By Johanna Kyrklund, Group Chief Investment Officer at Schroders

The last few months have been unusual because I've had more questions than ever about where markets are headed, yet in the end the outcomes have been quite benign. President Trump has been tearing up the economic rulebook, but markets appear to be relatively unperturbed: why?

Trump's policies are symptomatic of a medium-term shift in the political consensus: away from fiscal rectitude to fiscal profligacy, away from globalisation to protectionism and away from zero rates to tighter monetary policy.

One of my favourite books is "Player Piano" by Kurt Vonnegut and in this book one of the characters states: "Without regard for the wishes of men, any machines or techniques or forms of organisation that can economically replace men do replace men. Replacement is not necessarily bad but to do it without regard for the wishes of men is lawlessness".

Western societies have been profoundly disrupted by globalisation and technological innovation. As a result, the average person has not seen an improvement in their living standards. Wage growth was anaemic in the last decade and job insecurity increased. Against this backdrop, a backlash against the liberal consensus and the return of more populist policies is not that surprising.

A shift to a more expansionary fiscal policy in recent years has boosted nominal growth and this continues to support corporate earnings. From this perspective, populist policies can be helpful to equity markets.

The main cloud on the horizon from a growth perspective is clearly uncertainty over tariffs, with a lack of clarity around both final rates and potential carve-outs.

As noted above, market reactions to renewed tariff threats have become more muted over time, suggesting that investors increasingly treat such announcements as opening bids in a broader negotiation process. While this interpretation has largely proven correct to date, it does introduce the risk that markets may ultimately underestimate his willingness to implement significantly higher tariffs than currently expected.

Our base case remains an effective tariff rate of 12% - the highest level in post-war history but implying that some agreements are reached. This leads us to view the risk of US recession as being low, particularly as the labour market is still solid and energy prices are contained.

All in all, we remain positive on equities but risks are skewed in a stagflationary direction for the US as the lagged effects of tariffs start to impact the economy.

The most significant speed limit on equities, however, is the extent to which bond markets can take the rising debt levels that result from higher government spending. James Carville, political advisor to President Clinton, famously said "I would like to come back as the bond market. You can intimidate everybody".

So far, the Trump administration has paid attention to the bond market and appears to understand the importance of its stability. Inflation expectations are still under control. All in all, the signs are still benign but there are a couple of trends I'm monitoring:

• Firstly, the steepening at the long end of the yield curve. Yields on longer-dated bonds are rising faster than those on shorter-dated bonds, which suggests that concerns about spending are being gradually priced into bond valuations. There is no doubt that the longer end of curves is becoming more volatile.
• Secondly, we have to watch how Trump treats the Federal Reserve (Fed); a credible central bank is essential to a well-functioning bond market and how Fed Chair Powell's succession is handled will be analysed closely.
• Given rising debt levels, we continue to see bonds as a helpful source of yield but not a source of diversification. As we have said many times, we favour gold for this.
• Lastly, a word on the US dollar. Speaking to clients around the world, I do see evidence of strategic allocations to the US dollar being reviewed. After years of strong US outperformance, starting levels of US dollar exposure are quite high and there is a recognition that some diversification is necessary. However, these shifts will take time. The US dollar still offers unparalleled liquidity and so one should be careful not to over-egg this story.

As always, when confronted by daily headlines, it’s important for investors to stay focused on the medium-term trends. The political consensus has shifted, correlations across asset classes have changed, the companies we invest in are being disrupted but in many ways our job as active managers is the same as ever - researching corporate and country fundamentals, looking at risk from every angle, making decisions under uncertainty, being vigilant but patient in our quest for superior returns.