A Timely Note from Mike Petrino

Sometimes the Wisest Policy Is Restraint

Gregory R Lai, CFA

Every so often, I receive a note from our sage market observer and historian Mike Petrino that causes me to pause and think.

Mike has spent decades studying economic cycles, monetary policy, and financial markets. Educated at the University of Chicago, his observations are grounded not in political ideology, but in economic history. While headlines often focus on what governments should do next, Mike has a habit of asking a much simpler—and often more difficult—question:

What if the best course of action is to do less?

His latest commentary arrives at an appropriate time.

With election season approaching, investors are once again being inundated with siren calls promising sweeping economic change. Every campaign has a plan to address deficits, inflation, healthcare, housing, taxes, or economic inequality. The implication is often that the economy requires dramatic intervention, or else!

Mike argues otherwise.

Looking strictly at the data, today’s economy is hardly in crisis. Economic growth remains positive. Businesses continue to invest. Unemployment is near levels that policymakers have historically considered consistent with full employment, while inflation has moderated significantly from its recent peak.  Even oil seems to have shrugged off the dramatic.

That does not mean every challenge has been solved. It does suggest that history offers an important lesson: major policy interventions are most valuable when responding to extraordinary economic problems, not necessarily when the economy is already functioning reasonably well.

Mike illustrates this principle through several historical examples, reminding us that policy decisions often create consequences far beyond their original intentions.

I am pleased to share his commentary because it offers valuable historical perspective at a time when emotion and politics frequently overwhelm economic fundamentals.

Featured Commentary

The following commentary is provided by Mike Petrino, Senior Economist and Senior Portfolio Manager at Affinity.  Mike has spent decades studying monetary policy, business cycles, and economic history. His observations provide valuable context for today’s investment environment, and we are pleased to share his latest perspective with our readers.

Don’t Do Something—Just Stand There

By Mike Petrino

Recent data reveal a U.S. economy with modest real growth and a rate of inflation below its long-term average. There is no evident need for any major change in economic policy. However, if history is a guide, elected officials will find it difficult to resist the temptation to create new policies during an election year. Investors may therefore be confronted with volatile markets as the impulse to meddle prevails.

The latest estimate for real GDP growth in the second quarter of 2026 is 1.5% at an annual rate. This represents a decline from the 2.0% growth rate recorded in the first quarter and came in below the 2.1% expectation for the quarter.

There were, however, significant positive trends. Consumer demand grew at a strong 3.2% rate, while business investment in equipment increased at a 15.2% rate. Growing imports produced an estimated 1.0% drag on growth as importers stepped up their demand for investment-related goods.

The latest inflation reading shows prices growing at a 3.5% annual rate for the 12 months ending in June, down from a 4.2% annual rate in May. While the 3.5% rate remains above the Federal Reserve’s announced 2.0% target, it is below the long-term average inflation rate of approximately 4.0%.

It is unlikely that the Fed will be able to consistently control inflation at precisely 2.0%. As a result, investors will probably remain focused on the Fed’s position regarding the federal funds rate. The Fed’s belief that it can control inflation primarily by raising and lowering short-term interest rates may, in fact, ensure that it does not fully control inflation.

Unemployment declined to 4.2% in June from 4.3% in May. By comparison, the average unemployment rate over the past 50 years has been approximately 6.2%.

The Humphrey-Hawkins Full Employment Act of 1978 established objectives of unemployment at 4% or below and inflation at 4% or below. These objectives were intended to serve as guidelines for the Federal Reserve when establishing monetary policy. The Chair of the Federal Reserve is also required to testify before Congress twice each year and provide an accounting of the Fed’s performance in relation to these objectives.

Current measures of inflation and unemployment are therefore not far from the Humphrey-Hawkins objectives, which have been considered desirable for nearly 50 years. There is no urgency for major changes in economic policy.

There have, of course, been periods when substantial policy changes were needed.

During the 1950s, the United States experienced three recessions—in 1953, 1954, and 1958. While campaigning for president, John F. Kennedy attributed the recessions, and what he described as an underutilization of economic capacity, in part to the high tax rates in place during the decade.

Once elected, President Kennedy proposed a major reduction in tax rates. He argued that lower rates would stimulate output, increase employment, and ultimately increase tax receipts. President Lyndon Johnson followed through on Kennedy’s proposal with the passage of the Revenue Act of 1964. Following the Act’s passage, economic growth accelerated and tax receipts increased, as Kennedy had predicted.

