By AKEMI KONDO DALVI, CPA/PFS, CFP
For the last three years, economists have warned of a looming recession at the start of the year, only to end each year with hope that we had achieved the Federal Reserve’s targeted economic soft-landing. In 2022, the market was sure the Federal Reserve’s interest rate increases would push us into a recession.
During the start of 2023 and 2024 we continued to focus on Fed policy, supply chain imbalance, and the inverted yield curve. Despite those concerns, the U.S. GDP rose 3.0% in 2023 and 2.8% in 2024.
Apprehension takes the stage again in 2025, this time on the backs of several policy changes out of Washington that have the market worried about stagflation, or high inflation combined with stagnant economic growth. American policy changes have come like rapid fire in 2025. The most notable being policies on immigration, tariffs, government employees, the U.S. spending bill, as well as foreign and domestic aid.
Stricter immigration policies and tariffs on imported goods to the U.S. could perpetuate inflation. Studies have shown that illegal immigrants tend to take employment in less desirable or more dangerous professions, generally at a lower cost. Therefore deportation risks higher costs for the positions left vacant, particularly in the food service, construction, and produce industries.
Likewise, tariffs would increase the cost of goods to American consumers, further prolonging inflation. In February, President Trump temporarily delayed a 25% tariff on goods from Canada and Mexico until March. In the blink of an eye, March is upon us and tariff talks are dominating headlines and disrupting the stock market again.
Trump has also announced plans to introduce a 25% tariff on all goods imported from the EU, a 25% charge on all steel and aluminum imports, and a 20% tariff on products from China – yet a notable decrease from the originally announced 60% Chinese tariff. All of these have stirred the market with uncertainty.
Diving deeper into new policies out of Washington, President Trump has created the Department of Government Efficiency (DOGE), whose goal is to cut $1 trillion in government spending. Some of the department’s early steps to achieve this goal have included layoffs of an estimated 75,000 federal employees from various government departments including the IRS, Department of Veterans Affairs, U.S. Forest Service, the CDC, Department of the Interior, and the Energy Department.
Mass layoffs could hurt families and local economies. They also deteriorate consumer confidence, causing Americans to spend less, which results in lower corporate profits, and materializes into lower stock prices.
In late February, the House of Representatives passed a budget resolution that aimed to extend the 2017 tax cuts (due to expire at the end of 2025), increase spending for military and immigration enforcement, and raise the debt ceiling. The House bill notes that the $4.5 trillion in lost revenues from the tax cuts must be offset by a deficit reduction of $2 trillion from reduced government spending, leaving the excess $2.5 trillion as additional budget deficit for the coming years.
Internally, Republicans are torn over whether the targeted spending reductions are achievable and the bill was passed along party lines, so there is no room for dissension within the party. To enact the final budget resolution, the House and Senate must reconcile their parallel bills to one cohesive bill, and that is looking to be difficult.
With unprecedented changes happening so rapidly, it’s no wonder the stock market has been a bit of a rollercoaster. Every election brings in a new administration and change, albeit often milder than we are currently experiencing. Trump’s effect is more dramatic because his administration is creating a lot of uncertainty and the stock market dislikes the unknown.
However, the stock market has always been unpredictable and the inability to predict the future movements of the stock market is nothing new.
Since 1930, the U.S. has recorded 12 years that fit the definition of stagflation, when high inflation and stagnation or slow economic growth occur at the same time. However, in nine of those 12 periods, the stock market’s real return (return in excess of inflation) was positive!
Comparatively, the rate of positive real returns spanning from 1930 through 2024 was 68%. Therefore, while the idea of stagflation is unpleasant compared to our recent stock market rally, it is no reason to cash out your investment portfolio for an “under the mattress” investment strategy.
Predictions about the direction of the market form and evolve daily, but the market is quite efficient and digests current events to price stocks at appropriate levels to deliver positive future expected returns. The efficient market hypothesis remains true even amid uncertainty. Diversification is often the best way to capture market returns and reduce unnecessary volatility to maximize more consistent long-term returns.
Reach out to your Certified Financial Planner or CPA personal financial specialist if you could benefit from a review of your investment strategy for the financial journey ahead.
The opinions expressed above are solely those of Kondo Wealth Advisors, Inc. (626-449-7783, info@kondowealthadvisors.com), a Registered Investment Advisor in the state of California. Neither Kondo Wealth Advisors, Inc. nor its representatives provide legal, tax or accounting advice. Opinions expressed are not necessarily those of The Rafu Shimpo.