Walter Hamilton

Hello, and welcome to Trump 2.0, what the first 100 days mean for the economy and financial markets. I’m Walter Hamilton, editor in chief of Quarterly Insights magazine, and I want to welcome you on behalf of all of us at Capital Group Private Client Services. Well, if the past three months have proven anything, it’s that truth really is stranger than fiction. Regardless of where you reside in the political spectrum, it’s safe to say that almost no one predicted the full-blown geyser of events this year, especially on the global trade front. Instead of the market-friendly tax cuts and deregulation that investors had expected, there have been scores of tariff announcements, including a number of delays and reversals.

As it stands now, there’s a 90-day pause in almost all of the country specific reciprocal duties that were unveiled on April 2nd. The big exception of course, is China, which faces huge surcharges and which has struck back with its own huge levies. Other tariffs also remain in effect, including 10% across the board levies on most U.S. trading partners. All of this, as we know, comes against a backdrop of deep upheaval in Washington, including mass government layoffs, aggressive deportations, clashes with leading universities and strained diplomatic relations with long-term foreign allies. Not surprisingly, investors are trying to figure out what it all means and what may come next.

We’re joined today by three Capital Group Investment professionals who will provide some answers. Anne Gifford Ewing is a Capital Group Private Client Services senior trust, estate and fiduciary strategist. She focuses on trust, estate, tax and wealth-planning matters. She’s joining us today from Nevada, where she’s at a conference. Next is Capital Group Private Client Services portfolio specialist Ed Gonzalez, he’s a member of our Wealth Advisory group. Many of you may recognize Ed from meetings with your Private Wealth Advisor; he’s joining us from our Atlanta office today. And from Washington, we have Kellin Clark, Capital Group vice president of government and regulatory affairs. Kellin and his colleagues have spent countless hours keeping tabs on the latest developments on tariffs and related matters. So add it all up, I’m not sure which of these three folks is the most sleep deprived, maybe we’ll try to uncover that also in the next hour.

Finally, most important, thanks to all of you for being here, and as always, a special thanks to everyone who sent in questions ahead of time. We will weave many of them into our conversation today. Let’s dive in. Kellin, I’m going to start with you for the D.C. view. Give us the latest from Washington on the tariff front in terms of behind-the-scenes developments, negotiations, word-of-the-mouth murmurings, etc.

Kellin Clark

Well, thanks, Walter, and thanks for having me today and thanks for everybody for joining. It has been a whirlwind of activity in Washington as Walter said in this first 100 days, but we’re starting to notice a little bit of a slowing except for the tariff issue. Hopefully, I can provide a little bit of insight, although the one thing that I do like to caveat, particularly with this administration, is: I feel very confident about something for about 45 minutes, and then that changes pretty quickly. So by the end of this, I’ll probably have a very different opinion based on what pops into my Twitter feed in the next hour.

But I think for context, everyone in Washington is on pins and needles right now, they’re waiting to see what happens across both sides of the aisle. Republicans are waiting, trying to give the president a chance to work through a number of these things, they’re trying not to be too critical, although they’re getting a little bit uneasier. Obviously, Democrats are viewing this as a chance to really jump, they’re looking at the midterms, thinking about the next election, trying to think about how they can take the House back, how they can get some leverage back.

And Congress has been on a two-week break for Easter, this is the longest break that we’ve seen them take so far. The speaker, Senator Thune, they put an emphasis on being in Washington more and pushing the President’s agenda in the first 100 days. So when they get back next week, I think we are going to learn a lot about the level of discomfort members of Congress heard from their constituents while they were back home. This was the longest break, they’ve had two weeks, a lot of them have been at town halls, they’ve been out visiting their constituents and presumably they’ve been hearing about this on both sides of the aisle. Folks who think this is great, folks who are a little uneasy and folks who are really, really skeptical of this.

And during the break here, while members of Congress have been out of Washington, there’s been a shift in the White House and in the administration. It’s clear that Secretary Bessent is now in charge, Peter Navarro, Howard Lutnick have been sidelined to a point. And prior to Bessent’s ascension in the last couple of weeks, we saw Trade Rep Greer, Secretary Lutnick, trade advisor Navarro, they were signaling a very, very hard approach. There was commentary that reducing tariff rates, purchasing U.S. products, that would be deemed completely insufficient and nowhere near what the president was expecting. And a significant emphasis on addressing non-tariff barriers, things like regulatory barriers for U.S. firms in China, currency manipulation, huge things like IP theft, areas where these things typically take years to negotiate, not 90 days by any stretch of imagination.

That was top line before we went on this break. Since then though, Bessent has clearly supplanted the two of them in terms of who’s really driving the ship here within the administration. Bessent has been urging the president to moderate his top line, that they need to signal that this is not the outcome, this is simply a negotiating tactic. When I talk to my friends on both sides of the aisle, whether it’s the administration or in Congress, they say the same things to me publicly, they say it privately, they’re saying, listen, this is a leverage point, this has always been a leverage point, we are trying to get people to the table, you need to trust us.

Somewhat the commentary has altered as we’ve seen, it’s altered privately in the conversations I’m having, it’s altered publicly, it’s altered in the media. The White House is definitely eager to demonstrate to markets, to trade partners that trade negotiations are progressing, albeit slowly depending on what we’re talking about, yesterday they announced that there were 18 proposals being worked out. It’s also really important to remember when you think about Scott Bessent, where he comes from, he comes from South Carolina, I don’t know how many of you have ever flown into Charleston, but the minute you walk off a plane and you are 100 yards away from the airport, you see the Boeing plant, you see the Audi plant, you see the BMW plant, all of these firms need global components, even if they’re being built in the US.

