Trump's First 45 Days of Business

We recently sat down with Dominic Nolan, CEO of Aristotle Pacific Capital, to get his insights into the early days of the new Trump administration and the economic impacts, recent market action, Fed futures, and opportunities in fixed income. We finished with a random round of questions and personal reflection.

Market Performance: Total Return

Let’s start with the markets. February was a bit of a mixed bag with many U.S. stock indices down, but bonds ended the month higher. What happened?

I think President Trump is what happened. Jars are being shaken. February was the first full month of the Trump administration and they’re moving at lightning speed. The S&P 500 Index was down 1.3% in February, but still up for the year. The big move was in the Russell 1000 Growth Index, which includes the Magnificent 7. That was down 3.5% for the month and is negative for the year.

What about bonds?

Rates moved lower, with the 10-year U.S. Treasury yield dropping from mid-4% to around 4.25%. As a result, the Bloomberg US Aggregate Bond Index was up 2%. High-yield corporates were up 67 basis points, largely due to rates dropping and is up 2% for the year. Bank loans were pretty flat for the month but still up about 1% for the year.

Magnificent 7: Correcting?

Let’s jump to the Mag 7. So far, 2025 has been a much different year than 2024.

The Mag 7 has been an anchor on performance thus far. On average, Mag 7 stocks were down about 6% in February, with Meta the only one up year-to-date. What is also interesting is Nvidia, which I think is a barometer of what’s happening. In February, they had a strong quarterly beat, but their February performance was pretty muted on the outlook. For the S&P 500, performance has been largely driven by traditional names.

10-Year Treasury Yields Remain Range Bound

U.S. Treasuries fell in February with the largest decline in the last week of the month. What prompted that move lower?

Rates moved lower due to growth fears after moving higher due to growth optimism with President Trump coming into office.

Aristotle Funds' Economic Dashboard: GDP, Inflation, Jobs and Consumer Spending

What’s the current economic data telling us?

It’s flashing some warning signs. That’s something we haven’t seen in a while. It’s a bit unsettling to see the estimates from Atlanta GDPNow—which typically forecasts rates of growth above blue-chip consensus. It has gone in just a few weeks from real GDP growth above 2% to dropping to nearly -3%. I think the proposed tariffs are causing movement by accelerating inventory orders and holding off on future orders.

There are other warning signs. Personal consumption growth—which makes up about 60% of GDP and includes automobiles, furniture, food, gas, recreation, etc.—fell from 1.3% to zero. Real private fixed investment growth fell from 3.5% to basically to flat. That includes buildings, equipment, new home construction, and home improvements and typically makes up 10 to 15% of GDP. Taking those two indicators together, we’re talking about three quarters or so of the economic growth falling substantially. In addition, inflation is hovering between 2.5 and 3%. Inflation is a lagging economic indicator, and with the short-term strains we’re experiencing with the proposed and enacted tariffs, it could go either way. Finally, the job market is weakening and could worsen with cuts in the federal workforce.

Here's the bottom line. The narrative around the economy has turned negative. The narrative around inflation is uncertain. The narrative around jobs is negative. Personal consumption and savings are down. Given all that, the economy is signaling future weakness for the first time in a while.

Fed Futures: Accelerating Timing of Rate Cuts: Cuts Expected into July 2025

The Consumer Price Index (CPI) and Producer Price Index (PPI) both came in hotter than expected for January. Thoughts on the Fed’s next move?

I think the Fed’s dual mandate is going to be tested. Higher inflation argues for keeping interest rates higher for longer. But if we have a weakening job market, the Fed maybe in a bit of a conundrum. Right now, the market is forecasting one interest-rate cut for this year, but that projection is going to be extremely dynamic.

Trump's First 45 Days of Business: Current, Newly Enacted and Proposed Tariffs

Let’s move to our special topic. Vladimir Lenin once said, “There are decades where nothing happens, and there are weeks where decades happen.” The first 45 days of the Trump administration have been a whirlwind. Let’s start by looking at where do we stand on tariffs today with the acknowledgment that this is a very fluid situation.

