Macro Markets Podcast Episode 71: Midyear Outlook: Taking and Avoiding Risk in a Volatile Market and Uncertain World
Anne Walsh, CIO for Guggenheim Partners Investment Management, joins Macro Markets for a look back at the first half of 2025 and shares her outlook on the economy, rates, fiscal policy, monetary policy, and relative value. As we head into the second half of the year, the best approach to navigating the noise of market volatility is to stay focused on the long-term signals, which are positive for active fixed-income management
This transcript is computer-generated and may contain inaccuracies.
Jay Diamond: Hi everybody. And welcome to Macro Markets with Guggenheim Investments, where we invite our investment team to offer their analysis of the investment landscape and the economic outlook. I’m Jay Diamond, head of thought leadership for Guggenheim Investments, and I'll be hosting today. We're actually recording on June 30th, the last day of the second quarter, 2025. So the first half of 2025 is in the books, and it's been a six month period like no other for financial markets, for trade and fiscal policy and for geopolitics, among other things.
So what lessons can be learned from this highly volatile period, and what can we expect for the next six months and beyond? So here to dive into these questions is Anne Walsh the CIO for Guggenheim Partners Investment Management. Anne, welcome back and thanks for taking the time to chat with us today.
Anne Walsh: Thank you, Jay, and thank you to all of our listeners.
Jay Diamond: Well, Anne, I want to start off by quoting from a commentary you wrote in March of this year titled Don't Let Policy Volatility Overshadow Market Opportunity. Now, there's a link to the piece in our show notes if anyone wants to read it, or you can find it on our website. Now in this piece, Anne, you say that in your decades in the investment management business, you had, quote, rarely seen such a confluence of political and policy uncertainty, unquote. So take us back to what you were thinking about at that time.
Anne Walsh: Well, I might even go back a little bit further, Jay, to fall of 2024 and the time of the election. And so what we've seen is almost two markets that have developed out of whether you're talking about a timeline before the election or after the inauguration. And those timelines colored my thought processes when I wrote that piece. So if we go back when President Trump won the election, immediately the markets had a what I would call a relief rally.
And why do I call it a relief rally? Well, because it was evident at that point in time that at least as far as the markets were concerned, that tax policy would be along a trajectory that was beneficial for the markets, that there would be an extension of the Trump tax cuts in particular. And the market really reacted quite positively to that expectation. And along with that, the benefits of deregulation. So those are two of what I referred to as the four pillars of the Trump administration, key policy pillars. But notable for that, after the actual inauguration, the markets soured rapidly on the positives and began to focus in on the negatives, in particular, the other two policy pillars of the administration, trade and tariffs, which, of course, the administration moved rapidly to implement. And more on that in a moment. And secondly, of course, what I referred to now as reverse immigration and the expectation by economists that that would immediately have an impact on the cost of labor and the availability of labor going forward. So those were really key drivers.
Jay Diamond: So your advice at the time, Anne, was to stay focused and not to react to every piece of news that people received. So if I can quote from your paper one more time, you said that the policy agenda would, quote, make a lot of noise that drives volatility, but investors would be wise to focus on the signal provided by a solid U.S. economy, favorable disinflationary trends and strong credit fundamentals, unquote. So I would characterize this as a pretty prescient call, because very soon after you wrote that piece in March, we got the Liberation Day announcement that unleashed all the tariff turmoil. We got the big, beautiful bill. And geopolitical conditions worsened. So things got very noisy. But with all that noise, what were the signals that you were looking at? And how have you managed through this?
Anne Walsh: If I go back to when I wrote the piece as well, what else were we looking at? Well, we were looking at megatrends that were happening in the backdrop, regardless of the timelines that the administration was working under. So while the markets were, of course, focused on Liberation Day in April, what we really were thinking about were what are some of the megatrends that started before Covid, accelerated during Covid, and are actually being accelerated even further under the Trump administration? Well, reshoring of U.S. manufacturing, the buildout of energy, and the need for the energy grid to be expanded. Continued progress within our fuels and energy production, in addition to electricity and nuclear. Obviously, artificial intelligence and the buildout that is coming along with that. So there were a number of positive macro trends that were still happening in the background.