And the million-dollar question is just the market buy-in. I’m not sure daily fluctuations of a thousand points here or there, depending on a tweet or a comment or whatever, is reflective of the long-term anything. And despite this effort to make progress, despite the continued commentary that we’re getting there with some of these, the administration has set a high bar. They want to achieve altering bilateral changes to our global economy, they are intended to make lasting change.

The other thing in the next two weeks to watch is the legal challenges that these reciprocal tariffs are starting to face. Where that goes in the court system, does that alter the tracks that some of these court cases and the outcomes of that? That’s going to weigh heavily on the administration in certain instances. And the big question to watch this week, as the president pulls back the commentary even so in the last few hours and as we go into next week, is: What do they do on the announced semiconductor tariffs, on the pharmaceutical tariffs, which were intended to be another big stretch? There were obviously some carve-outs, but the question is, do they go there or is the commentary that we’ve seen even today, this morning, start to really pull this back a little bit?

Walter Hamilton

That’s a great intro. So very quickly, Kellin, I want to stay with you, I’m going to ask Ed in a minute about the stock market and the economy. But just if there is real pain in either the economy or the market, I’m curious, how much stomach do you think President Trump might have for lasting or deep economic or market pain?

Kellin Clark

I would say to an extent, yes, there is some stomach for it, but I think as we’ve seen the last few weeks, largely that needs to stay within the bounds of the equity markets. When we find ourselves pushing the limits of fixed income markets, treasury yields higher and higher, the dollar weakening, we’re going to see a more cautious tone. That is really the thing that got the president to back off, that was largely led by Scott Bessent to say, you’re walking towards some areas that may be really hard to pull back here. And so I think something to watch for is the limits of pain that the White House and the president are willing to take.

Also, we are going to be dependent, I think we’re going to learn a little bit next week with members back. And they’re going to quietly call the White House and say, boy, we’re getting our head ripped off over some of these things, whether it’d be farmers in more rural states, manufacturing states, bases where the president did win, but we’ll call them purplish states. And does that start to affect the president’s other agenda pieces? Does that start to affect his ability to influence on reconciliation and this tax bill? Because it becomes a distraction for these other things that the president wants to do.

And by no means are they not paying attention to polls, the president does not want to lose House of Congress, which will slow his ability to move things. So if voters are clearly either publicly or maybe even privately in polling starting to show that we may be walking towards a place of losing the House in the midterms, whatnot, they may walk that back. But I will say, when I talk to folks now, the White House still very much feels like the public trust them and that some short-term pain is acceptable and that they are saying they want the economy to succeed. But if the narrative becomes too blatantly painful for everyday Americans, there may be some recalibration. And I think we’re already seeing that too much, we’re seeing it, whether it’s in the narrative, narrative or even the Powell narrative, you may have seen this week, the president basically insinuated, I don’t love where J. Powell is commenting on things, whether or not they would fire him, there’s a backing off of those things a little bit, is the smoothest word.

But I will say right now in Washington, if you said to me today, where are people in D.C.? There are two camps, there is definitely the camp who thinks, absolutely, this is part of the plan, we know what we’re doing, we know where we’re headed. And then there’s another group of people who are saying, that is not a sophisticated game of politics, that is a game of shooting from the hip, so to speak, and there is two very staunch camps that we’re seeing right now.

Walter Hamilton

Good, all right. I did see the J. Powell news and we are going to talk about that a little later. Ed, let me talk to you, I’ve got a pair of questions for you. First is going to be the stock market, second is going to be the bond market. Let’s start with stocks, we know that when the tariffs were announced on April 2nd, they were more forceful than the market expected, market fell sharply, the 90-day pause, they were recovered strongly, but only partially. And they weakened since over ongoing uncertainty. Give me your thoughts on the stock market, the economy a little bit, and put this all if you would in a little bit of historical perspective please.

Ed Gonzalez

Sure, absolutely. And thank you so much for having me, Walter, and it’s a great question. First, when I take a look at what I’m seeing on the news, what I’m reading online, what I’m reading in certain journals, I’m seeing a lot of people make claims of, X is definitely going to happen next, or Y is absolutely going to happen next, and they’re very sure about however this is going to play out. And my only advice to everyone here is that if anyone tells you they’re 100% sure about how this is all going to play out, they’re either a fool or a liar.

We are absolutely navigating a sea of uncertainty right now where there’s just a lot of questions about how we’re going to proceed. There are many, many unknowns. So the question is, how do you invest thoughtfully and how do you construct a portfolio intelligently in truly uncertain times? And I’ll tell you this from a historical context, we have been in uncertain times before, this is not the first time that we have seen uncertainty in the world, this is not the first time that we’ve seen changing global trade patterns.

Real quick, you asked me about the economy, I would certainly say and agree with some people saying the risk of recession has certainly gone up, but it’s not my base case. When I look before, I think the probability of a recession happening in the next 12 months is certainly still below 50%. You’ve heard some groups, J.P. Morgan has risen their possibility of recession, Goldman Sachs did the same thing, here at Capital Group, speaking to economists, they’d certainly say that it’s elevated.

