's a lot easier to just start paring back hours than actually laying off employees. And the flip side of that is if demand slows down but the Fed starts to pivot, and ultimately that slowdown isn't as durable, well, then you might actually start to see those hours ramp back up, and that's going to be supportive of income growth starting to pick back up here.

So at the end of the day on the next slide here, I think it just kind of puts the whole picture together, which is that it's not layoffs that are really the problem. This is just the JOLTS rates. So JOLTS survey that we got yesterday. Purple is your layoff rate. Same kind of story with what you're seeing out of that NFIB survey where you're kind of moving higher off some extreme low levels, but you're not really seeing a significant acceleration in layoff activity.

The bigger issue is that churn has just slowed down. Quit rates are at significantly lower than pre-pandemic, but more importantly, hiring is as well here. So at the end of the day, I think there's a pretty easy solution to all of this, which is that the Fed starts to continue recalibrating policy. Inflation, in our view, continues to move lower here.

And I think what you're going to start to have to do is shifting their view from some of those upside risks to inflation to what really continue to be downside risks that are probably mounting on the labor market side. So it's probably not going to come necessarily next week at the next FOMC meeting. But as you move out over the next couple months here, I think you're probably going to start to see a shift in the Fed's reaction function, and that's going to ultimately help to put in a floor below labor market activity. We'll have a growth scare, but ultimately one that doesn't translate into a recession.

BRIAN HESS: Garrett, I'm going to ask Jack about the Fed next. But before we do that, two viewer questions I think might be interesting to touch on. The first one is about the idea of a Trump put. Do you think there's a Trump put out there? And if so, what's the strike price? How much further do we need to go down before we start to see some concern in DC?

GARRETT MELSON: Yeah. I mean, I think everybody is trying to figure out where that strike price is. At a certain point, I think there is one. But what markets are finding out is that it appears like it's a lot lower than it was in the first term, and a lot lower than a lot of investors thought this time around.

It might not be-- for as much of the rhetoric as we've heard about markets don't matter and the stock market's not the economy from the administration, I do think there is a breaking point. I think it's about anybody's guess as to where that is right now. It may not just be a specific level on equities, but it might actually be what the impacts start to translate into in terms of midterm results. That might end up being a bigger driver that starts to ratchet up pressure on the administration.

BRIAN HESS: Yeah. Or maybe if, like Jack was suggesting earlier, we start to see stock market weakness spill over into actual economic weakness through the wealth effect. The second question I wanted to ask you. You cover large cap US equities for our investment committee, and we got a question about which types of stocks would outperform in a growth scare. So which industries or sectors do you think would do best if we get another leg down, I guess, in risk assets driven by growth fears?

GARRETT MELSON: Yeah. I think your classic defensives probably still have a little bit more to run in that sense. So if you look at relative performance, it's basically a function of all sectors moving lower. But defensives have held up a lot better than the broad market and certainly better than cyclicals. That probably continues.

But I would actually argue that we might be getting to a point-- we've started to see this over the last couple days, where maybe some of that de-rating on the multiple front for some of the big cap tech names in your growth sectors has kind of run its course. That crowding has been cleaned up, positioning is a lot cleaner, and that might actually set you up for some of those more secular quality growth names to start outperforming as well.

BRIAN HESS: All right. Thank you. That's great. Thanks for answering that. I'd like to bring in the viewer engagement as much as possible, especially when we get good questions like that that can probably help everyone. So Jack, now let's talk about the Fed . I think for us, at Natixis, we've been highlighting that the market was too worried about inflation and not worried about growth as we came into this year. We felt like the priorities were backwards.

There was more reason to be concerned about a growth slowdown and less reason to be concerned about inflation continuing to move higher. And so that seems to be playing out now where we're definitely getting increasing talk about a growth slowdown and even recession risk. How about the Fed, though? What is their priority in terms of concerns, and how are they thinking about the risks of recession? And then what's the bond market pricing in for their potential policy actions going forward?