Additionally, the expectation was that part of the problem with the administration's rollout was the timelines and/or, if you will, the queuing of these major policy pillars. Because the administration really started post inauguration with the trade and tariffs discussion, so much so that the market focused exclusively on that, it almost completely forgot in terms of market sentiment, the opportunities for the other pillars. And let's talk about some of those as well. So first of all deregulation. This is particularly going to be positive in the shorter run for the financial services industry. And then of course energy. Further the market's discounted the impact suddenly of the tax cuts. Well now that's front and center in our headlines as the big beautiful bill works its way through the House and the Senate. And while I anticipate that it will still continue to go through some evolution before its final passage, we do anticipate that the bill will be passed here sometime, probably in July. Whether or not it makes it by the preferred date of July the 4th, I don't necessarily think so, but it will be coming pretty soon, and we can expect that the tax cuts will be made much more permanent as they get extended for years. So there's a lot of good information, i.e. signal with all the noise of the headlines. But we have to move beyond market sentiment, both in equities as well as fixed income, to get to where we expect the markets will end up by the end of this year.
Jay Diamond: So I don't want to spend a lot of time looking backwards. We are going to look ahead as we continue to chat here. But what, if anything, surprised you about the first half of 2025?
Anne Walsh: I think what maybe hasn't surprised me, but maybe an observation that as I think about the macro backdrop and I think about the trends that are in place. One thing that really hasn't surprised me has been that we remain in a trading range in fixed income, in particular on the ten year. Yes, as a result of Liberation Day headlines, we saw a selloff in fixed income but still within that range. And today, as we sit here on the 30th of June, we're looking at about four and a quarter yield on the ten year. And so that range that we have been in now for two and a half years, somewhere between the mid threes and the mid fours continues. So that didn't surprise me, and that's something that appears to be continuing and we anticipate will continue through the end of the year.
One area of the actual economy, however, and of course this is driving Fed policy as well, that we make an observation about and that is the resilience of the consumer and the resilience of the labor markets. So for all the concern that economists had, again, with regard to the fourth pillar of the Trump administration, immigration, with all the expectations that labor costs would suddenly drive up and that there would be a significant shortage of labor, that hasn't really evolved or developed in the way that I think most observers thought would happen during the course of the first half of this year. But it's a much longer process and a longer term trend that will have impact, I think, as we go through the Trump administration's full four year term.
Additionally, an area that we're watching closely has been the weakness of the US dollar. If I had to pick one area that is a probably one of the most I wouldn't say concerning necessarily, but one area that we really need to watch as we are realigning economic interests around the globe, particularly around and through trade and tariff policy. The weaker dollar really is a bit of a surprise, because it shouldn't have happened in the level that it did. Now, the dollar was so strong that it had room to weaken. But I think the speed with which it weakened and the sentiment around it, which continues to be oriented towards a further decline in the US dollar relative to other major developed currencies, that is an area that, given our high level of interest rates relative to other economies, really shouldn't have occurred in the way and rate of speed with which it did. So the dollar is a storyline that we're continuing to watch pretty darn closely. Our expectation, just to give you a sense of it, is that we're probably going to see a little bit more weakening. But given all the other macro comparables and purchasing power parity analysis, I would not anticipate that the dollar should weaken precipitously further from here.
Jay Diamond: And why do you think the dollar did weaken to the extent that it had?
Anne Walsh: Well, I believe that sentiment was a big part of that. And that is concern because of the trade and tariff policies that suddenly there was going to be a challenge to the reserve currency status of the US dollar. I do not have that in our base case. I certainly don't even have it in any kind of a tail scenario at this point in time. 70% of all transactions around the globe are conducted in U.S. dollars, and so it continues to have a very important role, and we anticipate it will, because there doesn't seem to be any evidence of any other currency that could fill the spot. Plus, the US economy is the most liquid and the most dynamic around the globe.
And so American exceptionalism, I'll put that term in air quotes, I think for a moment took on two different meanings. The meaning that I tend to think of is that the US markets are liquid. We have a rule of law. We have SEC oversight. We have an orientation towards capitalism which supports the capital markets in the US and continues to support American exceptionalism, and that the dollar would remain the reserve currency. For a window of time earlier this year, American exceptionalism suddenly meant the US stock market would go up endlessly in double digit levels. And when that particular interpretation then was questioned, I believe along with that came fund flows out of the US stock market and into other markets, particularly developed economies in Europe and in Asia, particularly for listeners, the EU markets and Japan. And as a result, I think that had contributed to the pull down of the US dollar.
Jay Diamond: A terrific look back, Anne, but let's look ahead now. To paraphrase Heraclitus, who said that the only constant is change, I think now the watchword is the only constant is uncertainty. The situation is still very fluid. The Israel-Iran conflict has sprung up in the last several weeks, and it's caused consternation, particularly in the oil market. The debt ceiling is approaching. There's still a lot of moving parts. What is your advice that you would give investors today?
