The Age of Uncertainty: Navigating Policy-Driven Markets as a Financial Advisor

Matt Enyedi [0:01] Welcome to If You Could with Matt and Taryn. I'm Matt Enyedi, and

Taryn Huget [0:05] I'm Taryn Huget. Hey

Matt Enyedi [0:06] Matt, how you doing

Taryn Huget [0:07] today? I'm doing good, a lot going on.

Matt Enyedi [0:09] A lot going on, in fact, I was thinking about it. It was just over a year ago today that markets woke up to something they hadn't priced in at all, not a recession, not an earnings miss. They woke up to the realization that executive policy was suddenly the market, that this single announcement, a single number, and a tariff schedule could move trillions of dollars overnight. Not because the economy had changed at all, Taryn, but because the decision had been made. That day was Liberation Day, and that was just the beginning.

Taryn Huget [0:39] Yeah, and here we are a year later with even more uncertainty layered on and now amplified by the conflict with Iran. I would say conditions have shifted almost daily with markets swinging on press briefings, headlines, tweets, and negotiation updates.

Matt Enyedi [0:55] Yeah, I feel like we're on the edge of our seats every day, but here's the thing I keep coming back to. Markets have always been uncertain. Economies have always been impacted by new variables that we hadn't considered before. That's always been the case. But what's new is the source of uncertainty, because it isn't economic cycles or consumer sentiment or earnings that are driving the uncertainty, it isn't actually uncertainty by chance at all. It may actually be uncertainty by design. A new policy environment that is intentionally unpredictable.

Taryn Huget [1:28] These are the moments when perspective matters most, really when cutting through the noise becomes essential, and that's why today, we've invited a familiar voice back, Chief Investment Officer and head of LPL Research, Marc Zabicki. We're gonna talk to Marc about what it actually means to do market analysis when the primary variable is singularly driven.

Matt Enyedi [1:53] Yeah, I can't wait to talk to Marc because this new question about how to go forward from here, when the honest answer might actually be, it just depends on what happens next.

Taryn Huget [2:04] Ladies and gentlemen, welcome to If You Could with Matt and Taryn. Let's get going.

Matt Enyedi [2:08] Let's go. Hey Marc, welcome back to If You Could. We're so happy to have you.

Marc Zabicki [2:14] Yeah, happy to be here, Matt. Taryn, how are you? Hey, doing

Matt Enyedi [2:17] Hey, doing good. Look, Marc, tariffs have moved from the front page to somewhere near the sports or arts page, because there is so much more going on right now in the headlines, from the Iran conflict to the ceasefire, to greater uh and broader geopolitical uncertainty. In addition to all of that, A whole new world order of policy. Something that I like to call the age of uncertainty. I really want to get your perspective here, because I think it's a perspective that isn't being shared or thought of enough. But before we go there, where do we sit today on tariffs and what do we see going forward with them?

Marc Zabicki [2:52] We stated, you know, a year ago roughly that we thought tariffs were largely a negotiation tool. It is policy and it's part of policy. You can see that, you know, coming out of President Trump's mouth as he deals with the Iran conflict. It wasn't a wholesale knock-on effect on inflation. The inflation was indeed shared across supply chain. It wasn't exactly the consumer's inflation problem to bear. And now we've got the question as to whether those tariffs are going. to be sticky or not based on court rulings and are we going to have to make good on, you know, the tariffs we did install on a go-forward basis. And it is a whole lot of uncertainty that the, the markets and investors, you know, have to deal with, and we, we still don't have all the right answers.

Taryn Huget [3:36] So as we look at the impact of tariffs on inflation, GDP, US manufacturing, and reshoring. I'm curious what effects actually materialize and what hasn't.

Marc Zabicki [3:48] Part of the, the tariff install or attempted install and certainly the negotiation around that was incentive for non-US manufacturers to bring production onto US shores. It was Incentive for production not to leave the US and I think that has led to some additional activity about production being brought back to the US or some companies making headlines agreeing with President Trump on building a facility here or there to manufacture this or that, including semiconductors typically technology, but there has been some positive effect of that. You know, I don't know, it's completely as positive as maybe the Trump administration would have you believe though.

