In a sluggish growth and sticky inflation scenario bonds still won’t shine, and while some strong businesses may still grow, many others could struggle under slow demand and higher costs.

The key point is that positioning needs to happen before the scenario unfolds. Markets are forward-looking—stocks often crash before a recession is official, and bond prices rally early as investors move to safety. By the time the news confirms a recession, bonds have likely already risen, and that might actually be the time to start looking at stocks again.

Fed Chair Jerome Powell recently described tariff-driven inflation as ‘transitory’. That word set off alarms across the investing world. After all, Powell used the same term during the post-COVID inflation surge—only for inflation to persist far longer than expected. Once bitten, twice shy. Investors are now more wary than ever about lingering inflation risks, especially when ‘transitory’ is mentioned again.

But beyond the sound bite, Powell also acknowledged that the labor market is no longer overheated. The Fed projects GDP growth of just 1.7%, pointing to a clear economic slowdown.

Still, the Fed held rates steady at 4.25% to 4.5%, as expected. Powell reiterated his confidence in bringing inflation down to the 2% target, though two rate cuts are projected by year-end—possibly bringing rates to 3.75% to 4%. That’s still relatively high, signaling that inflation remains a concern.

That’s why investing based on predictions is tough, especially in a world where policy unpredictability—like potential moves by Trump—can throw forecasts off course.

Ultimately, it depends on your investment approach. If you’re doing a diversified 60-40 index portfolio, you probably don’t need to worry much. That’s the beauty of disciplined indexing: you stay the course, no matter the environment.

But if you’re more discretionary and want to avoid large drawdowns, it’s sensible to tilt toward a more defensive stance. Sure, if the economy surprises on the upside, you may underperform—but it's the downside you’re protecting against.