President Trump has proposed 25% tariffs for Canada (excluding energy), Mexico and the EU. These are large increases and far more than the average applied tariffs by those countries on U.S. products. He also enacted an additional 10% tariff on China. As we’ve noted, this is a dynamic situation, so we’ll see how it all shakes out. But in the meantime, it’s created a good deal of uncertainty for the economy and markets.

Trump's First 45 Days of Business: Tariff Revenue More Than Doubled From 2017 to 2022; Will it Happen Again?

Do you see tariffs as a meaningful source of revenue for the U.S.?

I don’t. First, let me give you some context. In 2016 prior to the first Trump administration, tariffs generated about $45 billion annually. In 2018, after President Trump enacted additional tariffs, that number went to $51 billion. Now, it’s $77 billion. So even after Trump left office in 2021, the Biden administration continued the tariffs.

How uncertain is the ultimate size of the tariffs?

Very. The Wells Fargo Econ Tariff Tracker puts the revenue number somewhere between $77 billion and $400 billion. That’s a very wide range and gives you a sense of the uncertainty around what the impact will be.

What country will be hardest hit by the tariffs as proposed today?

If full enacted and maintained, Mexico would be hardest hit, They export $127.5 billion worth of goods to the U.S., followed by Canada ($78.5 billion), the EU ($61.8 billion) and China ($46.3 billion). Again, the real issue is no one knows how this is going to play out. And as you can imagine, when there is less certainty, there is more risk, thus risk premia increases.

Trump's First 45 Days of Business: S&P 500 Reaction Since the Inauguration

What has been the market reaction to all the tariff talk?

After President Trump’s inauguration, the S&P 500 had been up mostly between 1 and 2%, reaching a high of 2.57%. But in recent weeks with all the tariff news, the S&P returns since Trump took office have dropped to -6%. I think the market could snap back or dive further. It largely depends on whether we get clarity on what tariffs will actually be enacted and for how long.

Trump's First 45 Days of Business: Top 11 Agencies' Spending Increased by 50.6% from 2019 to 2024

What can you tell us about the Department of Government Efficiency or DOGE is doing?

This needs some context, in my opinion. Federal spending was up about 53% from fiscal year 2019 to 2024. The agency with the largest budget—the Department of Health and Human Services, which administers Medicare and Medicaid—had a 41.8% increase during that period. The agency with the second largest budget—the Social Security Administration—had a 38% increase, but remember you need to factor in an aging population, so more people are getting Social Security checks and Medicare coverage. Also keep in mind that inflation was up about 18% over those years. So, for example, the Office of Personnel Management’s 22.4% increase in spending was not too far above the inflation number. The increase for the Department of Defense was 26%, which was above the inflation rate but below nominal GDP (35% increase). We know there is inherently government waste and inefficiency, but from the standpoint of the actual spend, is it a gross overspend? I don’t necessarily think so.

On top of this, add the fact that spending such as defense, veteran affairs, and Medicaid are very hard to politically navigate. Take a look at the Department of Health and Human Services: $800 billion or half their budget is Medicare, and the spend on Medicaid is $600 billion. Things like children’s health care represent only 1% of that budget. So, the vast majority of the budget is Medicare and Medicare. Keep in mind that inflation has been very much accelerated by government spending, which one could argue was self-inflicted.

Trump's First 45 Days of Business: DOGE Reported Savings So Far

Is there low-hanging fruit that DOGE can recommend cutting?

There’s a piece of low-hanging fruit they found called USAID, which has a $40 billion budget or less than 1% of the federal budget. DOGE has already announced $15 billion in cuts with more to come. I think DOGE dug in and saw a lot of waste. They are also going after the Department of Education, which has seen a whopping 157% increase in spending between 2019 and 2024. Its budget is $268 billion, and DOGE says it’s cut $1 billion so far. It appears DOGE thinks there’s a lot more to be eliminated.

