Payden & Rygel: Assessing financial markets amidst political change

January 31, 2025

Eric Souders, Director and Portfolio Manager of Payden & Rygel’s Absolute and Multi-Asset Credit portfolio, assesses what’s different about the new president’s second term and how that may affect financial markets.

A change in political administrations always brings uncertainty to the markets, and the re-election of Donald J. Trump to the presidency for a second time is no exception. It’s tempting to try to predict the future based on the Trump administration’s first term; however, we face a very different set of economic and monetary conditions this time around.

A strong economy built on robust labor markets

President Trump enters his second term against the backdrop of the strongest labor market in decades, with growth driven by wages that have grown by 4-6% annually over the last eight quarters. Wages are now outpacing inflation, increasing purchasing power for a wide swath of American consumers. At the same time, jobs are plentiful. Prime working age employment is at its highest level in 25 years.

Rates and inflation

The Fed paused rate reductions at its January meeting in response to still sticky inflation and continued economic growth. However, all sectors of the economy are less exposed than in the past to rate increases. Households have the lowest debt levels in decades, while corporate profits are robust relative to debt service. Asset prices are at all-time highs.

A shifting political and economic landscape

Over the last six months, economic and political conditions in the United States have shifted dramatically, a change that has taken place in three distinct phases.

Phase 1: At the September meeting, the Federal Reserve cut rates by 50 basis points, financial conditions eased, and economic activity improved.

Phase 2: In the November election, Republicans swept the house, senate and presidency. This boosted animal spirits, equities rose, credit spreads tightened, and financial conditions eased further, and the Fed cut again just days after the election.

Phase 3: At the December meeting the Fed cut by 25 basis points, but Powell took a hawkish stance and signaled a pause. This was a notable shift that highlights key incentive structures and supports our view in 2025.

The Trump effect: 2016 vs. 2024

The second Trump administration faces a very different set of conditions than they did in 2016. The president’s biggest challenge is not growing the economy, as it was in 2016, but in containing inflation, a hot button issue for voters in 2024. The Fed is also focused on inflation, as Fed Chairman Jerome Powell seeks to protect his legacy: a recovering economy without widespread price increases.

For these reasons, our view is that interest rates need to rise before they can fall, especially at the long end. Higher long-end yields will cause asset prices to cool down, demand to slow, and inflation to abate. This might mean a mediocre 2025 for equities and credit and a challenging environment for bond yields.

Portfolio positioning

• In this environment, we’ve reduced our exposure to credit overall.
• We’re overweight shorter-term securities and underweight longer ones.
• Within credit, we’re downplaying sectors that are especially vulnerable to higher rates such as commercial real estate and consumer credit. Conversely, we like investment grade corporates, bank loans, and parts of emerging market debt.
• All-in yields in fixed income are healthy but spreads are tight, and volatility is too low, and therefore security selection is key.
• Risk assets are richly valued, making them vulnerable if the new administration and central bank prioritize containing inflation over growth.

Eric Souders is a Director and Lead Strategist on the Payden & Rygel global unconstrained fixed income team with a focus on absolute return and multi-asset credit solutions. In this capacity he is responsible for oversight of idea generation, strategy implementation and risk management.