Above the Noise: Investing through ambiguity

“Neurosis is the inability to tolerate ambiguity,” Sigmund Freud once remarked. This observation is fitting as investors face a myriad of uncertainties across various domains — monetary, fiscal, trade, industrial, and geopolitical. And if you thought sports were an escape, you might be disappointed to learn that championships by Philadelphia teams have often occurred during bad years for markets — 1929, 2008, and 2018, for example (as if a New York fan like me needed another reason to root against them). It seems to me that ambiguity is leading many investors to feel both anxious about losses and afraid to miss the bull market.

But when has life ever been unambiguous? We are forced, in all aspects of our lives, to proceed with incomplete information. Did I know when I married my wife that I would never again fall asleep without the glow of her phone lighting up the room? I did not, just as I cannot predict the outcome of current trade conflicts. Yet, I’m happy that I carried on in my relationship with only fragmentary knowledge. I also suspect that I will be rewarded from maintaining my exposure to risk assets.

For now, we listen intently when the Federal Reserve (Fed) speaks. We wait with bated breath for the next inflation report. We refresh X (or Bluesky, or whatever the kids use these days) for the latest in the trade war sagas. Yet, we move forward with incomplete data, grounded in the belief that US nominal growth has remained strong and that the Fed stands ready to further lower interest rates if growth deteriorates. That feels like enough. Plus, markets tend to climb walls of worry anyway. 

Let’s keep those egos (rational thoughts) defending against our ids (instinctual desires).

It may be confirmation bias but…

…inflation is likely to remain at the higher end of the Fed’s perceived “comfort zone.”¹ As the chart below shows, the Institute for Supply Management's Composite Purchasing Managers’ Index (PMI) Input Prices survey has historically been a reliable six-month leading indicator of the US Consumer Price Index (CPI).² And it’s currently indicating inflation of around 3%.

Inflation at the upper end of the “comfort zone“ isn’t necessarily a negative sign. The market has already priced out all but one of the Fed’s rate cuts for this year.³ Instead, elevated but stable inflation can be seen as supporting higher nominal growth, which tends to benefit corporate earnings.

A noted indicator suggests inflation may remain around 3%

It was said

“I feel the president should have at least a say in there. I feel that strongly…And I think I have a better instinct than, in many cases, people that would be on the Federal Reserve — or the chairman.” —President Donald Trump⁴

This quote came from Trump when he was on the campaign trail in 2024, but the sentiments behind it remain top of mind for many — especially as the country parses the details of the White House’s executive order from Feb. 18, 2025, “Ensuring Accountability for All Agencies.”

All presidents try to influence the Fed chair. Let’s hope it never works. The independence of the US Fed is of utmost importance. If the market senses that the Fed has lost its independence, that could have significant implications on US inflation expectations, the US dollar, US rates, and US equity valuations.

Remember Richard Nixon and Arthur Burns? I wasn’t alive to witness their working relationship, but I’ve read about it in textbooks. Nixon seemingly flouted the norms of Fed independence to pressure Burns into decisions that were economically bad in the long run but good for Nixon’s upcoming election. I, for one, am not ready to go back to the stagflation 1970s. I don’t think I would look good in polyester leisure suits.

Since you asked (part 1)

Q: Why have European stocks been outperforming US stocks since the beginning of the year?

A: Ironic, right? Has anyone coined MEEGA: Make European Equities Great Again? I borrowed it from a colleague. For one, the bar was set low, and the European economy is surprising to the upside.⁵ Two, European Central Bank rate cuts are coinciding with improving sentiment.⁶ Our preferred leading indicators for Europe appear to be returning to their long-term trend. Three, aerospace and defense stocks have soared as the Europeans ramp up defense spending talks.⁷

Could Europe’s “existential moment” over Ukraine and the continent’s security be the beginning of structural change in Europe? Investors have been clamoring for common funds for joint investment, completion of the banking and capital markets union, and a more complete single market. Is this the moment? Fool me once, shame on you. Still, I’m staying tuned to this.

Since you asked (part 2)

Q: When would you get concerned about inflation?

A: I’m watching the 10-year US Treasury inflation breakeven, which indicates what markets expect from inflation. It’s been rising but has remained below 2.5%.⁸ I’d be more concerned if the 10-year breakeven breached that level, as it did in 2022. It would suggest that longer-term inflation expectations had become unmoored and would likely elicit a response by the Fed. For now, I too suffer from the higher prices of eggs and auto insurance but remain comforted by still-contained longer-term inflation expectations.

Phone a friend

The tariff uncertainty is unlikely to go away soon. Are you concerned that tariffs could end the current business cycle and result in a significant drawdown in US equities? I posed that question to Turgut Kisinbay, Chief US Economist for Invesco Fixed Income. His response:

“Tariffs are likely to lead to a more volatile investment environment rather than result in a bear market for equities. For one, the US economy has proven that it’s quite resilient. Two, tariffs have tended to result in one-off price increases rather than sustained inflation from tariffs. The central bank is likely to see through the one-off price increases, although it may delay the continuation of the easing cycle. If sentiment and business investment begin to suffer from trade policy uncertainty, I would expect the Fed to respond. Ultimately there will be select winners and losers, but I wouldn’t expect a broad decline in risk assets or a recession in the economy.”

I recently read that…

...the US is going to set up a sovereign wealth fund. Is that feasible?

President Trump signed an executive order directing the Treasury and Commerce Secretaries to develop a plan for a US sovereign wealth fund within 90 days. This indicates a serious consideration at the highest levels of government, but the plan’s success will depend on addressing challenges including funding sources. The US doesn’t have a pool of government savings to invest. The nation runs deficits, as I am reminded daily by concerned investors. It's unclear how it would be funded. Through taxes? Unlikely. Treasury bond proceeds? I thought we wanted to reduce debt. Tariffs? Perhaps, although not if they are being used as a negotiating ploy.

And how would it invest? Can we be sure that it wouldn’t distort capital markets? Would the government’s investment decisions put political pressure on businesses? There’s still a lot to learn on this topic. 

On the road again

My travels took me to Mount Laurel, New Jersey, to the Delaware South Jersey Merrill Lynch conference. I suppressed my disdain when the conference began with a rousing rendition of “Fly Eagles Fly.” Admittedly I chuckled when I learned the giveaway was a copy of Inner Excellence, the book that Eagles receiver AJ Brown was reading on the sideline during a playoff game.

My panel discussion on markets was followed by a presentation from Eric Maddox. Eric Maddox was a US Army Staff Sergeant and interrogator who played a key role in capturing Saddam Hussein in 2003. Staff Sergeant Maddox teaches empathy-based listening. He believes that by truly understanding and valuing the other person's perspective, you can create a connection that encourages open communication. It’s a lesson that we all could use.

On a personal note, we’re officially on the college visit circuit. Everyone warned me that my daughters’ childhoods would go fast. I wasn’t prepared for how fast. As they sang in Fiddler on the Roof, “Seedlings turn overnight to sunflowers.”