But just looking at consensus, and the IMF updated its numbers just two days ago just about global growth and different economies throughout the world and they certainly revised some things down. But you look at global growth compared to where it was in January, still right around the same at expectations of around 2.8%. They did revise the U.S. down from 2.3% to 1.8%, Eurozone now at 0.8%, so slowing growth, and they specifically mentioned U.S. tariffs and uncertainty. But it wasn’t negative. And so I still think we’re seeing global growth here, maybe a little bit slower based on uncertainty, but not a clear sign or 100% sign that we maybe head into recession.

As far as portfolios, and we’ll get into more specifics later, this is something that we certainly preach at PCS all the time, but it’s about diversification, really truly be diversified and don’t try to make big bets on any certain sector or any particular part of the world. We find great companies everywhere. And I want to quote someone right now, so I want to quote Capital Group’s chief investment officer, Martin Romo, said this recently, “we are no longer in an either or market, you can’t just focus on one sector, one asset class, or one place in the world, today, it’s essential to pursue opportunities in growth and value, U.S. and international, large cap and small cap.”

Walter Hamilton

OK, good. On that diversification note, as we know, when the stock market historically has been volatile, place to go is the bond market, which has acted as a shock absorber, as a financial cushion of sorts. But the bond market lately has had its own volatility, the dollar has weakened unexpectedly and notably. These have been very unexpected and there’s been some talk of an end to the American exceptionalism trade, the supposed notion that U.S. assets are appealing because of our structural built-in advantages. Give us a sense of what’s happening with all of these and how they play into the whole picture, Ed.

Ed Gonzalez

So first, on the American exceptionalism, I certainly may be showing my bias here, but America is a wealthy country. We have an educated populace, we have one of the most productive workforces in the world and there is an entrepreneurial spirit in this country that should never ever be discounted. So I’m certainly not in the camp of, no, this is the end of American exceptionalism throughout the world. When it comes to the dollar, look, the dollar did go down unexpectedly and it was rather sharp. But just to put that again in context, I checked it this morning. The dollar index is right around 100. It’s down from 108 where it started the year. But we are simply back to where we were in September of 2024. And if you go back just to June of 2021, it was down at 90, so the dollar is going to have some moves up and down. It’s not going to stay exactly where it was and it had been moving up for quite a while. So to say that the dollar should always be moving up I think, is just not an accurate way to look at the currencies.

Now, in this particular scenario, when we look at just what happened, there’s definitely worry. Usually when markets are in turmoil, investors have fled to the safety of the U.S. dollar and U.S. Treasuries. That didn’t happen this time. In this particular case, there is a move into German bonds and if you look at international investors, they’ve also been increasing their exposure to Japanese bonds. And the other big thing that people have putting their money in, the ultimate safe haven for some people, has been gold. And so, we’ve seen a sharp move in gold. But what does this mean as far as our portfolios?

Well, when we talk to our capital group portfolio managers, I think there’s real opportunity here and a lot of the PMs think this as a big opportunity. So again, just one of the PMs that I was chatting with, one of our municipal bond PMs, Courtney Wolf, she describes it and she talks about, look, generating alpha in placid environments can be really, really difficult. It is much easier to try to find alpha for our clients and benefit our clients when there is a little extra volatility. And how do we do that? It’s taking the long-term view.

Again, going back to what I said in the beginning, if anyone promises you, they know exactly how this is going to play out, especially over the short term. No one really knows. But what you can do is when there are certain opportunities, if you take a longer-term view of three years, five years, eight years, there’s real opportunity. And at least right now, taking a look at municipal bonds, and again, talking to Courtney Wolf, there’s some really amazing opportunities. If you stay in high-quality investment-grade munis, go slightly farther out on the curve, a little bit more duration, getting 5% yields in investment-grade munis (BBB/Baa and above), we think over a three-year, five-year time horizon, that’s a fantastic place. So all this volatility is giving us opportunities.

Walter Hamilton

OK, terrific. Good stuff, Ed. Anne, let me talk to you, and I have one word, taxes. The extension of the Tax Cuts and Jobs Act, which was President Trump’s signature income reduction measure in his first term, was expected to be a highly visible priority in the opening stanza of his second term. If we had this webinar three months ago, it’d be one-on-one, you and me by ourselves. Obviously, tariffs have eclipsed that in the headlines. So my question is, what is happening with tax policy? Do we know the contours of the bill to the degree you know them? What are the potential obstacles, legislative or logistical and what do you think might be coming down the line on that front?

Anne Gifford Ewing

Sure. Thank you, Walter, and thank you for having me. Thanks to all of our clients who’ve taken the time to join. Yes, so the tax legislation is another big priority for President Trump’s second term. I thought I’d give a very, very quick overview of the Tax Cuts and Jobs Act that as you say, was passed in 2017 during his first term as president. That piece of legislation made a ton of changes to all kinds of tax rules both impacting individuals and corporations. A few of the highlights that touch our clients are the lifetime exemption amount was essentially doubled overnight. And as a reminder, it is at $13.99 million per person this year in 2025. The estate and gift tax rate was kept steady at 40% and a number of other changes were made. The standard deduction amount was raised quite a bit so that now, post-Tax Cuts and Jobs, far fewer taxpayers are itemizing, income tax rates went down for the majority of Americans and notably, the state and local income taxes, the so-called SALT unlimited deduction was removed and capped at $10,000.

