As a new administration takes the helm, we believe investors should stay focused on the economic metrics, not political theatrics.

The fast-approaching inauguration of U.S. President-elect Donald Trump on January 20th represents a critical juncture for policies which will shape the year ahead. And yet, as political noise intensifies, we believe investors must renew their focus on the evolving picture of economic indicators that will likely drive macro views and portfolio positioning.

Coming into 2025, markets appear to be pricing an interesting macroeconomic configuration. Last year, the U.S. Federal Reserve (Fed) delivered 100 bps of monetary policy easing, and yet since the U.S. Presidential election in November, the yield on the U.S. 10-year Treasury has increased by approximately 100 bps alongside broad dollar strengthening. Remarkably, this upward move has occurred even as Citigroup’s U.S. Economic Surprise Index, which tracks beats and misses in overall economic activity, has turned down in recent months, perhaps signaling some softening in the economy.

As the market has tried to trade the potential policies shifts of the new incoming administration, it seems to us that consensus has landed on a combination of looser tax and regulatory policies plus tighter trade and immigration, potentially leading to broadly higher inflation and continued resilience in economic growth. The Fed, according to its December Statement of Economic Projections, seems to agree.

Yet there continues to be a push-pull conundrum on policy: On the one hand, the incoming administration’s rhetoric suggests lighter regulatory oversight, lower taxes and reduced oil prices to unleash growth; on the other hand, it suggests disengagement from rest of world as it pertains to immigration and trade policy, which could be a drag on economic activity.

The lack of clarity on policy prioritization, timing and magnitude of change is what makes this political transition so consequential, and in absence of a crystal-ball, we think investors should stay focused on the knowns and let the data be their guide.

While we remain positive on the near-term outlook for risk-assets, based on healthy fundamentals and supportive high nominal growth, we do see a potential economic crossroads ahead.

In one scenario, the Trump administration’s policies act to reaccelerate growth (as the10-year may be pricing) and the Fed is forced to stay more hawkish. Alternatively, growth might continue to weaken as policy forces combine with higher rates and a stronger dollar to drag on economic output. In terms of asset allocation, scenario 1 suggests a tilt toward risk assets, while scenario 2 might encourage reducing risk.

So how to navigate the tides of this political transition?

We continue to monitor payrolls, jobless claims and unemployment for cracks in the labor market. We are also closely tracking construction spending—which in November hit an annualized 3%, a 5-year low—as well as manufacturing PMIs for leading insight into the industrial cycle. And given the importance of consumer spending to overall economic growth, we continue to keep an eagle eye on consumer sentiment, retail sales and credit-card delinquencies. We believe these economic indicators—observed with respect to inflation and other market data—will set expectations for interest rates, asset prices and portfolio positioning as the new year unfolds.

In a potentially tumultuous political climate, where wide and two-sided risks are at play, we believe focusing on the numbers rather than the headlines will serve investors well.