by Alexander Cousley, Russell Investments
Key takeaways:
- U.S. recession risks have increased
- U.S. government bonds are rallying
- The health of the U.S. consumer is an important watchpoint
On the latest edition of Market Week in Review, Director and Senior Investment Strategist Alex Cousley discusses the details of the Trump administration’s tariff plan and the market’s reaction.
Negotiate or retaliate?
Cousley begins by noting that U.S. President Donald Trump’s reciprocal tariff plan could increase the effective U.S. tariff rate by 14%. He says this estimated increase is greater than expected and is also very large in a historical context.
“We believe these tariffs have increased recession risks in the United States. In our view, the chances of a recession in the next year are now close to 50%,” Cousley remarks.
He says the new U.S. tariffs target Asian countries—including China, Japan, South Korea and Taiwan—more aggressively than the rest of the world. While it’s unclear exactly how countries will respond, some nations—particularly in Asia—have signaled they’ll look to lower tariffs on U.S. imports.
“Vietnam is one of the most prominent examples of this, but Japan and South Korea have also suggested they’ll take a negotiating stance,” Cousley remarks.
On the other hand, in a significant move of retaliation, China announced Friday that it will slap a 34% tariff on all U.S. imports starting April 10.
Cousley finishes by noting the European Union hasn’t been as vocal about any actions it might take.
Market movers
In the aftermath of the announcement, U.S. stocks sold off sharply on Thursday, with the S&P 500 declining by approximately 4.5%. Cousley says non-U.S. markets also fell, but by a lesser extent.
In U.S. government bond markets, yields fell as prices rose. “We saw a pretty aggressive rally in 2-year and 10-year Treasury notes as investors piled into bonds,” Cousley remarks. The outperformance is a result of rising recession risks, he said, adding that Treasurys still look close to fair value.
“With recession risks increasing, the U.S. Federal Reserve (Fed) may cut rates by more than expected at the start of 2025,” Cousley notes.
Switching to currencies, he said the U.S. dollar sold off Thursday in an unusual move. Meanwhile, the euro rallied, as did typical safe-haven currencies like the Japanese yen and Swiss franc.
Spending under scrutiny
Cousley wraps up with a look at recent U.S. economic data, which was a bit of a mixed bag. The latest ISM (Institute for Supply Management) surveys were weaker than many economists were expecting, while initial U.S. jobless claims edged down last week.
“In general, the data shows U.S. consumers are still behaving in a normal manner. The decline in consumer confidence hasn’t led to a decline in consumer spending. However, we expect that the latest tariffs will be a headwind to consumer spending moving forward,” Cousley states. He said uncertainty around the tariff situation—and how it could potentially impact U.S. capital expenditures—is what led Russell Investments’ strategist team to increase its recession risk this week.
Cousley explains the team uses a cycle, valuation and sentiment framework to guide its investment decision-making process. He said the business cycle outlook has deteriorated in the wake of the tariff announcement, while the team’s measure of investor sentiment has reached pessimistic levels.
“We haven’t seen sentiment move to a level of panic yet, but it’s firmly in the pessimistic stage,” Cousley states, adding that reaching the panic threshold could present potentially attractive buying opportunities.
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