JACK JANASIEWICZ: Yeah. And Garrett's sort of alluded to the backdrop here, and I think maybe the best way to summarize this is that the Fed is probably going to be dragging their feet in the air. And so the idea that the Fed is probably going to be able to maybe pivot sooner than later, maybe we're pricing in that a little bit from a too optimistic perspective. 

So I think from our perspective, the concerns today really come down to the Fed. That's going to be, I think, the key linchpin here. And the Fed sees inflation as a bigger risk than that growth slowdown. And if you look at the more recent CPI data and PPI data, those certainly are not helping, because when you do the look through to PCE, which is the one the Fed prefers to look at, it probably still looks a little bit on the warm side.

Right now the prevailing narrative is that inflation is sticky. So I think you're going to have the Fed looking to drag its feet a little bit more, and the idea of them pivoting to a dovish stance, we might be getting a little bit ahead of ourselves and the market may end up being a little bit underwhelmed by that response here. So the economic data probably continues to slow in here.

The markets, as Garrett pointed out, will probably price in that slowdown before the Fed actually pivots on the back of this to an easing bias. We've got the FOMC meeting coming up on 3/19. It's going to be certainly interesting. It's a dot plot meeting, so you probably are going to see the dispersion of the dot plots get a little bit wider there. But maybe the median dot changes marginally.

But I don't think it's going to be enough to give us an overall dovish takeaway. Maybe in the commentary, Powell gives us a little bit more of a dovish tilt, more nuanced view there. But I still think the risk is that the Fed does not quite come around to market its outlook for what the market wants, and as a result, underwhelms. And that could put additional incremental pressure on equities in here. So I think a couple things to highlight that maybe back that up in here.

This first chart, it's this concept of risk weighting. It's something that the Fed talks about when you actually read through their output. It's simply the FOMC members are being asked to indicate their judgment of risks weighted around their projections that they put into the dot plot. So in other words, what are the issues that are becoming more important to them? And in this case, we're looking at inflation in labor market.

And so it's simply a diffusion index of which respondents are saying those risks are becoming more or less important. And what's notable here is the divergence that we've seen more recently, which is the inflation risk side of the risk weighting is starting to tick up and we're seeing the opposite happening in the labor market side. So it just shows that the Fed has shifted its look, and it's not quite as concerned right now about the labor market, but it's really refocusing on the inflation side of the equation.

Again, if we go back to what I just commented on the PCE side, if that PCE number still comes in on the warmish side, that's their number one risk. And so even though we're seeing a cooling in the data, the Fed probably wants to see that cooling because it probably helps to give a little bit of the inflation backdrop some help here. And you're also seeing that same rhetoric following through.

And so this chart here, you're just looking at basically Bloomberg. They go through a lot of the Fed commentary and they're looking for specific words and they're sort of assigning a score to them and saying, are these more hawkish or dovish comments? And you can certainly see the more recent uptick here. These commentary coming from the Fed more recently has had a hawkish bias to it.

So again, not surprising given the more recent comments that the inflation backdrop might be sticky. The change in the risk weightings that I just highlighted here, you're seeing that follow through with regard to the hawkish rhetoric coming out of the Fed. So again, back to the risk that we were talking about. It's really marking to market that outlook. But the question is, are the Fed going to mark to market that outlook enough to where the market might be?

And so here, you're just looking at rate cut expectations. You can see that the market's really starting to price in increasing odds for a June and September cut. So now you're probably looking at close to three cuts being priced in between now at the end of the year. If you followed us from the beginning of the year, we were in the camp of about two to four cuts. So the market's certainly moving back to something closer to where we were aligned. 

But the point being here, you're certainly probably not going to see anything from the Fed until that June meeting because you're going to have a little bit more data on the inflation front to help support it. So again, the risk in here is simply that the market will perceive the Fed as being behind the curve. They're waiting for further evidence that inflation is really not sticking. It will continue to head towards its 2% target.