The decade preceding Ronald Reagan’s election in 1980 was characterized by rising inflation, rising unemployment, and slow or negative real economic growth—a combination that became known as stagflation.

President Reagan followed Kennedy’s example by proposing lower tax rates to encourage stronger real growth. At the same time, Federal Reserve Chair Paul Volcker took control of monetary policy and reduced the growth rate of the money supply. Inflation subsequently declined.

During the eight years of the Reagan administration, approximately 16 million new jobs were created and tax receipts increased at an average annual rate of roughly 8.5%. Unfortunately, federal expenditures increased at an even faster rate.

There have also been less favorable outcomes following major changes in economic policy.

In 1990, President George H.W. Bush reversed his famous pledge—“Read my lips: no new taxes”—and agreed to raise tax rates. He had been urged by some economic advisors not to do so: Don’t do something; just stand there. Political pressure ultimately prevailed.

The increase in tax rates was followed by a recession and a decline in tax receipts, while the federal budget deficit increased. President Bush raised tax rates, but ultimately collected less in taxes, and he lost his reelection bid in 1992 to Bill Clinton.

The current economic environment is not comparable to that of the 1950s or the 1970s. Real economic growth remains positive, while inflation and unemployment are below their respective long-term averages.

Nevertheless, the approaching elections have stimulated debates about the need for profound changes in economic policy, even though current conditions do not appear to demand them.

Claims have been made that major policy changes are required to address the large federal budget deficit, the affordability crisis, healthcare costs, income inequality, and a long list of other concerns.

Almost invariably, the proposed solutions involve higher tax rates, new taxes, additional regulations, or increased government spending. Each new policy has only a limited chance of improving economic conditions as they exist today and may create unintended consequences.

Fortunately, many of the proposals are so extreme that they are unlikely to attract enough votes in Congress to become law in their original form.

Investors should pay attention to the debates. They should also recognize that there is a reasonable chance that the most destabilizing proposals will never become legislation, at least not in their most extreme form.

Greg’s Investor Takeaway

Mike’s article reminds us that investing and policymaking share something important in common:

Activity should not be confused with progress.

My father has reminded me of that lesson many times throughout my life. Doing something may feel more productive than doing nothing, but action taken simply for the sake of action can often make a situation worse.

Markets have a tendency to react immediately to political headlines, campaign promises, and policy proposals. Investors, however, should remember that proposals are not legislation—and legislation rarely resembles the original proposal after it has moved through Congress.

History also reminds us that markets are remarkably resilient. Elections come and go. Tax laws evolve. Federal Reserve policy shifts over time. Yet the long-term drivers of equity returns have remained surprisingly consistent: innovation, earnings growth, productivity, and the ability of businesses to create value.

That does not mean investors should ignore public policy. Changes in taxes, regulation, government spending, or monetary policy can certainly influence markets.

But successful investing rarely depends on accurately predicting every political headline. More often, success comes from maintaining discipline while others become distracted by short-term uncertainty.

As election season unfolds, there will undoubtedly be more debate, more volatility, and more bold predictions.

Our job is not to react to every headline.

Our job is to remain focused on the fundamentals, maintain a disciplined investment process, and remember that patience is often one of the most valuable assets an investor can possess.

Sometimes the most productive investment decision is also the simplest:

Don’t just do something. Stand there.

Sources: U.S. Bureau of Economic Analysis; U.S. Bureau of Labor Statistics; Board of Governors of the Federal Reserve System; Office of Management and Budget.

Important Disclosures: The views expressed are those of the authors as of the date of publication and are subject to change without notice. This material is provided for informational and educational purposes only and does not constitute investment advice or a recommendation to buy or sell any security. Information has been obtained from sources believed to be reliable, but its accuracy or completeness is not guaranteed. Economic data are preliminary and subject to revision.

The information contained in this commentary represents the opinion of Affinity Investment Advisors, LLC and should not be construed as personalized or individualized investment advice. The analysis and opinions expressed in this report are subject to change without notice. The information and statistical data contained herein have been obtained from sources, which we believe to be reliable, but in no way are warranted by us to accuracy or completeness. This report includes candid statements and observations of economic and market conditions; however, there is no guarantee that these statements, opinions, or forecasts will prove to be correct.