Park your politics at the door, the changes that are occurring in the US, and thereby global markets - rightly or wrongly - are reshaping the financial market landscape at a frightening speed.
Market uncertainty has surged following recent developments in US President Donald Trump's trade and economic policies. Investors hoping for US government support are likely to be bitterly disappointed by US Treasury Secretary Scott Bessent's remarks, as he dismissed the 10% equity selloff as "healthy" and "normal." Bessent further suggested that a market correction was necessary to prevent against euphoric markets, which he warned could trigger a financial crisis. He also cautioned that there were "no guarantees" that the US economy would not fall into a recession.
These comments follow on from President Trump's comments last week, in which he asserted that the economy had to go through a "period of transition," arguing that previous growth had been "fake" under excessive government spending. This insistence ― that some 'short term pain for long term gain' has been sighted as the cause for weakness in equity markets. The Trump administration's efforts to slow the economy by cutting government spending and disrupting global relationships and trade agreements continue to unsettle investors.
These developments have seen market and economic forecasters rapidly slashing their estimates for 2025, chopping any kind of positive outcomes from the suggested economic path. Status quo, or a weakening in the economy now seems to be the destination ahead if the current policy combinations remain in play - and potentially a significant weakening at that. This has been jolting for many market watchers who felt 2025 would be a constructive year under the business-friendly administration of Trump, especially given previous claims that the US economy was "exceptional."
After a surge of optimism in post-election data, fuelled by expectations that tax cuts and deregulation would herald a new economic boom--sentiment has taken a sharp turn. Soft survey data has completely collapsed, taking the widely watched Atlanta Federal Reserve GDPNow tracker, a predictive tool which tries to read the health of the current economy in real time without the usual lags, to a scary -2.4% reading. This suggests the economy has hit stall speed and then some.
Future outlook and investor caution
We are yet to see such deterioration in the 'hard' data, but it does require close attention for investors, as the market will likely be punishing of anything suggestive that growth is slipping, such as falling retail sales or rising unemployment. While there is still a collective concern around the inflation outlook, especially as inflation expectations have risen, incoming inflation data shows signs of moderating, supported by declining oil prices and weaker demand for travel. However, falling growth indicators are likely to overtake inflation concerns in driving market sentiment. Historically, when growth falters, inflation is usually snubbed out very quickly due to demand destruction.
Such a development would likely activate the US Federal Reserve (US Fed), which has remained in a holding pattern after last year's 100 basis point rates cuts - a non-stimulatory cutting cycle to match victories in fighting excessive inflation. The US Fed had moved to a "watch and see" holding pattern, keen to monitor the impact of Trump's policies on the economy.
If economic conditions evolve with a material downside skew, a key question for markets will be how US Fed Chairman Jerome Powell responds to support the economy, particularly at a time when potential tariff-induced price rises could temporarily push inflation higher.
This is a difficult policy combination, but the US Fed can potentially look through such a development, as many tariffs have yet to make a significant impact. In a "Trumpian" world, these tariffs might even fail to materialise just as quickly as they were enacted.
The extent to which tariffs may drive inflation remains highly uncertain, providing Powell some wiggle room with US Fed policy. However, such look through is unlikely on the growth front. We have written at length on the feedback loops from stalling growth (remember the terminologies of 'hard', 'soft' or 'no' landing). If growth stalls it can be very difficult to reactivate without a 'stimulatory'' rate cutting cycle of significant magnitude. That is hardly a base case, but that outcome is growing in probability as the left tail of significantly higher rates is mitigated by the DOGE (Department of Government Efficiency - led by Elon Musk) effect on the economy.
While risks remain, the prevailing sentiment suggests that authorities are prepared to act if markets experience deeper corrections. However, they are reluctant to overstep unless the situation becomes truly dire. Otherwise, further corrections remain "healthy". This is a colossal change worthy of your attention. As such, any notion of a Trump "put" seems further away for now. In other words, the idea of Trump stepping in to prop up markets in a crisis is less immediate than previously thought.
In light of the uncertainties, particularly around the evolving economic landscape and potential policy shifts, investors need to be cautious and reassess their exposure to sectors vulnerable to policy changes, trade disruptions, and global economic slowdowns. While the US Fed's cautious stance offers some breathing room, the lack of definitive government support raises the likelihood of volatile market conditions ahead.
Charlie Jamieson, Chief Investment Officer
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