The tariff uncertainty is certainly not helping that backdrop. But the market's moving to pricing that growth slowdown potentially well in front of where the Fed actually might pivot to. So again, the key risk here is that the Fed potentially is perceived as dragging its feet, being behind the curve. And then you can see that spill over into a proper correction here. So one of the other key risks that we're thinking about really comes down to what the Fed outlook is.

BRIAN HESS: And so with that Fed view and the 10-year Treasury having been rangebound for quite a while, are we sticking with the idea that the long end is probably anchored for the time being? Jack and I-- you and I do a podcast together called Tactical Take, and recently we talked about this.

I think you put a range on the 10-year for 4%, maybe to 450 to 475, or at the lower end to middle part of that range. Is that still the thinking? That without the Fed cutting near-term and with the curve still fairly flat, yes, it's steepened a bit, but it's not 300 basis points steep. Let's put it that way. That there's limited room for yields to move down through 4%?

JACK JANASIEWICZ: Yeah, I think that's fair. And again, referencing the Tactical Take podcast. I think you brought up the point. What you're seeing overseas is also going to have an impact on the Treasury market here. And so as the growth story maybe brightens a little bit in Europe and to a lesser extent in Japan, I think with the yields backing up there, you're going to see that spill over to the US market as well. So that's probably going to help put a floor under rates from getting maybe aggressively 3% or 4% as well.

BRIAN HESS: Yeah. And that's a perfect segue into Europe, actually, which is where I'd like to go next. And we've seen some big news out of Europe  over the past couple of weeks relating to defense spending in Germany but Europe more broadly. It seems like the meeting between President Trump and President Zelensky did not go well, was a wakeup call for Europe that they probably need to step up for providing for their own defenses in a greater way.

There's been this debt break in Germany that has really locked the government up from providing fiscal stimulus at times when the economy has needed it. And this has catalyzed a sentiment shift and a mindset shift among politicians. So we've seen a willingness to exclude some defense spending from that debt break, which allows them to do it more emphatically.

We've also seen plans for an infrastructure program, a 500 billion euro infrastructure program in Germany that is much needed at this point. German economy has been struggling with the transition to electric vehicles. Auto manufacturing is so critical to that economy. And so it's created a lot of excitement. In Europe, we had a major move higher in European bond yields. The euro itself has moved up several cents in a very powerful move last week.

And now we're thinking this theme could spread outside of Germany to the rest of Europe, where countries with fiscal space will be able to spend a little bit more and support growth. And those that don't have fiscal space and would have been looking at austerity this year or next year, maybe don't have to pursue such aggressive austerity. Now in the models we manage here at Natixis, historically, our bias has been to be overweight US stocks, underweight international stocks, and Europe has been a big part of that.

And that trade has worked out well for us over the past five years pretty consistently. But now we're starting to wonder if things are shifting and we should be reappraising the medium term earnings prospects for European companies. So, Garrett, I'm going to ask you. What are you seeing in Europe and how do you think this will translate into opportunities there going forward?

GARRETT MELSON: Yeah. Well, I think you did a great job summarizing what's really played out over the last week or so, which is it's meaningfully changed the narrative. I would kind of separate the outperformance, that spate of outperformance for Europe into two phases. So if you actually go back to the end of last year, I think part of what's catalyzed this move, which kind of sees the S&P down 5% on the year, NASDAQ off 8%, 9%, a little bit lower in today's action.

And you look across the ocean STOXX 600 up 13% in USD terms, 7% in local terms. Pretty stark difference there. But I think it can be summed up in the fact that consensus was just too bullish on the US and too bearish on Europe. And that kind of has been the story for these runs of outperformance for Europe over the last couple years.

One way to put that into context is just take a look at the Europe-- or the economic surprise indices. If you take a look at actual data relative to expectations, those indices move higher when data is outperforming and vice versa. And basically, if you look at that spread between the US surprise index versus Europe, over time, it's tracked pretty closely with relative returns for the US versus Europe here.

