As the market continues to digest the ever-changing policies and headlines related to the economy, volatility (as measured by the VIX) closed at its highest level in nearly eight months. Whether it’s DOGE cutting spending or newly announced tariffs, uncertainty has the market cautious. One could argue, however, that this uncertainty is perhaps by design. Scott Bessent, the new Treasury Secretary, recently said the following: “The market and the economy have become hooked, become addicted, to excessive government spending, and there’s going to be a detox period.”^
Welcome to the “detox period.”
Bessent added that one of the primary goals of the new administration is to shift a large portion of government spending to the private sector (businesses). If achieved, the theory is to lower government spending (and money printing) while maintaining the growth of the economy through an economy less reliant on this spending. Whether this happens or not won’t be known for years, but out of the gate, and among other things, the uncertainty of this plan and execution has caused markets to sell-off in the short term.
Another hope of the new administration is to have lower interest rates across the board. With the national debt now greater than $36 trillion, and with nearly $3 trillion of debt that needs to be refinanced this year alone, higher interest rates continue to create a budget problem for the US.* In 2025, the government is expected to spend over $1 trillion (yes, with a ‘t’) just on the interest expense of this $36 trillion debt.** It’s one of the single largest line items in the national budget. Lowering interest rates is almost a necessity, but doing so while inflation remains sticky becomes the definition of the old cliché, “being stuck between a rock and a hard place.” The way they are trying navigate this “rock and hard place” is through a “detox period”, which is the nice way of saying they want the economy to slow down in the short-run so they can then lower interest rates and encourage growth through cheap debt.
What does a “detox” period look like? It sort of looks like the last 3 weeks in the stock market.
Time will tell how this all plays out. We anticipate markets to remain volatile in the short-term (the next 6-9 months). At that point, the new administration hopes that their “detox” will have taken place and the structural shift of a business-friendly environment will have replaced the previous money printing. We expect a bumpier ride than in years past as they look to make this structural change in the economy.
How this affects you and your portfolio is at the very top of our mind, and please reach out if you want to discuss this further.
^https://thehill.com/homenews/5182666-us-economy-government-spending-detox/