Topic Tags: International Economy

1Q 2025 Market Insights

This video is a recording of a live webinar held April 16 by Marquette’s research team analyzing the first quarter of 2025 (and recent weeks) across the economy and various asset classes as well as themes we’ll be monitoring in the coming months.

Our Market Insights series examines the primary asset classes we cover for clients including the U.S. economy, fixed income, U.S. and non-U.S. equities, hedge funds, real estate, infrastructure, private equity, and private credit, with presentations by our research analysts and directors.

Featuring:
Greg Leonberger, FSA, EA, MAAA, FCA, Director of Research, Managing Partner
Frank Valle, CFA, CAIA, Associate Director of Fixed Income
Catherine Hillier, Senior Research Analyst
David Hernandez, CFA, Director of Traditional Manager Search
Evan Frazier, CFA, CAIA, Senior Research Analyst
Dennis Yu, Research Analyst
Hayley McCollum, Senior Research Analyst
Chad Sheaffer, CFA, CAIA Senior Research Analyst

Sign up for research alerts to be invited to future webinars and notified when we publish new videos.

If you have any questions, please send our team an email.

 

Bracing for Stagflation

As markets swirl and stagflation fears mount, what should investors do?
Our newsletter last week outlined the broad context of President Trump’s new tariff policy as well as the most notable market impacts. Granted, the news seems to change daily, as does the market’s reaction; trying to pen a targeted newsletter is an almost worthless endeavor because by the time the ink has dried, markets have shifted due to another policy pivot. In the short term, the omnipresent cloud of uncertainty will continue to drive market volatility and investor sentiment. The best recipe for investors to weather this storm is patience and discipline, both of which can be difficult to come by in the current environment.

As we step back and take a longer-term view of the future, however, the threat of stagflation is becoming more realistic. Coined as a combination of the words “stagnation” and “inflation,” it is an economic backdrop characterized by high inflation, slow economic growth, and in some cases, high unemployment.

In this edition, we examine which asset classes are most exposed to stagflation and which can offer shelter.

Trade Turmoil: Assessing the Impact of Tariffs on Markets, the Economy, and Investors

The global trade landscape has been significantly reshaped by a series of aggressive tariffs initiated by President Donald Trump. These measures have elicited strong reactions from market participants and U.S. trade partners alike, leading to elevated levels of market volatility, souring economic sentiment, and strained diplomatic relations. While the situation is ongoing with major developments seemingly arising each day, this paper aims to summarize the events that have led to this point, detail the impact of the trade war on global markets, and provide commentary on what investors might expect in the months ahead.

Europe on Defense

The first 100 days of a presidential administration are typically scrutinized closely as the public develops a sense of the new government’s agenda and top priorities. The second Trump administration is certainly no exception, and the recent flurry of executive orders and tariff proposals has caused significant uncertainty for policymakers and financial markets alike. Trump’s handling of the Russia-Ukraine War has had an especially notable impact. In March, the Trump administration suspended aid to Ukraine after a tense meeting with Ukrainian President Volodymyr Zelenskyy. That decision elicited a strong response from European leaders, who now have a newfound sense of urgency when it comes to rebuilding the continent’s defense capabilities. In recent weeks, the European Commission, the executive branch of the European Union, announced its “ReArm Europe Plan,” complete with a white paper entitled “European Defense Readiness 2030.” These documents emphasize the need for Europe to bolster defense spending and outline an investment plan to do so.

Global markets took note of this dynamic well before the unveiling of the ReArm Europe Plan, with European defense stocks surging as the continent’s relationship with the Trump administration has deteriorated. To that point, the STOXX Europe Total Market Aerospace & Defense index returned roughly 28.9% in the first quarter, with noteworthy contributors including Rheinmetall, a German arms manufacturer, the French military aircraft manufacturer Dassault Aviation, and Leonardo DRS, an Italian aerospace and defense specialist. This is in striking contrast to the market leaders of 2024, including U.S.-based tech giants such as NVIDIA and Microsoft. The Magnificent Seven basket of stocks have returned roughly -16.0% so far in 2025.