Anne Walsh: Well, like I told investors back in March, which was to look for the important and relevant investment signals. I would also say that we should have learned quite a bit during the Trump administration the first time, so Trump 1.0. I tended to refer to President Trump as the Disruptor-in-Chief, and he has a desire to disrupt quite a number of our current policies and systems that we have in place in order to effect change going forward. This creates a bumpy road for investors. The words for the year, both last year and this year and I expect probably next year will be volatility and uncertainty. And I think that given the fact that the Trump administration believes that they have only about 18 months left in a timeline before the midterms to try and enact a tremendous number of policy changes and to reorient the government, which we haven't even talked about Doge, but Doge is still working, and the desire to reduce government bureaucracy and waste is still there.
[A]s a result, this what I referred to in the past as the badminton between politics and policy, whether that's geopolitics, trade tariffs, government reorientation, you name it, this is going to continue to create uncertainty and volatility with pretty much every news cycle. It's going to live in our heads 24/7. And investors need to think about bigger macro trends and to look beyond the short term. Stay focused on those longer term signals. And by the way, those signals continue to be very strong for U.S. fixed income as well as for U.S. equities. Although now that we've round-tripped it from the lows that we saw in April in the stock market, and now we're back at highs, I would say that we are priced for perfection in U.S. equity markets. And I'm cautious there because of the high level of P/E valuations that we see. And I would be thoughtful with regard to some risk there for a potential sell off, but only because of the elevated valuations and the lack of any risk premium in equities.
Jay Diamond: Anne, let's stay with a point you made about the longer term signals are positive for fixed income. What are those signals and what is your outlook for fixed income?
Anne Walsh: Back in 2022 when the bull market for bonds ended and we started to actually get paid a level of nominal yield in fixed income, relatively speaking, particularly when compared to pre-COVID years, we'll call it the post GFC, pre-COVID years. That was a tremendous benefit. At that time I said we finally put the income back in fixed income. Fast forward to where we are now and the story is even better. Why? Because inflation has come down so much that investors are actually earning a real rate of interest just to be in Treasurys. And we're getting a term premium to hold those Treasurys. Add in spread sector yields and suddenly you've got a recipe for a pretty attractive fixed income market compared to the ten plus years before Covid.
Other elements are that we came into this cycle with very strong corporate balance sheets, and the quality of fixed income issuers has been very high. And in fact, we've seen a lot more upgrades than downgrades. Now, I would caution investors that there are two markets and maybe there are two economies. And this is an observation that we've had, that the economy is bifurcated and the bifurcation is that the weaker consumer and the small and mid-sized businesses that are subject to bank lending have suffered quite a bit because they are much more interest sensitive than the other part of the economy. And that's the high end earner or wealth class and larger companies. But those larger companies where we're actually investing. And I would say that with regard to corporate credit, it remains high and it's substantially of quality while spreads are tight relative to history. Again, you're earning that real rate of interest and a very attractive nominal yield relative to prior periods. So unforeseen events could occur, but absent those, I think at this point in time, our outlook for investment grade and high credit quality high yield I think is very, very strong. And let's not forget structured credit. Structured credit opportunities remain very attractive. And the yields there are quite compelling.
Jay Diamond: What kind of yields are we talking about for investment grade corporate structure credit right now.
Anne Walsh: Well depending on where you are in terms of maturity and quality I would say you're anywhere from, you know, mid 5% all the way up to 8% for higher credit quality, high yield. And that's quite compelling and very attractive for investors.
Jay Diamond: As widely expected the Fed left its policy rate unchanged at 4.25 to 4.50% at its June meeting. Did you agree with that decision. And what do you expect from the Fed as we go forward?
Anne Walsh: I understand why the Fed held rates yet again in this extended pause, but I believe that the Fed has room to lower rates. And let me express a number of reasons why: They're very concerned about the reemergence of inflation as a result of tariffs. Our view is that increased amounts of tariffs and let's say where we are right now, we came into the Trump administration having on average, our tariff was around 2.5% across the board. Now it's around 13%. And we think that's probably about where it will stay. The assumption is that that creates an inflationary environment. However, my thought process is, is that it actually creates a recessionary environment. And along those lines, we really haven't seen inflation reemerge. If anything we're seeing the downward trajectory continue, i.e. disinflation continues. Now the Fed has said, well, we want to wait to see if there is an impact from tariffs on inflation before we take the next steps.
