Four guiding principles to navigate a new uncertain environment

The world has changed so profoundly that even the rhythm of the year is not what it used to be. The summer break isn’t a true break any longer — a good summer these days is one that goes by without a major global crisis.

But there is always a lot going on, and our hyperconnected world makes it impossible not to keep paying attention. Since the start of the year, we have all been relentlessly focused on a series of important issues: tariff negotiations, inflation and employment data, concerns about Fed independence, geopolitical tensions both acute and simmering, and ever greater advances and investments in AI.

As we enter the final stretch of the year, it’s the right time for a reset, the natural juncture to refocus on the business challenges ahead and how we intend to tackle them.

For business leaders, the greatest challenge today comes from pervasive heightened uncertainty. The U.S. administration has set out to reshape the global trading system; accelerating digital innovation continues to transform the global economy; tighter immigration policy has caused a sudden shock to the U.S. labor market; and to make matters worse, declining response rates to surveys have affected the quality of economic statistics, making it harder to gauge macro developments in real time.

To handle this multipronged uncertainty, I find it useful to rely on four principles.

First, focus on fundamentals to cut through the noise. In the incessant flow of news and opinions we are exposed to, the ratio of information to noise has worsened considerably – exacerbated by polarization. It can be hard to isolate what matters, but fundamentals eventually do assert themselves. It’s true for economic policies: excess monetary and fiscal stimulus triggered the high inflation of 2021-23; unsustainable public debt trajectories across advanced economies will keep upward pressure on bond yields and will need to be addressed through adjustments in taxes and spending. It’s true for industries and companies: corporations that invest in well-targeted innovation, including AI, should reap greater efficiency and market growth. Fundamentals always matter. That’s why in our investment strategies we place great emphasis on fundamentals research, married with cutting-edge quantitative analysis.

Second, keep an open mind. Sometimes, we mistake the way things have always been done for fundamental laws. It’s a convenient shortcut, but it can be misleading. That’s part of the reason why the proposed tariffs have not had the immediate disastrous impact that many predicted. Free trade was never truly free, and reshaping the existing intricate web of trade and non-trade barriers has a more complex gradual impact. And that’s why some classic recession signals have failed in the past few years, from the inverted yield curve to the so-called Sahm rule on changes in unemployment. They were treated as fundamental laws, when they were just empirical regularities already surpassed by a fast-evolving economic structure. Keeping an open mind and looking at the nuances is harder, but it can pay off.

Third, keep an eye on the long-term picture. Together with the focus on fundamentals, this helps distinguish cyclical changes from structural turning points. The past decade of near-zero policy interest rates and extremely low bond yields was interpreted by many as a structural change: proof that we had entered an era where inflation would no longer be a danger and bond yields would remain depressed. In 2020 the Fed changed its monetary policy framework to underscore that below-target inflation had become the greatest challenge. It now seems clear that those abnormally low inflation rates and bond yields were a cyclical phenomenon. Current yield levels are much more in line with the decades-long historical average, and the Fed this summer adjusted its policy framework accordingly. Taking a long-term view might seem counterintuitive with innovation moving so fast, but it’s more important than ever.

Fourth, keep moving. Operating in an uncertain environment requires agility, and building agility calls for exercising different muscles, building new capabilities and developing a broader range of options. In finance, this means creating and testing new solutions in our own operations and for our clients’ investment strategies, including through the use of AI; experimenting with novel strategies to increase efficiency and broaden access to investment opportunities, for example with crypto- and blockchain-based technologies; and expanding alternative asset offerings to provide greater opportunities to both borrowers and investors. All these steps are tailored to create immediate value for clients and shareholders, but they also serve to create optionality, to broaden the set of tools that will allow us as a company and the industry at large to handle the unforeseen new developments that lie ahead.

This volatile environment is both daunting and exciting. The uncertainty surrounding us means we have a lot to learn. But these four principles can help us manage the risks and take advantage of the opportunities that this fast-changing macro environment will present.

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