So those are just a few highlights of the changes that happened in 2017 and that legislation, all of those changes, is scheduled to sunset, or melt away, go away, at the end of this year, at the end of 2025. So you’ve heard us talking in webinars like this in the past and in different written communications to our clients and I’ve had many one-on-one meetings with many of you on the call about, while we have these tax rules in place, are there planning opportunities that wealthy clients should be considering and possibly taking advantage of? Notably, different ways of making gifts using that higher exemption amount while it’s available before it potentially goes away.

So once President Trump was reelected, of course as you say, a big question became, OK, he doesn’t — we presume — want his signature legislation to sunset during the first year of his second term. What is he going to do, particularly now while he has the Republican majority in the Senate and the House? As we know, those are both slim majorities and so depending on the outcome of the midterm elections, now may be his only or best opportunity to get some kind of new tax legislation passed. And the overall sentiment is that he very much wants to see Tax Cuts and Jobs’ substantive provisions extended, made permanent if possible, if not built upon. And we heard some of the ideas that President Trump would like to see enacted during his campaign. Who could forget no income tax on tips, no income tax on Social Security income. There’s even been a recent proposal from the Senate for a permanent abolishment of the estate tax. So there are a lot of ideas out there that could hypothetically be added on to the Tax Cuts and Jobs Act.

So we seem to be progressing towards a tax bill. That seems to be pretty clear. We’re all confident about that. There’s also a fairly confident sentiment that whatever the tax bill is that the Senate and House ultimately can agree upon, President Trump will sign it when the time comes because he and others understand that this year really is their opportunity to get this done. So we’re in the first, maybe second chapter of getting there. The first chapter really looked like a debate between, well, the House had a view that all of the different priorities that the president wanted to pass, whether it’s this tax legislation, border security, immigration control, some energy policy, all of those things should be wrapped up in one bill, sometimes, referred to as the one big beautiful bill, and that they should do that because they shouldn’t take the risk of getting stuck on something and not getting the other items passed.

The Senate had an approach of breaking it up into two bills and trying to get certain of those things passed ASAP, as soon as the president was in office, and save the tax provisions in particular for later in the year for a second bill to give them more time to really negotiate and be thoughtful and get it right. So we saw some wrangling over that. We seem to have coalesced and I’ll let Kellin correct me since of course, as he said, these all change day to day, these things. But we seem to have coalesced around the House approach of one bill. Until very recently, it was looking as though they really were going to make a push to get that bill finalized by Memorial Day.

We probably all saw in the news the last few weeks that the Senate had approved a budget proposal and there was an understanding that everyone would like to get this passed before the summer recess, before the debt ceiling was next hit, likely sometime maybe in July or August, depending on the April tax receipts. And getting all this passed well before they had to deal with funding the government in the fall. I’m now hearing that, well, maybe it’s moving more slowly than they would like and so, maybe we’re now looking at more of a fall bill passage.

I think whatever does get passed sometime this year could take one of two forms. One form would essentially be an extension of the status quo of the Tax Cuts and Jobs Act. And I touched on a few of the things that are in the Tax Cuts and Jobs Act currently. The other possibility, the second possibility, would be a yes and extend Tax Cuts and Jobs, but add in some of those other things that I mentioned. Some of those hopes and dreams of raising the SALT cap, getting rid of income tax on tips or Social Security, maybe bringing back some of the itemizations. I just heard at the tax conference I’m at now that currently, only 9% of taxpayers itemize anymore, which is a big change from a few years ago. So it’s interesting. I think the obstacles are clear.

No Democrat is going to vote for this bill. And the Republican majority is so thin that they really have to bring everyone on board to vote for the bill that they arrive at. And we have some real divisions within the Republicans as to what they think this should look like. We have a bastion who are real hardliners on raising our national debt. And as an example, I was looking at what is the estimate of the cost just to extend the status quo version of the Tax Cuts and Jobs Act for 10 years. And several nonpartisan groups have estimated that cost at $4.5 trillion, with a T, and that would not include any add-ons like moving the SALT cap or taking away income tax on tips just as an example.

So it’s expensive and they haven’t agreed on what the pay-fors could be and there’s a lot of negotiation to be done there. Some of the proposals for pay-fors, to pay for that added cost, include a proposal that’s been floated to raise income taxes on those earning more than $1 million in a year and some other ideas like that. So it’s going to be interesting to see where they fall on. Do we just settle for extending the status quo and maybe that’s a victory in itself for the Republicans or can we do more?

Walter Hamilton

OK. Good stuff. Very thorough, Anne. And very briefly, we’re about halfway through and we still have many more questions to get to and I know that each client’s portfolio, personal situation is different. But just briefly, is there any general wealth-planning advice you’re giving on this front given all that you just delved into?

Anne Gifford Ewing

Sure. So briefly two things. An obvious question coming from what I just said would be, well, if they extend Tax Cuts and Jobs, how long might they extend it for? Because for many of our clients, that might inform how long do I have to make decisions about more wealth transfer opportunities? Of course, we don’t know, but the current guess that I’m hearing from many different quarters would be somewhere between two years to maybe four or five years on the outside, for a variety of reasons. Number one, it’s going to be expensive as you just heard. Number two, they know that the balance of power may change at some point, whether at the midterms or the next presidential election.

