President Donald Trump’s tariffs and threats have ignited turmoil within the stock market, stirring worries about an impending recession. Jana Grittersová, a UCR economist and political science professor, sheds light on how these tariffs disrupt investor predictability, leading to a cautious stance on expansion and hiring while pushing investors towards safer assets. The S&P 500 index has notably decreased as uncertainty spills over into business strategies, contrasting with a rise in Europe’s Stoxx 600, bolstered by the weak dollar and heightened defence stock expectations.
The market’s mood has shifted from initial optimism following pro-trade announcements to a more sceptical stance. Grittersová notes that investors, having lost trust in the consistency of Trump’s policies due to flip-flopping decisions, are recalibrating their expectations. Concessions are now viewed as temporary maneuvers rather than solid solutions, leading to a cold reception towards supposedly good-news announcements, such as tariff delays, with market responses reflecting a broader fear of economic downturns and stagnant corporate earnings.
The discussion around the U.S. trade deficit reveals that while the U.S. imports more than it exports, this trend serves important economic functions. The deficit reached $918.4 billion in 2024, largely driven by the U.S. dollar’s status as a reserve currency. Tariffs aimed at correcting this imbalance may inadvertently raise production costs and reduce U.S. global competitiveness. Furthermore, retaliatory tariffs can exacerbate the deficit by dampening demand for American exports. Though not inherently negative, the trade deficit can lead to challenges if tariffs raise consumer prices and provoke international disputes.
The Cboe Volatility Index (VIX), a measure of the market’s anxiety, currently indicates elevated volatility but remains below threshold crisis levels. Historically, it peaked at 80 during the financial crisis of 2008. Grittersová suggests potential risks that could send the VIX soaring include escalating trade conflicts and supply chain disruptions. Currently hovering around 25, a rise above 40 could signal turbulent market conditions.
With the U.S. Consumer Sentiment Index recently falling to 57.9%, consumer pessimism appears to be growing, impacting spending willingness. This decline arises amidst trade policy uncertainties and inflationary pressures, especially among lower-income groups facing rising living costs. Although high-income consumers retain robust spending habits, continued negative sentiment could curtail discretionary spending overall, driving up costs for the consumer as tariffs bite.
Key economic indicators to monitor ahead include the Consumer Sentiment Index, which at its low suggests a shaky public confidence, inflation expectations, GDP growth rates, and the yield curve, which shows early signs of inversion, a classical recession predictor. Rising tariffs naturally add to consumer and business costs, amplifying inflation and stalling global trade, requiring vigilance for any signs of trouble ahead.
Tariffs under President Trump have stirred market instability and recession fears. Economist Jana Grittersová explains how uncertainty affects investment decisions, prompting shifts toward safer assets away from equities. The U.S. trade deficit continues to grow, while consumer sentiment declines. Key indicators such as the VIX and GDP growth will reveal economic trajectories, indicating potential risks tied to increasing tariffs and trade policies.
In summary, the assessment highlights the fragility of investor confidence amidst tariff uncertainty and trade policy inconsistencies under President Trump’s administration. The shifting behavior in trading patterns, the U.S. trade deficit’s dynamics, and the current state of consumer sentiment underscore the complexities of the economic landscape. Monitoring key indicators moving forward, from volatility indices to consumer spending behaviour, will be crucial for predicting any forthcoming economic challenges.
Original Source: news.ucr.edu