And I think you can make a pretty strong case that part of the story was just pulled up on the US exceptionalism and basically priced in for a pretty bearish outcome for the Eurozone and pretty anemic growth. You got a pretty historic overshoot, though, based on the election outcome in terms of US outperformance over the rest of the world. And what does that set us up for?

Basically a historic reversion in the opposite direction. You can see that purple line basically moving from extreme lows of US outperformance to now extreme highs of European outperformance here. So I think the first part of the move is very much like what we've seen in the past, which is it's just a function of sentiment and positioning getting too overly extended, bearish, and the data starts coming in less bad, and that catalyzes a pretty sizable move.

And if you look at flows, you can kind of see that reflected as well. You've basically been in a one way trade for three years now. It's about $250 billion in outflows from long only and ETF funds for the Eurozone. Compare that to $760 billion in inflows into US equity funds. Pretty stark difference there. And you've started to see that momentum shift pretty aggressively.

So just like the performance, US momentum inflows have really, really faded here in the light blue. At the same time, we've actually pushed it into positive territory for inflows into European equities. So by no means are they aggressive inflows, but it's a pretty sharp reversal here. And you can see how that sentiment has split very significantly in a short amount of time.

Now, as Brian mentioned, there's been some pretty significant developments. I won't go too into depth, but as you mentioned, the 500 billion euro infrastructure package. That turns out to be about 1% of GDP per year over the next 10 years for Germany. There were some allowances in terms of increasing borrowing limits for German states, up to 0.35% of GDP, up from 0, and then that exclusion of defense spending above 1% of GDP.

So that kind of leaves it open ended for an increase in defense spending. You put that all together and you could be looking at basically a doubling of Germany's budget deficit from about 2.8% of GDP, up to anywhere about 5% to 5.5% So it's pretty meaningful. I think the question investors are trying to answer is how much of this impulse spreads out more broadly outside of Germany's borders.

And Brian, you mentioned the country is kind of in this box on the right-hand side. Those are the ones that are currently under the Eurozone's excessive debt procedure, so they have strict limits in terms of bringing down their deficits and bringing down their debt to GDP. This certainly relaxes it, and what you'll see is those light blue or light orange dots, I should say, are basically their current deficits excluding government or defense spending.

So you can see it certainly does start to free up some flexibility here. In addition to that, there's hope that they can actually raise another $150 billion in EU level borrowing to lend out to some of the member states over the next four years. So you put that all together, that's about 1.1% boost to Eurozone GDP over the next four years. So it's meaningful. Now, what I would say is it certainly is a shift in the fiscal attitude.

But keep in mind when it comes to defense spending, which is really in reference to the multiplier effects in terms of that spending to GDP growth is fairly low. I think estimates are somewhere around maybe 0.5 to 0.6. So for every dollar spent, that translates to a $0.50 increase in GDP. So it's not the best return, although it is certainly spending that is needed and is helpful. But it might be a little bit more of an idiosyncratic story.

It helps growth. It certainly helps defense industries. Keep in mind some of that might also spill out of the economy as well. But at the end of the day, I think the issue is you need to consider how much of this is actually a meaningful regime shift that really, really does change more broadly. And more importantly, does it make a big difference for the larger economies that can actually have that flexibility to expand spending? That might be a little bit more mixed here.

So I think for us, we need a little bit more evidence before really getting on board with this. But if you're underweight in equities there, I think you do really need to reconsider how much you want to be underexposed to the region and maybe start trimming up some of that underweight there. Now, the last thing I just want to touch on market prospects is we always hear about the story about the valuations are cheap abroad and there's a lot of value to be had.

Now, obviously it could certainly be a value trap, which it has been, you could argue, over the last decade plus. But I wanted to put this in a little bit different light. If you take a look at PEs by sector for the MSCI Europe versus MSCI US, this is just showing you your differentials here. So across the board, you can see sectors are generally more expensive in the US versus Europe. That shouldn't surprise anybody.

