Economics Weekly: Making Active Great Again, authored by Richard de Chazal, CFA, explores significant structural regime changes accelerated by President Donald Trump that are reshaping the U.S. economy. These changes include the shift from labor to capital investment, the transition from a demand-driven to a supply-driven inflation regime, and the move from monetary to fiscal policy dominance.
The report highlights the shift from a global supply glut of labor to a structurally tighter labor market, moving away from an asset-lite financialized economy back toward a production-based economy. This transition is accompanied by a shift in the inflation regime, where supply-side shocks dominate again. The U.S. economy is moving away from a monetary-policy-dominant world to one led by fiscal policy, with fiscal policymakers taking the driver’s seat while the Federal Reserve is at the back of the bus.
President Trump’s strategy of moving fast and breaking things is raising uncertainty and unsettling financial markets, resulting in increased volatility and a rotation within equity markets. The report emphasizes the importance for investors to understand where the dust will likely settle once these changes are implemented.
One of the unintended results of these regime changes is the rise of active portfolio management. The report discusses the demand-driven inflation regime and the rise of passive investment, highlighting how passive investment momentum becomes self-perpetuating, leading to performance concentration in a handful of stocks. At their peak in December 2024, the “Mag 7” stocks accounted for 35% of the S&P 500. However, as the inflation regime moves toward being supply-driven, there is a shift away from passive investment and back toward active investment and greater diversification across the equity market.
The COVID-19 pandemic catalyzed significant regime changes, marking the transition from a demand-driven inflation regime to a supply-driven one and from monetary policy dominance to fiscal policy dominance. The pandemic exposed the brittleness of supply chains and the U.S.’s reliance on foreign goods, leading companies to move from just-in-time to just-in-case inventory management. Structural labor shortages, outdated capital stock, ongoing innovation, and government incentives are driving the transition from an asset-lite world to a more capital-heavy world.
The report also discusses the impact of climate change and viruses on supply-side inflation volatility. Volatile weather events and viruses like the COVID-19 pandemic and avian flu disrupt production, raising volatility and aggregate prices.
Investment implications include shortening investment duration horizons, greater diversification across sizes and sectors, and a renewed focus on valuation as an investment tool. The report suggests that investors will demand a higher risk premium for the return of uncertainty, leading to a shift away from passive investment to active portfolio management.
For more information about our macro research, please contact us or your William Blair representative.
Listen to the William Blair Thinking Presents podcast episode: Monthly Macro with Richard de Chazal—March 2025