Explicitly, I don’t know if DOGE will really be able to move the needle with this monster budget—so far, DOGE claims its cut $105 billion from a $6.9 trillion federal budget. I think the implicit savings will be more meaningful than the explicit, or actual savings, DOGE finds. By implicit savings, I mean if you are adding extra layers of transparency and accountability into the government-spend process, that should lead to a more thoughtful spend. It’s going to be fascinating to see the psyche of how departments spend going forward. Overall, I feel okay with what they’re doing.

Trump's First 45 Days of Business: The Grand Plan

Why is there such a big push now to cut government spending as quickly as possible?

Extending the Trump tax cuts of 2017 would cost about $4.5 trillion over 10 years. Trump and the GOP also want to add $300 billion for border and defense spending. That adds up to
$4.8 trillion in increased spending.

And there needs to be offsets to this spending?

Yes. The GOP is looking to offset $1.5 to $2 trillion of that spending through budget cuts. The largest cuts now being considered—about $880 billion—fall under the House Energy and Commerce Committee, and most of that spending is Medicaid, which is administered by the Department of Health and Human Services. Cutting Medicaid is an extraordinarily sensitive proposal to a lot of Americans, but if you need to get to $1.5 to $2 trillion in offsets, you’re going to have to consider it—especially since about 80% of the federal budget is either non-discretionary spending or a political non-starter like Medicare.

Trump's First 45 Days of Business: The Road Ahead - Generic Effects on the Economy

‍

We’ve talked about a lot of moving parts put into play by the Trump administration. How do you think they will affect economic growth and inflation?

What’s on the market’s mind right now are the more immediate issues: Increased tariffs, DOGE cuts, a potential government shutdown and geopolitical tensions. Policy changes such as deregulation, immigration and tax cuts will play out over a longer time period. Of the pressing issues, I think the DOGE cuts and looming government shutdown are disinflationary. Why? Less spending. But less spending also means less growth. That’s why the market is adjusting to lower expected growth. You’re seeing rates go down and more downside equity volatility. Increased tariffs are short-term inflationary, and longer-term means slower growth. So the issues on the market’s mind likely slow growth and be either disinflation or inflationary. But that doesn’t lead to higher asset prices.

What’s happened in the first 45 days of the Trump administration has been extremely kinetic. There’s a lot of volatility, and the reason the markets are weakening is your risk premium is increasing because of all the uncertainty.

Fixed-Income Yields and Year-to-Date Returns

Time for our traditional random round. I’ll give you a word or phrase, you tell me what comes to mind. First one: Momentum unwind.

A reversion to the mean.

China stock rally.

Stimulus.

German bunds.

That’s defense stimulus, and a big break from tradition for Germany.

Bitcoin sell-off.

A risk-off indicator.

In-N-Out Burger moving their headquarters to Tennessee.

That’s heartbreaking to me. I’m an Orange County guy, and In-N-Out is an Orange County staple. They’re closing their Orange County headquarters in 2029, consolidating West Coast operations to Baldwin Park, and then putting their new headquarters in Nashville for the tax breaks, better logistics, etc. I get it, but it’s a bummer.

March Madness winner.

I’ll go Duke. Cooper Flagg is a beast.

Spring break plans.

A trip to Tokyo.

Let’s close with a personal reflection.

I’ve been thinking a lot about what’s happening with the DOGE effort, and why some people object to it. Is it a substance problem or a style problem? With DOGE, the substance is government waste, and the style can be perceived as obnoxious or an overreach. Substantively, I think what DOGE is doing is right for our government and the taxpayers, but the style by which they go about it can be debated. In other words, it’s not what you say, but how you say it.

Definitions

The 10-year Treasury note is a debt obligation issued by the U.S. government with a maturity of 10 years upon initial issuance. It pays interest at a fixed rate every six months and pays the face value to the holder at maturity.

The 10-year Treasury yield is the interest rate the U.S. government pays to borrow money for a decade.

The Atlanta Fed’s GDPNow is a forecasting model that provides a "nowcast" of GDP growth.

Bank loans (or floating-rate loans) are financial instruments that pay a variable or floating interest rate. A floating rate fund invests in bonds and debt instruments whose interest payments fluctuate with an underlying interest rate level.