Interesting enough, when they started last fall in 2024 to lower rates, they were compelled to do so by the rapidly decelerating economic picture, particularly reflected in their own Beige Book. Fast forward to where we are now, and the Beige Book shows a similar slowing pattern, even from where we are, and yet the Fed is more concerned about inflation reemerging, instead of recognizing that the disinflationary trend is still there. Now, don't take my word for it, their own models suggest that, and in the past the Fed has been very model driven. The Taylor rule allows for us to see 50 to 75 basis points of further cuts at the short end—again, just to get to neutral, we're not suggesting any kind of stimulative behavior here, but just to get to neutral. And so as a result, I think that the Fed has room to cut. I believe they probably should have started a 25 basis point cut cycle here at the last meeting. Now, I took that position and subsequently both Chris Waller and Mickey Bowman have since subsequently also suggested that they, too, could see a 25 basis point cut, potentially as early as the July meeting.
So they are also looking at that Taylor rule model, I think, to get some guidance. Our thought process on this has been pretty consistent for the entire year. And actually our base case was for 2 to 3 cuts this year. And then more to come in 2026 as the economy continues to come off the so-called proverbial boil. And we anticipate that the growth will continue to slow, labor markets will continue to come into further equilibrium, and so as a result, I think that we could continue to see this downward trajectory in rates, which will be a very good thing for the interest sensitive parts of the economy.
Jay Diamond: Now, the president has taken an aggressive stance, as is his wont, towards the Fed's execution of monetary policy, saying, among other things, that Fed Chair Powell is, quote, too late and that rates should be 200 basis points lower, and that if the fed funds rate were lower, the interest expense on our federal debt would be lower. So what's your take on all this?
Anne Walsh: Well, there's several elements here at once. One, yes, if we were to see 200 basis points lower in rates, we would see a much lower federal cost of interest. And that's a good thing because frankly, we are experiencing a tremendous amount of fiscal deficit spending for which we have to borrow copious amounts of money at higher rates to subsidize. Having said that, our friends in Washington, D.C., tend to not think about saving anybody any money. And we are seeing in the big beautiful bill, frankly, that there's not enough fiscal restraint. So deficit spending will continue. So mathematically speaking, yes, President Trump is correct. But having said so, again, what is the Fed's role here? The Fed's role is to manage within their dual mandate, the dual mandate being stable prices and stable employment.
And again to get to that target of neutral, I'll go back to the Taylor rule. The Taylor rules suggest 50 to 75 basis points of cuts, not 200. And I think it would be precipitous on the Fed's behalf to try and lower rates that rapidly.
Another point here is the Fed's independence. Now the Fed is not a truly independent government entity. It is an entity with Congressional oversight. But it is not executive oversight. And so their independence and credibility are something that's very near and dear to particularly the Fed chair’s heart, but also to the Fed in general. And so they want to ensure they're adhering to their dual mandate and remaining very much an independent entity from the executive branch. Now, President Trump isn't the first president to browbeat the Fed Chair, and he probably won't be the last one. But at the same time, the Fed is only off pace, in our view, by about 75 basis points, not 200 basis points.
Jay Diamond: So Anne, you referenced something about fiscal policy, which is something of course, the Fed does not control, which is a problem. So let's focus on that for a moment. What is your thought process on fiscal policy situation in our country?
Anne Walsh: Well, I think this is important to tag along with the last question with regard to 200 basis points of rate cuts. We have another element, and that is the term premium that is being demanded by investors in order to buy U.S. debt, because the fiscal spending is so profligate at this point in time. And so many of those in Washington, in Congress in particular, had seem to have been bought into the concept of modern monetary theory, which to distill that into a soundbite, basically is just you never pay your debt back. And there's a serious number of investors and/or a few in Congress that believe that you have an obligation to at least pay some lip service to wanting to pay the debt back. And since that isn't the way our friends in Washington operate right now, that has led to a requirement by investors that they get paid a risk premium for US debt.
And so fiscal policy, in my view, is really quite unsustainable at $2 trillion of deficit spending a year, that has to be financed with debt. Now, I haven't yet heard of a better way to reduce that deficit spending than to actually just cut spending. And as long as that isn't happening, then the actual rates market will continue to act in a vigilante-like way to keep rates high. So the Fed can do part of this by lowering rates at the short end to neutral. But the rest of the cost of capital for the U.S. government is because they simply won't stop spending. And I heard it said recently, and I was rather amused by this, which is I have always said that they're spending like drunken sailors, except this time the drunken sailors are spending your money, not their own. So I think that we have a lot more that we can do to try and support those fiscal hawks in their efforts to try and lower spending in Washington.
