Trump didn’t use the ‘R-word’, but that’s what markets fear

Donald Trump and his Treasury Secretary Scott Bessent did something foolish at the weekend. While they didn’t use the “R-word”, they declined to rule out a recession.

Not surprisingly, that caused an acceleration of the slump in a sharemarket already nervous about Trump’s erratic but determined efforts to impose tariffs on America’s major trading partners, which investors and business leaders fear will lead to higher inflation and lower growth.

The S&P 500 fell 2.7 per cent overnight, having plunged 8.6 per cent in less than three weeks. The Nasdaq fell 4 per cent. It has lost 13 per cent over the same period. The “Magnificent Seven” big tech stocks fell 5.4 per cent and are now down 16.5 per cent since the sell-off began on February 19.

Things haven’t quite turned out for Wall Street as investors hoped they would when Donald Trump returned to the White House.Credit: AP

Elon Musk’s Tesla crashed 15.4 per cent on Monday. The electric carmaker has lost more than 38 per cent of its market value since February 19 and is down more than 50 per cent since Trump’s inauguration and Musk’s elevation to head his Department of Government Efficiency.

Amid plummeting sales of Tesla vehicles around the world, the company has lost $US713 billion ($1.14 trillion) of market capitalisation from its peak of $US1.54 trillion in December.

Bitcoin, which surged 15.5 per cent after Trump announced it would be included in a digital assets national strategic reserve – confirmed by an executive order this week – has wiped out all those gains over the past few days.

‘We may go up with some tariffs. It depends. We may go up. I don’t think we’ll go down, or we may go up ... They [businesses] have plenty of clarity.’

Donald Trump

Behind the markets’ sell-off is the fear that Trump’s fixation with tariffs and the chaotic approach he has taken to implementing them will lead to stagflation (the combination of lower economic growth and continuing high inflation) and perhaps recession.

It’s not helping business or consumer confidence that no one, including Trump himself, seems to know what his tariff regime will ultimately look like.

“We may go up with some tariffs. It depends. We may go up. I don’t think we’ll go down, or we may go up,” Trump said at the weekend in an interview with Fox News.

“They [businesses] have plenty of clarity.”

That’s clarity? How could businesses or individuals invest with that level of “clarity”?

Trump has been announcing tariffs (on Canada, Mexico, China, aluminium and steel) and threatening others (on copper, Europe, more on China and Canada, as well as “reciprocal” tariffs on everyone), and then pausing them, saying he will proceed with them, pausing them, exempting some products after saying there’d be no exemptions and generally causing confusion and uncertainty. That’s not clarity – it’s chaos.

In that same interview with Fox News, Trump was questioned about whether he expected a recession this year. Instead of dismissing the prospect, he replied: “I hate to predict things like that,” and referred to “a period of transition” for the economy – i.e. things could get bumpy.

Similarly, on Friday, Bessent said the markets and the economy had become addicted to excessive government spending, and there would be a “detox” period as the administration transitioned from public to private spending.

“Could we be seeing that this economy that we inherited [is] starting to roll a bit? Sure,” he said.

That’s effectively an admission that Trump’s tariffs and Musk’s crude attack on the government’s workforce will slow US growth.

There are already signs within US job data for February – data too early to reflect the impact of Musk’s efforts – that the labour market is softening and businesses are being cautious about hiring.

Will there be a recession in the US? It’s too early to tell, but the sell-off in the markets signals that investors are fearful. Market economists have ratcheted up the risk of a recession, with JPMorgan Chase raising its odds of a recession to 40 per cent.

Credit: Matt Golding

If the consensus expectations for this week’s CPI numbers prove correct, the prospect of stagflation will also remain alive. The inflation data, due on Wednesday, is expected to show the inflation rate essentially flat-lining.

There’s a Federal Reserve board meeting next week, but no one expects the Fed to announce a rate cut. What the central bank and its chairman, Jerome Powell, have to say about the outlook for the economy, inflation, and interest rates could provide another influence over the short-term direction of the markets.

Powell has been careful not to comment directly on Trump’s tariffs, essentially saying the Fed is waiting to see what effect they have on the economy.

We know, broadly, what effects they will have.

Customer duties are paid once goods have entered the US. They are paid by the importer – US-based entities. The cost of the tariffs is either absorbed, in part, by the importer or passed on to its customers. Tariffs are ultimately largely a tax on US consumers, raising prices and feeding into the inflation rate.

Trump’s tariffs would be one of the largest tax increases in modern US history. If implemented as he has described, they would both reduce growth and increase the inflation rate relative to what it might otherwise have been. That’s where the growing concerns about stagflation stem from.

Those concerns are exacerbated by the scale of Musk’s crude assault on the federal government’s bureaucracy, which will add to unemployment, reduce consumer spending and create gaps in the US government’s ability to deliver key services.

The slowly developing program to deport millions of undocumented immigrants – the lowest-cost workers – en masse could also increase inflation and lower growth.

For investors, it wasn’t supposed to be like this.

With Trump in the White House and Republicans controlling both houses of Congress, the combination of deregulation, smaller government and Trump’s promised $U4.5 trillion of tax cuts, predominantly for the wealthy, was supposed to deliver nirvana for Wall Street.

Investors thought Trump’s promised tariffs were a bluff, with the threat of a 10 to 20 per cent tariff and a 60 per cent tariff on imports from China enough to provide leverage for trade deals where Trump’s much-vaunted (but, judging by the trade deal struck with China during his last term in office, overrated) deal-making skills could be deployed.

Instead, they got a still-evolving and highly complex trade war with America’s closest trading partners, along with an upheaval of the defence and broader relationships with America’s traditional allies.

Now, as Republicans are struggling to agree on a spending bill, the government faces a shutdown on Friday if it can’t raise the debt ceiling; Trump is all over the place in what has become an extremely complicated and uncertain plan for his tariffs; countries targeted by his tariffs are strategically retaliating with tariffs of their own; and the Republicans whose states benefited most from Joe Biden’s Inflation Reduction Act and CHIPS Act are squirming and resisting as Trump tries to erase his predecessor’s legacy.

That’s not what they expected. The reality of the Trump administration, at least in this earliest phase, is turning out to be quite different to what investors thought they had been promised.

Businesses and investors abhor uncertainty. They’ve got more of it now than they can digest. They’ve got chaos and are fleeing to the sidelines.

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