While investors are understandably enthusiastic about the prospects of defense spending jumpstarting the European economy, making these defense goals a reality will not be an easy task, especially for European countries such as France that are heavily indebted with a highly taxed citizenry. One thing is for certain: The market’s response to recent defense initiatives in Europe illustrates the importance of maintaining a diversified investment portfolio, as it is difficult to predict the catalysts that will drive performance reversals like the one detailed above.

School’s Out?

While the United States has historically prioritized public spending on education more than other developed countries, there has been a recent convergence in U.S. education expenditure as a percentage of GDP with that of other countries in the OECD, a group of mostly developed and democratic nations. Specifically, in 2000, the U.S. spent 6.1% of total GDP on education, which was notably higher than the OECD average of 4.9% at that time. That said, the U.S. figure dropped to 4.7% in 2016, which was slightly below the 4.8% OECD average that year. Based on this trend, it should come as no surprise that U.S. students are beginning to fall behind their global peers in key academic areas. To that point, U.S. K-12 students ranked 12th and 28th in science and math, respectively, out of 37 OECD member countries in 2022 according to Pew Research. The U.S. average score for math fell by a whopping 13 percentage points between 2018 and 2022 alone.

While the challenges faced by U.S. students due to the COVID-19 pandemic were significant, the fact that U.S. now spends roughly the same as other developed nations (as a percentage of GDP) has certainly contributed to these lackluster scores. Going forward, a renewed focus on education-related spending and outcomes should serve the U.S. well, as a robust public education system helps drive economic growth, stability, and innovation.

Assessing the Trade War “Battlefield”

The tariff plans announced by President Trump in recent days represent a significant escalation in trade policy and a shift away from targeted import taxes and toward broad-based economic measures. Specifically, the Trump administration imposed a blanket 10% levy on China and initially imposed a 25% duty on imports from Mexico and Canada, but has since paused those measures amid negotiations with the governments of those two nations as of this writing. The economic implications of these new policies are profound, potentially triggering inflationary pressures and reshaping global trade dynamics. This week’s chart highlights how U.S. export-dependent economies like Mexico and Canada are particularly vulnerable to Trump’s initiatives.

Trump’s tariffs have already prompted retaliatory responses from certain countries, raising concerns about the potential for an escalating trade conflict. Many economists note that these reciprocal measures could lead to a contraction in U.S. real GDP, an increase in consumer prices, and a disruption of established international trade networks. As the global community watches this ongoing situation closely, the ramifications of these unprecedented trade measures are yet to be fully understood.

New Year, New President…Same Outlook?

From an investor’s perspective, the current environment feels lot like it did twelve months ago: U.S. equity markets returned over 20% the prior year, fixed income is (still) offering attractive yields, and overall portfolio performance was positive for most programs. Nevertheless, nothing lasts forever and sentiment can shift on a dime. It is also likely that some of President Trump’s policies will have an impact on markets, with the specific impact varying by the policy and asset class.

In this edition:

  • U.S. Economy and Policy Expectations
  • Fixed Income: “If you liked it last year, you’ll like it this year”
  • U.S. Equity: Concentration risk still looms
  • Non-U.S. Equities: Positive earnings outlook, policy uncertainty
  • Real Assets: Real estate bottoms, infrastructure demand robust
  • Private Markets: Private equity on the rebound, private credit still compelling

A Cup of Joe Could Break the Bank

Over the last few years, a cup of coffee has become much more expensive as the costs of the two primary beans used to make the beverage, Arabica and Robusta, have moved significantly higher. Arabica beans are often imported to the U.S. from Brazil and are used to make higher quality coffee blends, while Robusta is a cheaper type of bean often exported from Vietnam and used to make instant coffee. A variety of factors can impact the prices of these beans, including weather irregularities, demand fluctuations, supply chain disruptions, regulatory changes, and currency movements.

