Risks increase but recession still unlikely: PGIM’s Butler
Market volatility has soared amid a rapid shift in US policy on everything from government spending, trade and immigration, but PGIM’s Jonathan Butler isn’t convinced that recession is likely.
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As global markets come to terms with aggressive US trade policies, global fund manager PGIM’s top leverage executive Jonathan Butler is taking a longer-term view.
Post-election euphoria in markets has been replaced with a sense of gloom.
Stock markets are hitting correction territory, credit spreads are widening, and recession fears are up as the scope and sequencing of US President Donald Trump’s trade policies in particular is turning out to be worse for markets than was expected only a few weeks ago.
Just as concerning has been scant evidence of a so-called “Trump put” option – sensitivity on behalf of the US administration to a falling US stock market that could lead to a change of course.
The latest sign that the White House is unfazed by a 10 per cent fall in the S&P 500 in recent weeks came Monday, when US Treasury Secretary Scott Bessent told NBC’s Meet The Press that he’s not worried about the recent fall in US stocks.
“I’ve been in the investment business for 35 years, and I can tell you that corrections are healthy, they are normal,” said Mr Bessent.
“I’m not worried about the markets.
“Over the long term, if we put good tax policy in place, deregulation and energy security, the markets will do great.” His comments sent S&P 500 futures reeling in Asia-Pacific trade on Monday.
Crude oil prices have fallen, but not enough to stop inflation expectations soaring on tariffs.
Trump’s tax and deregulation policies are yet to be seen, so the focus is naturally focusing on US trade policy.
However, Mr Butler, PGIM’s managing director and the head of its European leveraged finance team, is taking a longer-term view of Trump 2.0. PGIM had about $US1.38 trillion ($1.59 trillion) of assets under management at the end of September.
Mr Butler says the risk of a policy “mistake” causing at least a mild recession further falls in high-yield credit and stocks are rising simply because the US administration is doing so much at once.
On Monday, Macquarie Equities said the S&P 500 now faces a bear market because of US President Donald Trump’s aggressive cost-cutting and trade policies.
That implies a fall of at least 20 per cent from the record daily closing high of 6144.15 hit last month.
“Unless Trump blinks and pulls back from trade wars and spending cuts, there is the risk of a material slowing in US real consumer spending,” said Macquarie’s Australian equity strategist, Matthew Brooks.
However, Mr Butler is looking ahead to where the US economy will be in a couple of years from now.
While the credit market is not yet signalling that a recession is imminent, the post-election Trump trade euphoria – that he’s going to be great for growth, great for everything in the markets and business sentiment – has been completely unwound after spreads hit record “tights” in January.
“If you look at how he’s (Trump) behaving, he’s got the strongest US political mandate for some time, and obviously he wants to make America great again based on his own personal definition,” Mr Butler told The Australian.
“I think he feels that he’s got the mandate where he can create some short term pain if that’s going to create a better medium to long term.
“And so his view is that by pushing on tariffs, he’s going to put America into a better trading position. Tariffs are a tax on the consumer, so he is hurting US consumers, but he seems to think the short term pain of that is worth it to get a better trading position.”
Trump has at times been “deliberately offensive”, but investors need to “read through the noise.”
“He’s doing it to get a reaction, so you kind of have to read through what he says, which is really difficult, because it is offensive,” Mr Butler said.
“What he’s doing is he’s putting a position out there.
“Everyone says ‘whoa, so we’re not going to do that’ and then he’s actually creating conversation.
Goldman Sachs has calculated that the average US tariff will more than double to about 10 per cent based on Trump’s announcements, more than four times the increase seen in Trump 1.0.
The outcome of a comprehensive review of US trade policy is due by April.
So-called reciprocal tariffs, taking into account VAT taxes in Europe, are due to start on April 2.
However, Trump has at times reversed, delayed or dialled back his tariff plans in recent weeks.
The risk of a recession has undoubtedly gone up, as tariffs will disproportionately hurt lower-income consumers in the US. The percentage chance of a US recession in 2025 has soared from 22 to 42 per cent in the past few weeks, according to Polymarket, a cryptocurrency-based prediction market.
Volatility has soared amid a rapid shift in US policy on everything from government spending, trade, immigration, Ukraine and the Middle East. But Mr Butler isn’t convinced that a US recession is likely.
“So you’ve got the tariffs which are inflationary, and you’ve got immigration which is inflationary, but offsetting that, he does seem to be doing work to try to bring energy costs down, and that would be very deflationary,” Mr Butler says. “If he achieves peace in Ukraine, Russian gas hits global markets.
“If he achieves peace in Gaza, then potentially Iranian oil hits the global market, and he’s already been pushing OPEC to increase production, so if he’s able to bring energy costs down, that’s deflationary. On top of that, Trump plans to deregulate across markets.”
With that in mind, Mr Butler says investors need to think about the medium to long-term outlook.
“We have to look at what he’s doing rather than what he’s saying, and what we think will be achieved rather than what he’s necessarily saying,” he said.
“So you’ve got to think through all of these top-down scenarios, and then on a bottom up level, you’ve got to buy companies that you feel are going to be strong enough and stable enough to outperform the market, going through all of the different scenarios that may get thrown at them.”
In the big picture, he’s convinced that Trump does want to “make America great again” and that means having a strong economy to suit the election cycle about three years from now
“But the probability of all of that happening smoothly, obviously, is a challenge, and that’s where you have the volatility and the risk in the near term.”
Originally published as Risks increase but recession still unlikely: PGIM’s Butler
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