CalSTRS CIO Scott Chan said the probability of a future recession accompanied by stagflation has increased due to the “unprecedented and world-changing” risks associated with the Trump administration’s policies.

In a livestream of the March 12 investment committee meeting of the $349.7 billion California State Teachers’ Retirement System, West Sacramento, Chan cited President Donald Trump’s spate of executive orders in his first weeks in office as the primary driver of the risk of uncertainty in the markets.

“As you know, markets and corporations, they don’t like uncertainty, but this is going beyond that typical market uncertainty, that corporations don’t like,” Chan said. “I would say that the potential risks here are unprecedented. They’re world changing. I was thinking about an analogy… I just came up with the word unprecedented. Unprecedented and world changing because of the uniquely uncertain and risky environment we’re in.”

Chan said that while the economy was “fairly strong” entering 2025, there are four primary risks that have pushed the U.S. stock market into negative territory thus far in the calendar year, chief among which is the threat of tariffs and the potential of a trade war.

“That risk has been the biggest change that we have to accept: The possibility of that risk as we are engaging and deepening into this and potentially heading into a trade war, which would have very, very severe consequences to investment portfolios, not just ours,” Chan said.

He also cited the Russia-Ukraine war as a risk associated with uncertainty, as well as the anticipated extension of tax cuts that could increase the U.S. budget deficit.

“That could be good in the short term relative to the economy, but it’s likely to add an increase to the deficit, among a whole host of other things I might add to that, and structurally, I think that means higher interest rates over long term period, with the possibility of some issues around the supply and demand of Treasuries,” Chan said.

“But with over $36 trillion in debt, which is over 7% of our GDP, this has to go down structurally. We’re simply spending too much, and it’s unsustainable. We’re akin to a train heading off of a cliff. I don’t know when the risk will materialize, but there is significant risk with that situation,” Chan said.

And while he said it may be surprising that he would add the topic as a fourth risk, Chan said he believes the Trump administration’s actions around immigration is a significant risk because reduced immigration could have an impact and hurt GDP.

As for how CalSTRS will address the increased risk brought about by the administration’s policies, Chan said he and staff are looking to become “more dynamic around the strategic asset allocation.”

One such move Chan and staff are making is bringing the pension fund’s allocations to diversifying assets, specifically fixed income, risk mitigating strategies and cash/liquidity, up to target in order to become more defensive. As of Dec. 31, the pension fund’s allocations to two of those portfolios were underweight at 12% fixed income (below its 13% target) and 8% risk mitigating strategies (below its 10% target). Also as of that date, cash/liquidity was slightly overweight at 2.5% versus the target of 2%.

As of Dec. 31, the rest of CalSTRS’ actual allocation was 40.5% public equities, 15.4% private equity, 13.2% real estate, 6.6% inflation sensitive and 1.8% collaborative strategies.

The rest of the target allocation is 40% public equities, 15% real estate, 14% private equity, and 6% inflation sensitive.

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