So realistically, anything that they manage to extend is probably not forever. So what does that mean for our clients? Number two, please do engage with your team, your Private Wealth Advisor, Ed, me, our colleagues in the wealth advisory group. We really want to be thinking and be thoughtful and not be making any last minute scrambling decisions about should I make more gifts? Should I transfer some assets while valuations may be a bit diminished? We want to have a plan in place. You can then take your time to decide whether to pull the trigger. But coming up with the plan really takes time to have it be thoughtful and a good individual fit for you and your family.

Walter Hamilton

OK, terrific. Thanks, Anne. Kellin, let me turn it back to you and tariffs for a moment. And really, so much of this is about China. We see at least publicly in their statements, both the U.S. and China, both seemingly dug in. So my question is simple, what odds would you place on a deal, a big one, a lasting one, etc., between the U.S. and China?

Kellin Clark

Yeah. Well, thanks, Walter. The China question is really an interesting one in the sense of a couple of things to note. When you talk to some folks here in Washington, particularly around all the tariffs right now, they will tell you all of this is an end goal to get at China. They will say the whole ballgame that you’re seeing, the whole grand politics scheme, is to specifically get at China.

The other thing to remember with China is, China has been a punching bag for members of Congress for three years now. You’re going to be hard-pressed to find a single member of Congress who not either publicly and/or privately, that really won’t sort of throw some shade at China. It is in all of this, when you think about everything that’s going on. It is one of those rare places where you’re finding a lot of bipartisan bicameral interest in. Now, the approach and the tactics, there’s some skepticism around some of those, but the key thing to remember about them is that largely both parties are somewhat aligned in their skepticism, we’ll call it, of China. In terms of a near-term grand bargain, it seems unlikely to me. An easing of this game of chicken that we’re playing right now with each other, I think maybe, largely.

I’ve written and rewritten sort of commentary about this over the last two days, multiple times now because it seems like it’s changing by the hour almost. Going into last weekend, nobody was blinking. Two hours ago, the president tweeted that something to the effect of tariffs won’t be zero with China, but they’ll be significantly lower. I mean, lower from 145% is a pretty big deal. The stock market has today rebounded pretty nicely, largely I think that’s coupled with some Powell commentary, which I know will get. Then, Bessent was at an IIF event this morning and he hedged. He was throwing plenty of shade at China, but also acknowledging America First “shouldn’t be America alone,” recognizing I think that it is very hard to decouple from them. You cannot just overnight click your fingers and wish that everything that’s done in China is suddenly done in Indonesia or Bangladesh or Vietnam or whatnot. Places that we may be getting a little bit further, a little friendlier audience.

The president’s advisors have been starting to slowly push this narrative and this notion that China’s starting to come to the table, they’re not saying a whole lot. They’re not saying how and what, but they’re saying, “Oh, we’re getting phone calls. We’re getting conversations,” so obviously we’re not seeing a Xi-Trump interaction between President Trump, President Xi, but you’re starting to see the leakings of, well, we’re walking back and not necessarily walking back, but maybe we’re making some progress. More broadly, though, I expect the president to be able to negotiate deals with a number of partners, Japan, South Korea starting. Probably over the end of time, Mexico, Canada, Vietnam, Taiwan, India, places like that. I think the broad question on China and the EU seem more unlikely in the near term and the China case is even harder just because it comes with a whole host of other issues that aren’t as problematic with the number of our allies. Industrial subsidies can be a huge issue related to China that they’re not going to solve that overnight.

Also, to the point earlier, China remains a politically winning issue on both sides of the aisle. The longer everyone can seem tough on this issue, and then I’ll call the million-dollar question is whether or not some of these bigger-issue items require Congress to step in. And Congress has almost gotten there repeatedly in the last year and a half on a whole host of different bills and legislative things that they’ll probably have to also address if we’re going to get some grand bargain with China.

Walter Hamilton

Again, somewhat quickly because the answer could be forever, but in this game of chicken, do you sense one country or another having the upper hand? I mean, is China at a disadvantage because its economy is so export dependent, especially following its property crisis? Does it have strength because simply of the nature of its government and the hammerlock that Xi Jinping has on the political realm and he can just accept economic pain and play a waiting game? How do you see that briefly?

Kellin Clark

Yeah, I mean generally, I would say neither has an upper hand when two global superpowers are playing chicken with each other. I think from a data side, it’s probably fair to say that China is certainly more exposed than the United States is in terms of who’s willing, from a data perspective. In terms of a political perspective, who’s willing to accept more pain in a game of chicken? I think it’s hard to see that China’s tolerance isn’t higher than ours. I mean, I think at least publicly, again, we’ve not seen China back off at all. Obviously, the president started to back off, Bessent started to back off a little bit. Now, whether or not they’re backing off on the phone is a little bit of a different story and that’s what the White House is saying is happening. I think from public perspective, certainly China’s going to stand stronger in terms of their tolerance threshold publicly, maybe not so much privately is probably my view.

Walter Hamilton

OK. OK, Ed, let’s talk about the U.S. now, the U.S. economy and let’s bring the Federal Reserve into it. As you alluded to earlier, the U.S. has some clear core strengths, there’s no doubt about it. Low unemployment, positive wage growth, strong productivity, strong corporate balance sheets. A question mark is the Fed and whether the Fed will jump in. Normally, when the economy weakens, you expect the Fed to jump in, but there’s the inflation question and does it exacerbate inflation? Give us your take on the U.S. economy and where the Fed might go with interest rate cuts, how many when, so forth.

