Investors have been put through a lot of market volatility in the past few weeks and that’s mainly been due to news of the “Big T” of tariffs that have come from President Trump in the US.
With the US being home to the world’s largest stock markets, it’s easy to see why they felt the pain. The benchmark S&P 500 Index in the US has fallen 5.5% this year while the tech-focused Nasdaq Composite Index is even worse off, having declined 9.7%.
But while the tariff news has caused some immediate jitters, the knock-on effects of them could be potentially far worse and that has spooked markets. So, why exactly have US stocks fallen so much in the past month?
Tariffs And Inflation
The main concern for the stock market has been the fact that tariffs that are being imposed unilaterally by the US are looking like they may set off a global trade war.
For example, after the US announced 25% tariffs on Canadian and Mexican imports, Canada took action of its own. It announced tariffs on US$21 billion worth of goods. Meanwhile, the European Union (EU) has also announced tariffs on US goods worth US$28 billion after President Trump slapped a 25% tariff on European steel and aluminium.
All this back and forth is sparking retaliatory tariffs from other nations and bringing up renewed fears of inflation in the US as well as globally.
While recent consumer price index (CPI) data for the US economy was slightly below expectations, investors are also concerned that the US Federal Reserve will see the uncertainty as a big reason to keep interest rates on hold.
That might be an issue given the data that has shown the US economy cooling. That’s particularly true for the jobs market, where recent non-farm payrolls reports have come in below expectations.
For example, February’s jobs report showed that 151,000 jobs were added in the US economy while forecasts had called for 160,000 new jobs. The unemployment rate in February also ticked up to 4.1%.
Recession Risks
Beyond tariffs and inflation, what this all leads to – at the end of the day – is the increased threat of a deep recession in the US economy.
With trade wars, it can easily escalate and now investors are starting to realise that all the talk on the presidential campaign trail from President Trump was not just a negotiating tool but punitive tariffs are in fact being imposed on both allies and strategic rivals, like China.
That has come at a time when the US economy is starting to slow and the consumer is also spending less. Earnings results from the like of Walmart Inc (NYSE: WMT) – a giant big box retailer in the US – have also hit sentiment as management gave a cautious outlook on the state of the consumer.
Indeed, when Ontario Premier – of Canada – threatened a 25% surcharge on electricity exported to the US in retaliation for American tariffs, he summed it up by saying “If we go into a recession, it will be called the Trump recession”.
Investors are also not sure whether President Trump is willing to continue with his tariff agenda even if the US does go into recession. Recent comments from his cabinet officials don’t bode well. President Trump’s Commerce Secretary – Howard Lutnick – said this week that tariffs on foreign goods “will be worth it” even if they push the US economy into a recession.
Uncertainty Rules The Day
As with any stock market correction, or bear market, they are usually caused by massive uncertainty. And that’s what has caused the latest drop in stock prices in the US.
Uncertainty around trade, tariffs, inflation, and whether they ultimately lead to a US recession, as well as a recession worldwide, is a concern for markets.
Of course, if there is a recession, then companies’ earnings will get hit but perhaps the bigger issue is that there could be a “stagflationary” scenario for the US economy; where growth slows but inflation remains elevated (because of tariffs).
At the moment, that is what the market is fearing could materialise for the US economy and has been a big driver of the fear that has taken hold over the past month.
Read Also: How To Invest For Income In A Trumpian World
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