This Monday, the stock market week started again with turbulence, and investors are already losing track. In the background, the fear of a recession in the United States and an increasingly present fear in the market. Is that Donald Trump's intention to achieve his desired interest rate cut?
"Interest rates should be lowered, which will go hand in hand with tariff increases. Let's rock and roll, America!" he pointed out less than a month ago on his social media platform Truth. What he doesn't mention is that the path of tariffs also threatens to spike inflation, which could force the Federal Reserve to take the opposite path: maintaining or even raising rates in the face of pressures.
Why is the U.S. Stock Market falling in recent weeks?
The reasons that drive millions of investors worldwide to move their money in and out of certain assets and securities are always numerous, as seen with the panic that devastated Nvidia's value and spread throughout the tech world when a Chinese chatbot was announced. But the consensus among Wall Street analysts now points to two main factors: the tariff policy of the new U.S. government, which has created an atmosphere of uncertainty, instability, and hostility among partners and neighbors out of thin air, and the possibility, partly also derived from the former, of a recession in the world's leading power.
What's the issue with tariffs?
Modern economies are deeply interconnected. Virtually all economists on the planet, except those advising or leading the Trump Administration, believe that tariffs are a bad idea, that free trade is more beneficial than protectionism, and that tariffs lead to inflation and price increases. Donald Trump argues that tariffs are good, necessary, and will bring enormous wealth to Americans, as the state will collect money from other countries, allowing for tax cuts, as if today's economy were that of a century and a half ago, the period he most venerates and cites. Affected countries have responded with similar measures, increasing the cost of basic products and domestically produced goods. A single car piston crosses the borders of Canada and Mexico six times before being assembled. That's why major companies, from Walmart to Target to BestBuy, are already publicly stating that they will have lower profits at best and will start passing on price increases to customers.
Would that lead to a recession?
It certainly contributes, but it's not the only factor. Last week, the Atlanta Federal Reserve, using real-time analysis, estimated that the U.S. economy could contract by more than a point in the first quarter, despite ending 2024 positively and with a very strong momentum. Inflation is a huge problem because it could lead the Federal Reserve to stop lowering interest rates, and even raise them, to cool down the economy, further increasing the risks of a recession. But in addition to that, two critical elements also come into play. The first is the immigration issue. Just as the Spanish GDP has grown thanks to the weight of immigration in the last two years, if Trump expels millions of people, as he says, that will have an effect on everything, from activity to consumption. Many workers are already fearing expulsion and are quitting and hiding. The second, even more powerful in the short term, is the wave of layoffs in the public sector, agency closures, budget cuts. If that engine stalls, the whole suffers.
Is Trump to blame for Monday's losses?
Consumers and businesses are unsure of what to expect next. Since February 19, the stock markets have destroyed over 4 trillion in value, largely in a 'unnecessary' and self-inflicted manner. Wall Street, which breathed a sigh of relief on Friday with worse-than-expected employment data but still positive, suffered on Monday because over the weekend, in an interview, Donald Trump did not rule out the country entering a recession. The politician's manual says that no matter what happens, when asked on camera if there will be a downturn or something bad might happen, it should always be denied, because for the market, sometimes there is only one thing worse than a lie: the truth. When Fox wanted to know if the president expected a recession this year, Trump replied, "I hate predicting things like that. There is a transition period because what we are doing is very important." He had already used words like "transition," "turbulence," or "disruption" in recent days when talking about prices. He had even shared messages from his key agitators insulting citizens and telling them to stop "whining about the price of eggs" and to close ranks because the revolution is profound. But he didn't say no, and the market doesn't forgive these things.
Will the federal government 'shutdown' this week?
If all that wasn't enough, this week brings back a ritual as classic and common as it is inexplicable and puzzling in U.S. politics: the possibility of a federal government shutdown. This occurs when negotiations in Congress on budgets, spending ceilings, etc., hit a snag. It's almost always anecdotal, but it adds unease to a market already completely atonic because Republicans control both legislative chambers and the Executive. Analysts now give it a 30% chance. "It could happen," Trump admitted on Sunday night about the shutdown, "you never know." With all contracts at stake, companies are not in the mood for jokes or more doubts.
What are the chances of a recession?
JP Morgan Chase has raised its recession risk this year to 40%, up from 30% at the beginning of the year. "We see a material risk due to extreme U.S. policies," they point out. A team at Goldman Sachs has increased its estimate of the probability of a recession in the next 12 months to 20%, from the previous 15%, warning that it will skyrocket if the president remains "committed to his policies even in the face of much worse data."
Morgan Stanley economists, as reported by The Wall Street Journal, lowered their economic growth forecasts last week and increased their inflation expectations. The current majority opinion, in the market and the academic world, is that there will be no recession, ceteris paribus, but rather much slower growth. In the graphic words of Michael Madowitz, economist at the Roosevelt Institute, "it's not so much like the economy is going to suffer a major car crash, but more like it has decided to start smoking a pack of cigarettes a day." The damage will be medium to long term.
The Republican apparatus and those allied with President Trump, laying the groundwork, blame Joe Biden amid fears of a possible contraction, recession, or slowdown. Despite 2024 closing with 3.4% growth. It is true that last year there were constant fears, after several years of constant shocks, from Covid to the war in Ukraine and the energy crisis to supply chain problems. Not to mention the price of oil or the turmoil in the regional U.S. banking market. All of this created a permanent pessimism, among academics and institutions, fueled by inflation, restrictive monetary policies, and geopolitical risks. The recession estimates were as bad or worse than those mentioned for now. But the classic vulnerabilities associated with a recession, such as sustained reduction in corporate profit margins, stress in the credit market, and shocks in the markets, never materialized. And that is perhaps what is starting to be perceived now.