Uncertainty about US economic policy has rarely been higher than in recent months. That has been destabilising for the US consumer and businesses.
Commodity prices are helping disinflation despite stalled progress, with US tariffs posing a risk while other economies benefit from easing.
All global assets except commodities posted positive returns over the past year, with Bitcoin, gold, and equities leading, though recent shifts in momentum raise uncertainty about the sustainability of recent stock gains.
Uncertainty is the enemy of economies and financial markets, in our view. Figure 4 shows that uncertainty about US economic policy has rarely been higher than in recent months. This has been destabilising for both US consumers and businesses. Given the central role of the US in the global economy, and the uncertainty surrounding its trade policies, the broader global economy has also likely been affected.
Psychologically, though, we may be adjusting. More importantly, markets and consumers are learning to expect frequent policy shifts, and this is beginning to influence how announcements are received. As a result, the Economic Policy Uncertainty Index has fallen recently. It is hard to sustain surprise indefinitely.
This adaptation is evident in financial markets as well. Fear gauges such as the CBOE VIX and ICE BofA MOVE indices have returned to more typical levels after the April spike caused by reciprocal tariffs and White House criticism of the Fed. While the panic has eased, we remain watchful. Volatility often spikes in recessions, and the economic backdrop still warrants caution.
After stalling earlier in the year, the path to lower inflation seems to have resumed, helped by falling commodity prices (Figure 8). Two main forces are at play here: concerns about the impact of US tariffs on global demand and OPEC+ increasing oil production. These factors have pushed prices down, contributing to a broader disinflationary trend.
Despite ongoing concerns about trade related supply chain disruptions, the New York Fed’s Global Supply Chain Pressure Index has not shown significant stress (also in Figure 8). This data, current through May 2025, could still reflect lagged impacts, but for now, conditions appear stable.
Note: Past performance is no guarantee of future results. Monthly data from December 2005 to May 2025. NY Fed Global Supply Chain Pressure Index tracks the state of global supply chains using data from the transportation and manufacturing sectors, as constructed by the Federal Reserve Bank of New York. It is shown as standard deviations from the historical mean. Source: Federal Reserve Bank of New York, Global Supply Chain Pressure Index, S&P GSCI, LSEG Datastream and Invesco Global Market Strategy Office
The US is one exception to the disinflationary trend. Tariffs may lift both producer and consumer prices, which helps explain why the Fed has not cut interest rates since December 2024. FOMC members have signalled they are content to delay further cuts until later this year. In contrast, falling commodity prices and a weaker US dollar should support disinflation abroad, allowing other central banks to continue easing (see Figure 9). We believe the Fed will move quickly once it begins easing again.
Over the past year, nearly all the fourteen global assets we track delivered positive total returns, except commodities. The strongest performers were Bitcoin, gold, and equities (both US and non-US). China outperformed, and our Overweight there helped, though we remained Underweight US equities. In fixed income, emerging markets led the way, another Overweight position for us.
The US dollar has been broadly stable over the past year, according to the Goldman Sachs Trade Weighted Index, but has weakened against several major currencies. In recent months, momentum has shifted. Since late February, more assets have posted negative returns, particularly private equity, commodities, and US equities.
Bitcoin and gold remain top performers, along with non-US equities, especially Japan. Government bonds have risen in relative performance, while the dollar has softened. Despite April’s market volatility, asset performance has remained surprisingly resilient. US equities rebounded in May, even as haven assets like bonds and gold lost ground.
The key question now is whether the recent outperformance of equities over government bonds, and the leadership of US stocks, is a true trend reversal or just a temporary relief rally. We believe the answer lies in the economic cycle. Unless global GDP growth slows meaningfully, we doubt defensive assets like government bonds and investment grade credit will lead.
Instead, we expect global economic acceleration in the year ahead. That environment should favour selective riskier assets, such as non-US equities and industrial commodities. However, we remain cautious on US equities due to concerns about valuations and the domestic outlook. We also see stretched valuations in the USD, gold, and Bitcoin.
Asset allocation is the process of dividing an investment portfolio among different asset classes, such as stocks, bonds and cash and so on. Bonds generally tend to be ‘safer’ investments than stocks and are, for example, seen as more defensive. Assets are allocated based on economic and monetary expectations.
Spreading the risk and number of potential opportunities across various asset classes, such as equities, fixed income and commodities. The aim of diversification is to reduce the overall risk of the portfolio.
Central banks can ‘tighten’ policy by raising interest rates. This is done to curb inflation or an overheating economy. After the pandemic, inflation rose as pent-up demand was released and supply chains issues were cleared. Russia’s invasion of Ukraine further spurred inflation due to higher energy costs. Central banks responded with a series of rate hikes, which is the tool generally used to moderate inflation.
When an asset is assigned Overweight, an analyst or investor typically thinks that it will outperform others in the market, sector, or model. Underweight is indicative of the opposite.
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