And I think that's really a reflection of the fact that US companies are just simply have higher margins, higher profitability and have exhibited more dynamism. But if you actually normalize that for that persistent valuation gap and look at that gap on a z-score basis, those gaps shrink down quite a bit. And so the argument that we're trying to really highlight here is even at an outright basis, some of those sectors aren't all that cheap, especially the sectors that are high in demand by investors.

Take a look at the left-hand side, tech, comm services, the growth areas of the markets that investors are clamoring for. Not really that much of a valuation discount, and even tech is actually a little bit trading rich to US tech equities. But on the flip side, when you look at the z-score, basically the only value to be really had is coming in real estate, utilities, staples. The more defensive areas of the marketplace that investor demand really isn't seeking out. 

Maybe the one area of value is financials, which obviously have been a straight line up and to the right this year. But the bottom line is when you dig through this, I don't think there's as strong as a valuation argument here for international equities relative to the US equities. So the last thing I would just say is it's been a really stark and impressive run of outperformance.

But I think on a tactical basis, if we actually do see that growth scare filtering in here, I have no reason to believe that the old adage of when the US sneezes, the world catches a cold. And so when you think about that run of outperformance in a short period of time, I think tactically, you might be setting up for a little bit of a catch down trade if those growth concerns start to filter out more broadly to the market.

BRIAN HESS: So, Garrett, we're taking this development very seriously, and we are doing work on it and thinking about the medium-term implications. But it sounds like near term, the markets have actually priced a lot of good news. And so it's maybe not the safest entry point for European risk assets, especially if what you're highlighting with the potential for a US slowdown to emanate more broadly into the rest of the world were to happen, and there's room for these stocks to join the correction along with US equities.

It probably also means that if-- I mean, our base case-- and I'm going to ask Jack about our base case to close this out next. But it sounds like our base case is that we're going to avoid a recession. And so that means that this correction in risk assets is ultimately viable. And when we look and think about how to best position for that entry point, we're probably, for now, still looking at US stocks as the thing to buy, because there hasn't been the same level of weakness in European equities. Is that true?

GARRETT MELSON: Yeah. Absolutely. I think that's probably the area-- the playbook for sell-offs is you want to probably start adding risk where the pain has been most extreme, and I think that's still certainly the case for US. Probably on the growth side of the spectrum as well, maybe even some of the beta names. And if you do have that catch down, that might be an opportunity to start adding into or trimming some of your underweights at a little bit of a better entry point.

BRIAN HESS: Yeah, exactly. So we'll focus on the US for the snapback, and then if we get that, we can think about relative value at that point between domestic and international assets. OK, Jack. I think we're going to skip the last segment just because we're running out of time here. But we got one question in the chat that was very simple. What is your base case? So I'm going to tee it up for you to just close this out with our base case. Growth, inflation, stocks. Let's hear it.

JACK JANASIEWICZ: Yeah, listen. This is basically what we started out at the beginning of the year with by saying that the market was probably overly hawkish on inflation and maybe too sanguine on the growth outlook. I think in the interim, I think you still have a little bit more downside pressure here because you are going to continue to see weakness. I think once you start to get some softer inflation prints, and the Fed will then start to pivot and give them a little bit more room to be supportive, that's probably going to be the catalyst where you start to see the bottom forming in here.

And that's probably when you're going to start to see the decks clear, and you're going to end up having a pretty good runway for a rally, basically maybe into late summer, early fall. So there's probably a little bit more downside pain in here, but I think it does set up for a pretty good run once we get that cleansing and you get a little bit more clarity on the tariff front, on the inflation front, and then you finally get that pivot from the Fed.

BRIAN HESS: OK. Thank you, sir. I appreciate it. With that, that's it for today. I do want to thank Jack and Garrett for their insightful commentary as always, and also want to thank everybody for joining us today on this call. We really appreciate the support. If there are any questions about anything we talked about today, just reach out to your Natixis sales rep, and we'll be happy to answer them for you. That's it. We'll see you all next time. Thank you very much.