Basis points, also known as bps, are a unit of measure used in finance to describe the percentage change in the value or rate of a financial instrument. One basis point is equivalent to 0.01% (1/100th of a percent) or 0.0001 in decimal form.

A bond is a fixed-income instrument and investment product where individuals lend money to a government or company at a certain interest rate for an amount of time. The entity repays individuals with interest in addition to the original face value of the bond.

The Consumer Confidence Index (CCI) is a monthly report that measures how optimistic consumers are about the economy, labor market, and their finances.

The Consumer Price Index (CPI) is a measure that examines the weighted average of prices of a basket of consumer goods and services such as transportation, food, and medical care. It is calculated by taking price changes for each item in the predetermined basket of goods and averaging them. Changes in the CPI are used to assess price changes associated with the cost of living.

A coupon or coupon payment is the annual interest rate paid on a bond, expressed as a percentage of the face value and paid from issue date until maturity. Clipping coupons refers to the practice of earning income through interest payments from bonds.

Duration is often used to measure a bond’s or fund’s sensitivity to interest rates. The longer a fund’s duration, the more sensitive it is to interest-rate risk. The shorter a fund’s duration, the less sensitive it is to interest-rate risk.

Fed funds futures is a tool used by traders and institutions to hedge or bet on changes in the federal funds rate, which is key to U.S. monetary policy.

The federal funds rate is the target interest rate set by the Fed at which commercial banks borrow and lend their extra reserves to one another overnight.

The Federal Open Market Committee (FOMC) is the branch of the Federal Reserve System that determines the direction of monetary policy and is responsible for raising or lower interest rates.

Fixed income refers to assets and securities that pay a set level of income to investors, typically in the form of fixed interest or dividends.

Gross Domestic Product (GDP) is the total monetary or market value of all the finished goods and services produced within a country's borders in a specific time period. The nominal GDP growth rate compares the year-over-year (or quarterly) change in a country’s economic output to measure how fast an economy is growing. Real GDP is GDP adjusted for inflation.

High-yield bonds are debt securities, also known as junk bonds, that are issued by corporations.

Investment grade refers to the quality of a company's credit. To be considered an investment grade issue, the company must be rated at 'BBB' or higher by Standard and Poor's or Moody's.

The Personal Consumption Expenditures Index (PCE) is a measure of consumer spending and includes all goods and services bought by U.S. households. Core PCE excludes the prices of food and energy.

Risk is defined in financial terms as the chance that an outcome or investment's actual gains will differ from an expected outcome or return.

Spread is the measurement of the spread of a fixed-income security rate and the risk-free rate of return, represented by treasury bonds. Spread income refers to the additional income from this difference.

Volatility is a statistical measure of the dispersion of returns for a given security or market index. In most cases, the higher the volatility, the riskier the security.
Yield is the income returned on an investment, such as the interest received from holding a security.
A yield curve plots the interest rates of bonds that have equal credit quality but different maturity dates.

‍

Any performance data quoted represent past performance, which does not guarantee future results. Index performance is not indicative of any fund’s performance. Indexes are unmanaged and it is not possible to invest directly in an index. For current standardized performance of the funds, please visit www.AristotleFunds.com.

The views expressed are as of the publication date and are presented for informational purposes only. These views should not be considered as investment advice, an endorsement of any security, mutual fund, sector or index, or to predict performance of any investment or market. Any forward-looking statements are not guaranteed. All material is compiled from sources believed to be reliable, but accuracy cannot be guaranteed. The opinions expressed herein are subject to change without notice as market and other conditions warrant.

Investors should consider a fund’s investment goal, risk, charges and expenses carefully before investing. The prospectus contains this and other information about the fund and can be obtained at www.AristotleFunds.com. It should be read carefully before investing.

Investing involves risk. Principal loss is possible.

A full list of holdings can be found at www.aristotlefunds.com and are subject to risk and to change at anytime. Any discussion of individual companies is not intended as a recommendation to buy, hold or sell securities issued by those companies.

Aristotle Funds and Foreside Financial Services, LLC are not affiliated with Pacific Life Fund Advisors LLC. Foreside Financial Services, LLC, distributor.