Matt Enyedi [4:33] That's what I wanted to challenge a little bit, Marc, as you look at from 24 to 25, the trade imbalance stayed roughly the same. I think it changed by 905 billion to 900 billion, so not a whole lot of change there. China exports are at an all-time high, they grew by another 5% per year. They're just not coming to the US anymore, they're just finding new trading partners across the globe. And on the flip side, US manufacturing has struggled. It's continuing to climb. The ISM chair actually said, manufacturing employment is stubbornly stuck in contraction. So, what breaks us from those things and what changes?

Marc Zabicki [5:09] It took decades to install kind of this, you know, globalist mindset where supply chains could extend in all four corners of the globe, and, and I don't know that this is specific to the way Trump thinks about it. I, I think he's just trying to change that, right? So it's, it's going to take multiple years and And you probably will see it slow play in the data that you see here recently, and that's in fact been the case. So, I think it's gonna take more than just 2025 or 2026 to really see that. By the time we get to 2027 and 2028, do we actually begin to see more of that, and then thus do we get a new president installed thereafter. that changes the whole scenario up again.

Taryn Huget [5:51] I am curious whether the broader economy is becoming so disinflationary, you know, driven by AI and those expected productivity gains that some of these pressures just don't matter as much as we thought.

Marc Zabicki [6:05] AI in particular, I think is going to be disinflationary. I think Kevin Warsh, once he's installed as the new Fed chair, is going to argue that those are indeed disinflationary forces, and he's going to argue, at least we believe that productivity is going to be enhanced as a result of those forces. That's going to allow the Federal Reserve to ease policy. Somewhat, which is going to be a tailwind in the back half of 2026. The Iran conflict curtails some of that, but I, I think disinflationary pressures, higher productivity do kind of offset some of these other inflationary forces, however, short term or long term, kind of like oil prices today.

Matt Enyedi [6:46] And so I guess, Marc, you know, the conversation that you and I had a year ago, when the markets were in freefall, uh, and you called the bottom, correctly, and at the time, it seemed like the sky was falling a little bit. And now here we are a year later, and like I said, it's not only the top of the headline, I guess the question that I have is, do the tariffs even matter?

Marc Zabicki [7:06] They matter, but I, I think they're short term, and I think the market's telling you, frankly right now as we sit here, that it's willing to overlook the Iran conflict and look beyond that, uh, because the market is a, is a forward-looking mechanism.

Taryn Huget [7:20] Well, we know that the tariff conversation isn't going away. They do matter, and we know the Trump administration is likely to look for new ways to deploy tariffs. And Marc, I know you and your team. We are going to continue to cover this closely on the blog, on market signals, but I want to pivot us for a moment and rewind to February 27th specifically. At this point, tariffs were still being debated. Markets were volatile but functioning, and the economy was already navigating a layered set of uncertainties. So let's pretend that the conflict in Iran never began. What were you predicting in the economy and how were things looking then?

Marc Zabicki [8:02] We were actually predicting higher than normalized growth, call it a 2.5% growth rate with about 2.5% inflation.

Taryn Huget [8:09]  So then February 28th hits, the US and Israel launched coordinated strikes on Iran under Operation Epic Fury, and suddenly the whole world is upside down. What now?

Marc Zabicki [8:23] Then you have a lot of people, myself included and our team included, you know, trying to decipher, OK, what's going to happen? How long is it going to be an issue, and what are the real risks of shutting down access to 20% of the world's oil capacity. And then you layer on the action by the Trump administration around Iran, and then the fallout as it relates. to higher oil prices and the effect on the consumer with the midterm elections fast approaching, which common sense would tell you that the Trump administration's probably taking that into account and doesn't want to go into midterm elections with extremely high oil prices and a lot of conflict in Iran. So, he's probably incentive to bring it to a little bit of a close here. Now, we'll see how that looks. And I think that's, that's what's happening today.