Ed Gonzalez

Yeah, absolutely. I think it is really interesting because you’re seeing people worried about the future because of the uncertainty. The IMF, as I mentioned, revised some of their growth expectations down. If you at where we are sitting today, just look at the real numbers today, as you mentioned, there’s a lot of good data points to point to. Unemployment is at 4.2% and below our 10-year average. We are seeing rising real wage growth above its 10-year average at 1%. The wages for the average American are rising faster than inflation. Productivity is rising. These are all good things. The other point is that some clients have asked me, there’s all this delay in the data and things could be falling apart right now and we wouldn’t know it for a few months.

To that, I really love to bring up the Federal Reserve has something called its Weekly Economic Index. They started it in 2019 specifically for that reason, they wanted more real-time data. They get a daily feed of things coming in and they publish it every week on their website. Just to give you an idea, fourth-quarter GDP was at 2.5%. The 13-week moving average for this Weekly Economic Index that they track, 2.5%. The very last reading that they published on April 17th was at 2.5%. The economy is, at least in the U.S. at this point in time, still looks good and looks quite strong. The problem is just worries about the future and all the things that we’ve been discussing about. The things that draw real concern is uncertainty over U.S. policy. Then, the other big concern is what is the response of other countries going to be to U.S. policy? For those of you who had meetings with me personally, I’ve said all the time, and you’ll probably hear this from other people, markets hate uncertainty.

When we take a look at something like business investment, how are businesses investing? We’ve got a data point on this in our current market update. When uncertainty is rising, like it is today, business investment in their own companies drops from 7.4 to 2.8%. People are holding back and this is discussions that some of our analysts have been having, that we’ve been having. We go to certain companies, I’m thinking specifically now of just the car industry, what’s going on? There’s questions about tariffs and there’s so much uncertainty whereas they’re saying, “Look, there are certain cars that certainly, we could build it all here in the United States. Currently we built some of it here. Some of it’s in factories in Mexico or around different parts. We could all bring it inside the United States. We could leave it the way that it is.” What are we doing right now? Nothing, because we’re just not sure where we’re going to end up with tariffs.

They’re not investing inside the United States, not investing in any factories outside. They are waiting and seeing. If this lasts for a shorter period of time, it’s not a huge deal, but think as Kellin alluded to, if this uncertainty persists, it could certainly put a weight on growth, weigh down growth. I think that’s what people are pricing into the market. Not that something is structurally wrong, but policy uncertainty is leading to people holding back. That’s the first thing.

You asked about the Federal Reserve. There’s certainly a lot of things changing in the Federal Reserve. There was some back and forth between Chairman Powell and President Trump that seems to be dying down at the moment. As we look at expectations, I just checked it today, the futures market is currently pricing in the Fed is going to cut rates three times or three 25-basis-point cuts as of today, but yesterday, it was four times. If you look at the Federal Reserve’s own summary of economic projections that they put forth in March, it was probably more like two times.

I think there’s just still a lot of uncertainty and the Fed is very open that as economy changes, they will update what they’re doing. I will tell you here at Capital Group when we discuss things and our economists discuss things, the Fed has two big mandates. They want to see full employment and stable prices and they have a target inflation of 2%. Right now, we have very strong employment, so we don’t see a spike in unemployment. We see a fully employed economy by their standards and inflation is still sitting a little higher than 2%. If you look just at the numbers, there’s no real reason for them to cut. If we see a true weakening in the economy, that may change things.

Walter Hamilton

OK. All right, good. Let’s briefly touch on Jerome Powell, which was the last question to add to my list of questions. It only popped onto the radar a couple of days ago with the clash between Jerome Powell and the president. Kellin, is there any realistic possibility or likelihood that the president would fire the chairman of the Federal Reserve or do anything else to undermine the independence of the Fed, which could trigger talk about uncertainty? What do you make of that?

Kellin Clark

Yeah, I’ll be short on this. I mean, there’s two answers to this question. There’s the “will he” and the “can he” answer to this question. On the will he, obviously, we’ve seen markets rebound a little bit today on reports that Bessent and Trump have sort of backed off of Powell. I think Bessent has really reiterated to him like you have a market that is iffy already on a whole lot of things. Upheaval at the Fed would potentially do as much damage as we’ve already seen and fluctuations that are flying all over the place on a daily basis and that politically, they probably can’t stomach that right now.

On the can he question, which is really a broader legal question. There is a case of the Supreme Court, it has not been ruled on, is Trump versus Wilcox, which is now on the court shadow docket, which would determine how much autonomy some of these federal agencies have. It is the timing of that. If it stays on the shadow docket, it could be ruled on at any day. If they actually put it on the regular docket, it could be heard in the next month or week or when they pull it up, pull public arguments up and whatnot. This decision would largely give a lot of clarity, I think to the can-he question, but I think in the short term on the, can-he question, he probably won’t given the court case that is pending. I think there are many who would expect if he did try, that Powell would actually be willing to fight it.

The most underlying thing in all of this is that Powell is due to roll off as chair, not as a governor, but as chair next year. I think Bessent is probably getting Trump to back up by saying, “Just wait. You’ve got the time. The market will not react in a way if you do it when it’s as part of normal course business, so just wait.”

