Mackenzie Investments’ 2025 market forecast did a better job than most on the potential market impacts of president-elect Donald Trump’s proposed trade and immigration policies. I spoke with Steve Locke, CIO of fixed income and multi-asset strategies on Wednesday to learn more.
“We can deal with uncertainty in any investment decision if we have a healthy amount of risk premium, or some kind of pricing for that uncertainty already embedded in the markets that we’re looking at,” he told me.
Investors aren’t there yet. Notwithstanding a bit of chop since the start of the new year, markets “are not fully embracing that there’s a big change in risk ahead of us here,” Locke said.
One of the reasons for my call was to understand the mechanics of factoring these kinds of outsized risks into a market outlook. I’ve wondered if forecasters shy away from addressing tall risks, as they’re often called, because they’re so difficult to analyze and easy to get wrong.
That’s only partly true, Locke said.
“When you have something that’s larger and more of a tail risk to a forecast, those are typically harder to pinpoint the timing of, or potentially the size of the move that we have to forecast,” he said. “We need to think about a range of different impacts all at the same time and create a distribution of outcomes.”
Recency bias can be a factor too, Locke told me. “The most recent experiences we’ve had tend to be what we use as our inputs, and use to think forward in our analysis.”
Locke was referring to forecasters broadly. It is a useful insight when making decisions based on market outlooks.