Matt Enyedi [9:12] Yeah, and this is one of those hard closes though, right? Because both sides have a say in it. I did want to jump into this oil shock a little bit, Marc, and just get your perspective from a historical point of view, but also where we sit today, is we saw oil prices jump to $114 120 dollars a barrel at their peak, and they've since kind of metered down from there, and, and they kind of volatilely swing, almost daily, based upon whether the ceasefire holds, whether there's a negotiation. happening or not. And I guess one of the things I'm trying to understand best is you've got this massive transmission mechanism challenge with the closure or partial closure of the Strait of Hormuz. How does that spike or that shock flow through inflation, interest rates, consumer spending, corporate earnings, consumer sentiment, and ultimately, The financial markets.

Marc Zabicki [10:04] It's really a near term negative for all of the variables that you mentioned. So what travels through the Strait of Hormuz in terms of oil, effectively none of it comes to the US, but WTI and Brent and other oil prices are global oil prices, so it does translate into a negative effect here that has a negative effect on discretionary spending, negative effect on oil and, and certainly gas prices, that all runs the risk of dampening our expectations for US economic growth, and it has dampened our expectations in 2026 and it also raises our expectations. For inflation, the good news is when these type of instances take place in the market in terms of an oil price spike, they're typically seen as a short term effect that the market's willing to kind of look beyond and so far that appears to be the case again.

Matt Enyedi [11:00] Can I dive a little bit deeper into that because of the combination of studying the oil markets a lot recently, and being a big fan of the show Landman, I know a lot about oil now. But one of the things that I thought was really interesting is the difference between spot price and dated price. And spot price being what the oil or the commodity is trading at, and dated price being what people are actually paying for it. And because of the different freight and risk premiums given with the closure of the Strait of Hormuz, the dated price is actually significantly higher than the spot price, where we might see oil trading at $90, $95, $100 a barrel, what people are actually paying for it after all of those costs are incurred, might be $20 to $25 more than that per barrel. And so what I'm, I'm trying to understand is, is the market misunderstanding how much the price of oil has actually spiked based upon looking just at spot price.

Marc Zabicki [11:53] I I don't know if it's misunderstanding it. I think the economic effects in The Asia Pacific, where more of the oil is going from the Strait and the economic effects in the GCC area are a key worry for US investors. And what I mean by that is, are the economic effects a knock-on effect to asset prices such that it's going to make large institutional investors in the GCC. Or in the Asia Pacific region react differently based on the economic pressure that they're feeling. There's some definitive reality to that, and what they do with asset prices, whether it's Treasury bond prices or US equity prices, because they own both, has an effect clearly on our market. So I think that's That's the real effect and one of the reasons why the hope was that this was going to be a short term consequence, because the longer this lingers, and it's not over yet, the more question you have to raise about how international investors are going to treat the economic impacts that they see firsthand.

Matt Enyedi [12:59]  And how long do you think we can hang on. to these higher prices before it does change from a short-term phenomenon that the market can kind of glance past versus, it's truly gonna be impacting the kind of total outcomes of corporate earnings, etc.

Marc Zabicki [13:14] The short answer to that, Matt, as we sit here today, we're about right there. Listen, if this isn't fairly cleaned up with some firm clarity as to the path forward by the end of April, Then risks start getting perhaps a little bit out of hand.

Taryn Huget [13:30] Right now we appear to be in a holding ceasefire. The Strait of Hormuz is partially open. Markets have partially stabilized, but the range of outcomes is still wide. I want to walk through three plausible scenarios and what each one could mean for the market. So I'm gonna say them, but then we'll go one by one. The first scenario being lasting peace, a durable diplomatic resolution. Scenario B could be a forever war, the ceasefire collapses, conflict drags on, Hormuz stays impaired. And then there's scenario C, extended negotiations, something like the JCPOA process, prolonged talks, on again, off again pressure, years of uncertainty baked into the market. Let's walk through each of those scenarios and talk about how each of these could play out. So, first scenario, lasting peace.

Marc Zabicki [14:25] I don't know that we'll ever get lasting peace. My lifetime, peace from geopolitical tension, whether it's in the GCC area or anywhere, to be honest with you.

Taryn Huget [14:34] So scenario B, a forever war.

Marc Zabicki [14:37] I don't know that Iran can afford a forever war at this point, and it, it really, it's in the best interest of most parties involved to not see a forever war, you know, take place. Now, it doesn't mean it's not going to happen. It just means that Cooler heads are likely to prevail.