Walter Hamilton

OK. All right, very good. Let me talk to you, and as I referenced at the outset, we got a great many questions from our clients ahead of time. A fair number revolved around Social Security and the outlook for Social Security. As we know, President Trump has pledged that he will not cut Social Security benefits, but obviously, Social Security has been in the headlines lately and not in the best of ways. Like other government entities facing DOGE cuts, the Social Security Administration has announced pretty large workforce reduction plans. It also had to back off a controversial plan to limit some transactions over the phone, which sent a fair number of people streaming to offices with lines there. My question generally is, what is your sense of Social Security? What questions are you hearing from clients?

Anne Gifford Ewing

Sure. I think I feel comfortable saying that I’d be very, very surprised to see actual Social Security benefits cut and I defer to Kellin on any kind of political insight there, but I’m hearing from many quarters that that would not happen. It’s such a zone of economy and the way most Americans plan for their futures. Certainly from our client’s point of view, I don’t know that a lot changes for them. Our wealth advisory group helps you to model if you take Social Security now versus later, what does that look like in your overall picture? As most people probably know, waiting usually means a larger dollar amount. Those payments and those dollar amounts and the benefits themselves, I really think are of a third rail that will not be significantly or if at all, cut.

What I could see happening just from a more practical logistical point of view is yes, we’re hearing about a lot of workforce cuts at a lot of federal agencies, including Social Security. It doesn’t take an expert to realize that might mean slower processing, slower decision making. For someone who’s already on Social Security and you’ve got that automated check coming, I doubt that’s going to change. For those who need to do some sort of transaction with Social Security, changing something, starting benefits for the first time, I think it’s reasonable to expect that there could be some delays to getting that done as compared to doing it a few years ago perhaps. Just being aware of that, building that possibility into your timeline. By the way, we’re hearing the same about the IRS, all kinds of just delays to getting responses from them, transactions done, etc. I don’t think that that observation is unique to Social Security, but I would bear that in mind.

Walter Hamilton

OK, very good. OK. Kellin, back to you. As I said, we’ve gotten a great many client questions and this one I’m going to read verbatim because I think it’s a real question that probably many people have in some form. And our client writes, “We have seen the Trump administration take punitive actions against various law firms recently. Is there any concern that the Trump administration might also target financial services firms for retaliatory actions if they disagree with a firm’s investment decisions, business practices or HR programs to strengthen inclusion? If so, is Capital Group doing any scenario planning to protect the business and clients?”

Kellin Clark

Yeah, I think this is a question that is certainly I think front and center for a number of people. And I think as the law firm thing has sort of unfolded, it’s gotten a lot of press and a lot of attention. Certainly don’t want to speak for them, but I would say more broadly in terms of sort of, we’ll call it the targeting of various different industries, particularly in the financial services world, this has been a ping-pong actually that’s been going on for quite some time now. We have seen this even prior to President Trump coming back for a second term where we’ve seen a number of House Republicans, we’ve seen Republican-leaning states really target a number of financial services firms over ESG and or various different climate things, or there have been a lot of issues with banks related to gun dealers and gun manufacturers after Sandy Hook and Parkland and things like that.

And so this is an issue that’s really been navigated a lot over the last two years, particularly on ESG. We’ve seen a number of Republican-leaning states ban financial services firms from doing business with them unless they change tactics or committed to various different things. We’ve seen this in Texas, we’ve seen in Missouri, we’ve seen in Oklahoma. But on the flip side of this too, we’ve also started to see more liberal states try to do the reverse of this. And frankly, this is an area where I expect us, Capital Group, but also a number of industries to have to navigate a world in which you have potentially a federal stance on something depending on who’s in the White House. Then you have states from various different political backgrounds trying to pull you in one direction or the other and it is going to get harder and harder to navigate this landscape.

You’ve got 50 different states, they have a lot of different opinions. You have a federal view on something for four years. Maybe that ping-pongs back and forth another four years. I will say specific to Capital, we have managed to stay out of the fray on a lot of this. We do a lot of education here in Washington about who Capital Group is, what we do as an investor, how and why we are investing in various different businesses and industries.

I think we’ve done a very good job of being able to portray to members of Congress on both sides of the aisle that we are always looking out for our clients, and our investments are based on where we think there are client opportunities and client returns. And we have largely stayed out of the political fray. We’ve, knock on wood, haven’t had our name called in any states yet so far to ban doing business with them. So, it is an issue we spend a lot of time on and I continue to expect to spend a lot of time on, but I think our message as a long-term investor for our clients is something that really resonates with members of Congress.

Walter Hamilton

OK, terrific. Very helpful. Ed, I want to direct a question to you, which in itself is a question that you often hear, which is whenever there’s a sharp decline in the markets, sort of the age-old question invariably materializes in some form of, “Is this time different?” I think what it means is have the pillars of the market or the economy or even the world shifted to such a fundamental degree that I have to, in some way, shift my portfolio in some dramatic way and to adopt a more defensive crouch, if you will? I think the answer is a forceful no for many of the reasons you’ve elucidated today. But I know you get that question. Tell us if you would, how do you address that question and answer that question when you yourself are asked it in client meetings?

Ed Gonzalez

Oh, it’s a really reasonable question because there’s just so much going on in the news right now and I think there’s a lot of angst and worry about all the changes. So, I do like to say, certainly this time is different because every situation is a little bit different, but that doesn’t mean the pillars of capitalism or our more economy are crashing down around us. So one of the things that I love to point to, it’s in this current market update for this quarter. We have a slide on this and it’s one that I’ve been sharing a lot and it’s just talked about how markets have acted through other times like this, other crises. It starts in 1987 and it just shows we have lived through the invasion of Kuwait and the first Gulf War, bird flu, the Ruble Crisis, 9/11, the great financial crisis, the largest pandemic the world has seen in a hundred years.

