This time it might be the stock market teeth economy.
Financial markets around the world have plummeted within days since President Trump announced cleaning fees and announced that it would launch a global trade war. The S&P 500 fell more than 10% over two days last week, shaking violently on Monday amid news of further tariffs and rumours of delays. Stock prices in Asia and Europe are also falling sharply.
Experts often warn that the stock market can be a misleading measure of the broader economy. Stock prices can move for many reasons, including technological development, changes in consumer preferences, changes in taxes, or interest rate policies.
But sometimes the market conveys an economic message. And recently, they were talking explicitly. Investors overwhelmingly believe that Trump's tariffs and retaliation from US trading partners will lead to rising prices, slower growth and perhaps a global recession.
The surge in stock prices does not only reflect the fear of a recession. It could also help consumers to reinforce spending according to the evaporation value of their portfolio, which could help them to trigger one.
The disruption over the next few days may not be that important, said Ryan Sweet, chief economist at Oxford Economics, is a forecasting company.
The direct impact of tariffs is the most severely lowered for low- and middle-income consumers. They tend to spend more money on food, clothing, and other products covered by their duties, and have less savings to isolate them from higher prices. However, the market decline is most keenly felt by higher earners who own disproportionate shares of stocks and other investments.
These wealthy households have played an important role in supporting consumer spending in recent years as low-income households are narrowed down by rising prices, high interest rates and wage growth. Currently, higher earnings can become more cautious as your investment loses value.
“I stopped by my office today and said, 'I'm not going to redo the kitchen because the entire kitchen budget has been wiped out by the stock market over the past three days,” said Tarasinclair, an economist at George Washington University.
Wealthy households are not the only households affected by a decline in stock prices. The majority of Americans own shares either directly or through retirement accounts. And the segment that owns stocks in individual companies has been rising in recent years. This is part of the memestock investment boom that began during the pandemic.
Sweet estimates that the amount of “wealth effects” (homes totally increase or decrease spending as stock market changes) is four times the pandemic, making the economy more vulnerable to market declines.
“The chances of losing spending are hundreds of billions of dollars,” he said.
A decline in spending of that magnitude will ripple through the entire US economy of $30 trillion. Amid uncertainty about tariffs and other policies, businesses are already growing more cautious about employment and investment. They are primarily resistant to cutting jobs, but if sales start to decline, it can change rapidly.
“That's your communication mechanism for the recession,” said Michael Gamen, American economist at Morgan Stanley. “If high-income households are low in demand, and then companies may engage in layoffs, and these layoffs usually conflict with low-income and middle-income households again.”
Recent market movements suggest that these fears are growing. Stocks in technology companies, automakers and other companies with global supply chains are suffering from some of the biggest declines. However, losses are not limited to businesses that are most directly affected by tariffs. Stocks in airlines, hotel operators and other companies that serve disposable income consumers are also declining.
“What we're seeing is that we're hitting big businesses, hitting small businesses, everyone is bumping into them,” Sinclair said.
Oil prices also fell sharply. It suggests that investors believe that economic activity, including travel, shipping costs and infrastructure investments, is likely to weaken not only in the US but around the world. In fact, other countries could be hit harder, as exports constitute a larger share of the economy.
“The rest of the world is much more attractive to global trade than we do,” Gapen said. “This isn't a great recipe for global growth. It may be more likely to have a global recession than the US recession.”
Many investors remain optimistic that Trump will reconsider his tariff plans before it leads to widespread layoffs or business failures. However, even if he is, it is not clear whether the damage can be completely reverted. In some cases, after a few weeks of policy reversal, corporate leaders may not be convinced that tariff threat lies behind them.
“The companies have a huge number of questions and there aren't many answers. When that's the situation, they're probably the most comfortable taking shelter in a bunker,” Sweet said. “They pull back jobs and bring back investments in structures, equipment and software.”