Taryn Huget [14:55] Well, then it's sounding like maybe scenario C, extended negotiations is where we're going to be, but I would also like your take on potentially a scenario D that we aren't even thinking about or talking about.

Marc Zabicki [15:06] This negotiation is not going to go on much longer, would be my guess, but in terms of negotiation with the GCC area. And the US or Europe or whatever it may be, that's a constant, and that's something, again, and we believe that investors have to factor in. Whether they stop today and say, oh, we're done negotiating, we've agreed on this, I think the back and forth and the headline risk associated with any of that is going to be ongoing.

Matt Enyedi [15:34] From tariffs to turmoil in the Middle East, there's always so much going on, but I think that's probably where I want to take us next is What does it mean as we step away from the tactical, or the moments of the day, and we think about it from more of a structural or secular sense, as to what does it mean for the next several years under this administration. And something that you mentioned that I thought was brilliant and and kind of prescient, which is that today policy is increasingly the dominant market force. And you've described this moment through the lens of the policy engine. Maybe walk us through what you mean by the policy engine.

Marc Zabicki [16:07] And actually, the policy engine was the subtitle for our, our December outlook, and we have thought in terms of the body of work at LPL Research that fundamentals themselves do not drive the market as much as they did 5 years ago, 10 years ago, 15 years ago. It's increasingly policy and policy risk. Policy we mean by monetary policy, fiscal policy, geopolitical policy are increasingly driving what goes on in the marketplace because as governments get bigger and Federal Reserve gets increasingly seemingly more powerful and it's looked at to extract us out of situations like COVID, like the Great financial crisis. It's become a little bit of a safety blanket that the investors, whether they be institutional or retail, constantly look to, frankly, to bail them out in some cases. Fundamentals have really kind of reached a back burner standing in policy and what's going on in policy and the give and take is what you have to focus on as an asset allocator to decide whether it's a good time to put money to work or not.

Taryn Huget [17:19] So let's talk about policy a bit more. You know, in the first year of this administration, policy has really moved at an unusually fast pace. You have the one big beautiful bill, fiscal package, significant deregulation, immigration, a new Fed chair, liberation day tariffs, and now a war in Iran. And really with the exception of the OBBBA, most of this is being driven by executive order, and which has been happening for the last 4 administrations, but we're seeing it even more so now.

Marc Zabicki [17:54] I think if you look back under Biden and Obama as well, and even the Bush administration. You are increasingly seeing executive order drive more and more policy. Trump perhaps is the epitome of that, but it's legal back and forth, and it's executive order that's really shaped policy here in the US for the last, you know, couple, few decades. And that's another reason why as an investor, you sit back and you ask yourself, OK, what risk do I want to put on the table in terms of my asset allocation, knowing full well that I could get up tomorrow morning, and a stroke of the pen could change the way I think about this or that, which is increasingly the environment that we're in.

Matt Enyedi [18:37] Do you see this continuing, and that's kind of the world we're gonna live in, is executive order, followed by litigation, followed by the Supreme Court trying to solve for it in a near-term solution set, but you can tell that isn't what they believe their mandate is. To be, and they want Congress to act.

Marc Zabicki [18:56] Spot on, Matt. I don't know how we back out of that, frankly, the constituents, the voters seems to have less and less power, frankly. I mean, we're told ever since we were in elementary school to go out and vote, go out and vote and go out and vote, and, you know, listen, I believe that, but it seems like that vote doesn't mean as much as it used to decades ago.

Matt Enyedi [19:15] When we're seeing the zigs and zags of the administration. And this kind of policy engine, the uncertainty may not be by chance, but that uncertainty is actually how policy is being written, in that the Trump administration wants people to be unbalanced, they want to keep people on their heels, so that they can create a confusion that gives them as many options as possible. And so while we might think Hey, this uncertainty is uncomfortable. It might actually be uncertainty by design.