And through all of that, over this time period, the global markets were up 16 times. So, there will be problems, there will be crises that we deal with, but as human beings, we improvise, we adapt, we overcome. Companies adjust. Capitalism allows for that, and then we move into the next growth cycle. So, there’s certainly going to be ups and downs I would say to everyone. We are certainly experiencing a time of great volatility, but what that also means is there’s great opportunities within our portfolios and our analysts and portfolio managers are taking advantage of that. If you’re a long-term investor, and we all should be on this call, this is a great time to take advantage of those opportunities and allow the market and The Capital System^TM to do what it’s been doing for the last a hundred or so years.

Walter Hamilton

OK, good. I will let individual clients ask you and our Private Wealth Advisors in your meetings what some of those steps are. OK, we’re coming just about to the end here, Kellin, I’m going to give you the last word. And I guess the question would be how do you see the immediate future playing out? So I guess more than 45 minutes, but less than some indiscriminate amount of time, what might be the best- and worst-case scenarios? And just finally, what are you and perhaps all of us, what should we all be looking for in perhaps just the next few weeks as all this plays out in Washington?

Kellin Clark

Yeah, well thank you again everyone for joining. I think in terms of obviously best-case scenario, this all gets resolved in the next 90 days. That seems unlikely. Worst-case scenario, this escalates further from where it is right now I think. I think my view is sort of the market has somewhat in the near term sort of fundamentally misjudged Trump. I mean I think if you go back the last 18 months, the president had been shouting this from the rooftop. If you didn’t hear it, you just weren’t listening. I think the most important thing to remember that while he doesn’t want to hurt the Republican conferences too much, which certainly would stymie his ability to pass legislation in the second half of his four years. We can probably have a whole separate webinar on the debate of this commentary and the whatnot, but sans Constitutional change, the president is not running again. So he has less to lose.

When you are not running again, you have less to lose, and I think the president clearly has a stronger backbone than most politicians. He feels a strong desire to upend the government as we have sort of historically viewed it in the last we’ll call it 20, 30 years, and he feels his voters have asked for this. They’re looking for him to deliver. He is willing to accept certain levels of pain for this. Now again, if voters start to sour on him and that becomes more evident in town halls, in their polls, he will largely start to walk some of this back. But I think it’s important to remember his backbone is stronger than most, and his belief that he has leverage on this is pretty strong.

In terms of how they’re feeling, I would say they feel truly divided. It depends on what day you ask. Their conviction is strong within the administration, but it honestly depends. When I have conversations with people, there is a feeling that some of them are like, “Ah, we’re uneasy by this.” And then some of them are like, “Yep, we are exactly where we are supposed to be.” I think the most important indicator for folks in the near term on, particularly as we started this conversation on trade and tariffs, is whether or not we start to see progression with various countries to the degree that they start to offer non-tariff barrier things. That is going to be the most clear sign that they’re actually getting somewhere or whether or not they’re sort of in the wind.

I would continue to expect uncertainty for a while. And I would also expect as members come back, there are some big ticket items here to focus on, but I would continue to expect uncertainty from the administration and I would continue to expect Congress ... I said this before we started this to our group, which I always like to say. I would expect Congress to be exactly what it is, the world’s most powerful high school. They will wait till the last minute to do anything. They’re like teenagers who forget they have a paper in the morning. I would expect that on tax reform. I would expect it on China legislation. I would expect it on largely anything that involves the deadline particularly.

Think of Congress as nothing more than what you would expect, a bunch of teenagers. There are the cool kids, there are the bullies, there are the policy wonks and they will all wait until the last minute to do anything. And I think the other thing to watch among the Congress sort of administration angle is the dynamic between Republicans and Congress, and Anne mentioned this when we were talking about taxes, their majority is thin. It is very, very thin. And can they keep everyone on the same page? Can they keep people from getting picked off? Can they keep people from being looking the other way as constituents get louder and louder and how much does that start to affect them? I think that is going to be something that is really key and really important.

Then I would say maybe three things to take away, three things I think to follow and watch right now. I expect there will be a number of trade deals. How big they are and what’s in them and whether or not they’re getting across those non-tariff things included in those is going to be something to really watch. But I do expect something on that movement. As Anne said, I think they will get there on a tax bill as we finish the year. And then my sort of wild card in all of this, in terms of things to watch for in the next six months in Washington, is Fannie and Freddie. I think there is a massive effect on the housing market if they are to release those two from conservatorship. They are quietly working, not so quietly to get there, but it could be the largest IPO in history and that could be a huge, huge thing.

Walter Hamilton

OK, terrific. All right, well we certainly have plenty of fodder for our next webinar. We’re just about at the top of the hour. So, Anne, Ed, Kellin, if Congress is high school, I would like to thank all three of you for being the adults in the room for our discussion today and for sharing your thoughts. To all of you, clients and in the audience, thank you again for your time and your questions. If you didn’t get your specific question answered today, please do reach out to your Private Wealth Advisor because we would love to get everyone’s questions answered. Before we let you go, we have one last request of you please. A brief survey will appear shortly on your screens. We would greatly appreciate you taking a quick moment to fill it out. Your response provides valuable feedback that helps us shape all of these events. So, thank you again, all of you for being here today. We look forward to seeing you at our next event.