Jay Diamond: So Anne you talk about a term premium, which is important, but let's talk about spreads, which is a little bit different. In credit markets, the spreads of corporate debt and structured credit are hovering near record tight despite a slowing economy. How are you viewing the credit markets right now?
Anne Walsh: Well I think there's two elements going on. There's just basic supply and demand. Corporate issuance is actually down year over year. Now there are ebbs and flows, and there are some windows of time where it seems like there might be higher levels of issuance. But relative to the demand, what we're seeing is that there just simply isn't as much volume of corporate credit being issued relative to history. And so as a result, that sets up a built-in strong level of demand for investors to purchase corporate credit paper. And that's kept spreads tight, except during that window in April, where there was a concerted selloff in both credit as well as in equities. Although the equity selloff was more extreme relative to credit.
What we're also seeing is that we came into this cycle, as I mentioned previously, with very strong balance sheets. In 2021, in particular, what we saw was the terming out of quite a bit of debt at very low cost for corporate America. And so as a result, what we saw was that there's a nice tailwind for the issuers relative to where we've been. So we came into this period of time with a wonderful tailwind on credit. And yes, we've seen a slight increase in loan default rates and a slight increase in bankruptcies…but from a prior low. And so as a result, on top of 2024 being a big year for upgrades from the rating agencies relative to downgrades, we saw the entire credit market shift up in credit quality over the last, say, couple of three years. So what we're seeing is a small change on the margin. We tended to avoid the lowest credit quality strata in the past when spreads get this tight because frankly, it makes sense to then go up in credit quality relative to that opportunity set. Because the risks of spread widening do exist and they exist more significantly at the lowest end of the credit rating categories.
Jay Diamond: Anne, thank you again for your time. I know how busy you are. So let's conclude our conversation by getting a little granular. Given all that we've discussed and your outlook going forward, how do you and your team approach portfolio strategy today?
Anne Walsh: Sure. Well, frankly, it's a good time to be an active fixed income investor at this particular time. But there are some caveats. There are risks in the market. There is uncertainty. There is volatility. So what we do is we look along a timeline into the future, paying very close attention to large macro trends. And what are those? Well, as I've mentioned we're in a trading range. But being in the trading range on the ten year is actionable. You can extend duration when you get to the higher end of that yield range, and you start to shorten duration when you get to the lower end of that range. All in yields are very attractive. Credit quality, whether it's structured credit or corporate credit or other spread sectors, is very appropriate for investors today. You're getting paid a risk premium, an inflation premium. And so that steady income is a real benefit to diversified portfolios, especially as one of the cautionary areas is the fact that we are really at the very high levels that we are in equities on P/E valuations. So the risk is higher in equities now. And so this ballast that can be provided by fixed income across any number of fixed income categories is a strong positive for investors.
We tend to like the belly of the curve, that 5 to 7 year maturity range. And while spreads may appear tight, careful credit selection and diversified portfolios is really the way to structure portfolios at this time. We believe that our specialized sector and industry knowledgeable investor team can identify these opportunities. We can be nimble while policy and politics play badminton during the course of the next half a year, and we can find various other assets also that make a lot of sense again with those macro theme backdrop. And that is infrastructure and real estate assets that make sense. Hard assets, private credit. All of the areas within fixed income or fixed income-like sectors can make sense in a diversified portfolio at this time. So honestly, it's a pretty good time to be a fixed-income investor. But with some caution, again, around equities.
Jay Diamond: Terrific. Anne, thank you so much for your time. If you could leave our listeners with one final takeaway, what would it be?
Anne Walsh: Well, maybe to repeat myself, be prepared for volatility and uncertainty to remain high. Geopolitics being what it is, markets being what they are. But stay focused on the longer term picture and again those macro themes. That it's a good time to be an active fixed income investor. And to enjoy the rest of the summer because I think the rest of the year is going to be very interesting.
Jay Diamond: I believe you're going to be right, Anne. So again, thanks again for your time. I hope you'll come again and visit with us soon.
Anne Walsh: Thank you, Jay, and thanks again to all of your listeners.
Jay Diamond: And thanks to all of you who have joined us for our podcast. If you like what you're hearing, please rate us five stars, which is how people find us. And if you have any questions for Anne or any of our other podcast guests, please send them to MacroMarkets@Guggenheiminvestments.com and we will do our best to answer them on a future episode or offline. I'm Jay Diamond, and we look forward to gathering again for the next episode of Macro Markets. In the meantime, for more of our thought leadership, visit Guggenheiminvestments.com/perspectives. So long.
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