Marc Zabicki [19:50] I mean, there's a certain way that Trump manages his affairs, that's far different the way from Biden did or Obama or Bush, etc. etc. And it's really kind of country first is the focus, right? Where people have, you know, now thought about their supply chains, now thought about, you know, do I trust my product. You know, coming from China, etc. and all the risks that may be associated with that. It is just a different way to manage the US government that people are just not used to because it hasn't been done this way before, at least in recent memory.

Taryn Huget [20:25] So, I can't not talk about midterms. You talked about it briefly at the beginning of this conversation, but politically, We're starting to see signs of potential change. You know, Democrats have performed well in special elections since 2025. And if that momentum carries, what does that mean for the second half of this administration? And what does it mean for the markets and how do our advisors play this?

Marc Zabicki [20:52] I think right now the administration looks like it's on its back foot in terms of its positioning. Ahead of the midterm elections, and we could see probably a shift in the House, at least. I think the unfortunate reality for the constituents and for investors, and you, you've got to just figure out a way to manage through it is that if the House switches hands or if the Senate switches hands or both, I think all policies are going to come on. heavy scrutiny and there'll be attempts at reversing some of them and the go forward policy of country first or bringing the means of production back onto US shores may be less than what people are thinking now. And then we have to figure out a way to digest that. So it's the 180 degree shift that occurs like every 4 years. Now we're just talking about it's occurring in this case, every 2, and you've got to Just be on your toes in order to handle that. But right now, it looks like the House is going to shift and, and perhaps the Senate as well. It really depends on how well the administration does at getting through this Iran conflict.

Matt Enyedi [22:01] Given what we've just talked about, does it really matter? Congress isn't pushing out legislation in a meaningful way, and the president has to sign anything. comes across his desk anyway, and he still has the right to use executive orders to get what he wants done. So does it even matter?

Marc Zabicki [22:15] I think it does. You would assume historically that a Republican president is, is perhaps maybe more business friendly. They are a bit less regulation. So let's assume that the Trump administration is exactly that. So, in a few months, time here, we may be talking about a Washington DC that is maybe not as regulatory friendly as it was, maybe not as business friendly as it was. So, as an investor, that causes you pause and makes you think about your allocations a little bit differently. So I think that's exactly what we're going to be faced with, if we do see a, a, a turn in, in the House or the Senate.

Matt Enyedi [22:52] Yeah, one way or the other, my prediction for what happens next is unpredictability. And if you think about where we are, where the noise and the signal are harder and harder to distinguish, where news feels like social media, social media feels like news, it's really tricky to figure out which direction. To go next. And you add in policy volatility, and markets that react to headlines instantly, and the noise becomes overwhelming. And like you said, the policy and the noise become the drivers of the markets, and much less so fundamentals, and it's just tricky for advisors and investors alike to be anchored to their long-term plans.

Taryn Huget [23:33] Yeah, and I actually think, Matt, that that was a perfect setup for the close of this conversation and our if you could question. So, Marc, you know, we've spent this whole conversation navigating uncertainty, tariffs, war, policy engines, and in a world where uncertainty is the policy, where the next headline. can move markets before a human can react, where the rules of investing that worked maybe 20 years may not work the same way going forward. If you could give one piece of advice to an advisor or to an investor, what would you tell them?

Marc Zabicki [24:11] The first thing I would say is that don't let politics decide your investment allocation. And along with that, you know, I would say that if I'm an advisor, in this environment, especially as it relates to AI, I think communication is going to set you apart from the typical advisor. So, make sure that the, the end investors always thinking about risk management, not necessarily when It's a good time to own equities or not own equities, but what are we doing in this policy engine regime that keeps us focused on risk management such that we're creating a portfolio that helps us navigate whether it's a Republican or a Democrat in the White House or whether we have geopolitical risk or no geopolitical risk. It's kind of like in search for that utopian portfolio that that is capable of kind of navigating all instances.

Matt Enyedi [25:09] In a world of uncertainty, it is incredibly powerful to have the steady hand of LPL research and Marc Zabicki on our side and helping us through it all. And so Marc, thanks again for joining us today. It's been a delightful conversation.

Taryn Huget [25:25] Yeah, thank you so much, Marc. Thanks for being here.

Marc Zabicki [25:27] Well, thank you, Taryn. I appreciate it, Matt as well. Always a delight being with you both.