This year, major drivers of prices include the high demand for coffee and concerns around supply given severe weather in Brazil and Vietnam. A late August frost in Brazil impacted the newly flowering trees and, thus, the next season’s beans, while severe droughts in both countries have impacted harvests. Droughts can cause coffee tree branches to die, leaves to fall (prohibiting photosynthesis), early flower shedding, and bean damage, all of which reduce a coffee tree’s expected harvest. Aggregate demand for coffee has gradually been increasing in tandem with these issues, primarily due to the growing coffee market in China. According to the U.S. Department of Agriculture, coffee consumption has risen by roughly 150% in China over the last decade, as the drink has become more affordable, accessible, and grown in popularity among young people. This growth is projected to continue into the next season of coffee consumption, up to 6.3 million bags (132lb each) from 5.8 million bags in the 2022/2023 season.

These challenged supply/demand dynamics have been felt by investors. To that point, coffee futures prices climbed 70% in 2024 and remain well above long-term averages as traders hedge against potential production delays and the anticipation of higher coffee prices. Additionally, name brands have also felt a squeeze, as Nestlé (the parent company of brands such as Nescafé and Nespresso) announced in November its plans to increase coffee prices and make smaller packages to absorb the higher costs of coffee beans. As consumers consider alternative morning beverages like orange juice or milk to cut costs, a word of advice: A cup of coffee is worth the price!

2025 Market Preview Video

This video is a recording of a live webinar held January 16 by Marquette’s research team analyzing 2024 across the economy and various asset classes as well as themes we’ll be monitoring in 2025.

Our Market Insights series examines the primary asset classes we cover for clients including the U.S. economy, fixed income, U.S. and non-U.S. equities, hedge funds, real estate, infrastructure, private equity, and private credit, with presentations by our research analysts and directors.

Featuring:
Greg Leonberger, FSA, EA, MAAA, FCA, Director of Research, Managing Partner
Frank Valle, CFA, CAIA, Associate Director of Fixed Income
James Torgerson, Research Analyst
Catherine Hillier, Senior Research Analyst
David Hernandez, CFA, Director of Traditional Manager Search
Evan Frazier, CFA, CAIA, Senior Research Analyst
Dennis Yu, Research Analyst
Michael Carlton, Research Analyst
Chad Sheaffer, CFA, CAIA Senior Research Analyst

Sign up for research alerts to be invited to future webinars and notified when we publish new videos.

If you have any questions, please send our team an email.

Reluctant to Spend

In recent years, the Chinese economy has struggled to return to pre-pandemic levels of consumption and economic growth. This lackluster rebound can be attributed to factors including prolonged lockdowns from the country’s zero-COVID policy, regulatory crackdowns on private sector companies, and pervasive weakness in the country’s property sector. Recently, the Chinese government, in tandem with the People’s Bank of China (PBOC), has enacted measures to address the country’s myriad issues. For instance, the PBOC announced a monetary easing package in the third quarter that included interest rate reductions and cuts to reserve requirement ratios for Chinese banks. While the Chinese equity market saw a sharp September rally as a result of these measures, investor excitement has since waned, with the MSCI China Index down roughly 20% over the last two months.

One key reason measures to restore growth in China have been unsuccessful is that they have failed to boost domestic demand, of which consumption plays a large part. Economic uncertainty has made Chinese households reluctant to spend and consumer confidence in China remains well below long-term average levels, a trend outlined in this week’s chart. While a general malaise contributes to this lack of confidence, there are aspects of the Chinese economy that pose unique challenges for the government as it relates to economic revitalization efforts. One such challenge is the distribution of citizens’ wealth. To that point, approximately 80% of household wealth in China is comprised of real estate assets, rendering Chinese consumers particularly vulnerable to the ongoing instability in the country’s housing market. Additionally, only 10% of Chinese citizens own stock (as opposed to 70% of U.S. citizens), meaning any propping up of the Chinese equity market by the government may not result in a commensurate increase in domestic wealth and consumer demand. Consumer confidence in China has also been hampered by the country’s high levels of youth unemployment, as the jobless rate for 16–24-year-olds exceeded 17% at the end of the third quarter. Young educated Chinese workers in particular are facing a weak job market, along with a mismatch in job availability and their skill sets. These and other challenges have plagued the Chinese government for years, and while policymakers are now taking action to address them, whether new measures are sufficient to restore business and consumer confidence in China is yet to be determined.