U.S. Stocks Steady as Investors Await Trump's Tariff Plans

As the April 2 deadline approaches, U.S. stocks have exhibited a stable trend, suggesting that investors are banking on clear trade policies to stabilize the market. The major U.S. stock indices experienced a slight decline overnight, but this was far from the market's expectations of an economic downturn. The Standard & Poor's 500 index, which had fallen about 8% from its February high, has since rebounded over the past two days, continuing a trend of recovery from its recent lows.

Ask Aime: What is the main factor driving the recent stability in U.S. stocks?

Investors remain relatively optimistic for several reasons. They believe that President Trump will not persist with any tariff policies that would severely hinder economic growth. Additionally, they do not anticipate betting on recession risks unless there are more apparent signs of economic decline. Furthermore, they expect that more information about Trump's tariff plans will reduce market uncertainty.

Ask Aime: What factors are driving the recovery of the Standard & Poor's 500 index?

Despite the market's optimistic sentiment, Wall Street analysts remain cautious. Even as more tariff information becomes available, the market acknowledges that it is still challenging to grasp the true intentions of the Trump administration. Some analysts suggest that the "uncertainty" surrounding tariffs could be a negotiating tool for the Trump team.

However, "hard data" continues to show resilience, supporting the market's cautious optimism and spreading to both stock and bond markets. This has provided some support to the market. Jim Caron, Chief Investment Officer of morgan stanley Investment Management's Portfolio Solutions Group, candidly stated, "I know we will face tariffs, and now this game is something Wall Street is very good at—we need to calculate the cash flows in these tariff scenarios and the possible range of outcomes."

Some analysts believe that investors are underestimating the threat posed by tariffs. Recently, goldman sachs analysts predicted that the effective tariff rate in the U.S. would rise by 15 percentage points this year, which would have a tax-like impact on consumers and reduce economic growth by more than one percentage point. The firm now estimates a 35% chance of a recession in the next 12 months, up from a previous estimate of 20%.

Investors face a significant challenge in understanding Trump's true intentions regarding tariffs. If the tariffs are aimed at raising substantial revenue and encouraging manufacturers to establish production bases in the U.S., then import tariffs would need to be substantial and long-term. However, if the goal is to extract concessions from other countries, the tariffs might be temporary.

Most investors acknowledge that Trump's commitment to tariffs is stronger than what Wall Street generally assumed at the beginning of the year. He has already imposed significant tariffs on goods including steel and aluminum and has unsettled the market by refusing to rule out the possibility of an economic recession this year. However, Trump has also backed down twice from imposing broader tariffs on imports from Canada and Mexico. He has also encouraged investors by discussing a "flexible" and "tolerant" approach towards other countries.

The uncertainty surrounding tariffs may be more damaging than the tariffs themselves, potentially harming the economy by causing businesses to delay investments. While some hope that the period of peak uncertainty is over, few investors expect to gain completely transparent information in the short term. Trump's impending actions are expected to trigger a period of negotiation, retaliation, and lobbying by countries and businesses.

For many, the data is encouraging. Although multiple surveys show a significant decline in consumer and business confidence, "hard data" indicates that their actual spending has decreased only moderately. This has boosted market sentiment in recent weeks. According to the latest report, consumer spending grew by 0.4% in February, slightly below economists' expectations but an improvement from January's 0.3% decline, which was partly due to cold weather suppressing demand. The latest employment report for February also showed steady job growth, with the unemployment rate remaining at a low level above 4%.

This cautious optimism has extended beyond the stock market. Investors' demand for holding lower-rated corporate bonds over government bonds has increased in recent weeks. However, these spreads remain below their peak from last year, indicating limited market concern about a significant increase in default rates, which are typically associated with economic recessions. Colleen Cunniffe, Co-Head of Global Credit Research at Vanguard, noted that the relative stability of the credit bond market primarily reflects the current economic fundamentals. While there are signs of increasing pressure among low-income households, "overall, consumers remain in fairly good shape."