On the menu today: Yes, it’s easy to overestimate the impact of the Dow Jones Industrial Average, the Standard and Poor’s 500, and the Nasdaq, and the stock market is no stranger to volatility. But the cumulative effect of the Trump tariffs, the overall uncertainty and erraticism in the president’s trade policies, and some loose talk about the possibility of a recession all added up to a market meltdown on Monday. Trump team members like Kevin Hassett insist this is all just a temporary blip and a hangover from bad Biden policies; meanwhile Larry Summers, the Cassandra of Joe Biden’s inflation and cost-of-living woes, warns that we’re nearly 50–50 for a recession, almost entirely because of self-inflicted wounds. Read on — and try not to check your investments for a little while.
On Tariffs and Market Uncertainty, ‘We’re Getting the Worst of Both Worlds’
You probably don’t want to check your 401(k) this morning.
There’s this perception in some corners of the new Right, echoing the thinking of the old Left, that the stock market is a concern only for people who look like the little top-hat-wearing guy from Monopoly. That perception has been outdated for a long time now. In 2024, 62 percent of Americans owned stocks. As of 2023, 53 percent of private-sector workers participate in a workplace retirement plan, and 49 percent of private-sector workers participate in a retirement savings plan. Among state and local government workers, 81 percent participate in a workplace retirement plan and 18 percent participate in a retirement savings plan. These include 401(k), 403(b), 503(b), and Thrift Savings Plans, Individual Retirement Accounts (IRA), and Keogh accounts.
Separately, nearly 17 million American families save for college using 529s, which can invest in stocks. And according to the Federal Reserve, 48 percent of American retirees depend on “interest, dividends, or rental income” — unfortunately, that study didn’t break down those figures by each category.
Lots of ordinary folks’ hopes for retirement and college, and retirees’ ability to cover living expenses, depend on the continued healthy performance of the stock market.
Monday was just a brutal day for the stock markets; the Dow Jones Industrial Average (DJIA) closed down 890 points, or 2.1 percent, while the S&P 500 fell 2.7 percent, and the Nasdaq composite index plummeted 4.0 percent. What’s more worrisome than one particularly bad day is the fact that since Inauguration Day, the DJIA has fallen 2.5 percent, the S&P 500 has dropped 5 percent over that period, and the Nasdaq has plummeted 10 percent. As the Wall Street Journal notes, all three major indexes are now below their levels recorded on Election Day last November.
Throughout his first term, Trump took credit for a booming stock market. On Maria Bartiromo’s program on Sunday, President Trump took a dramatic turn and argued that Americans should not look to the stock market to evaluate the performance of his presidency and the economy:
Bartiromo: Before you came into the Oval Office the first time, you were a very successful businessman, very successful real estate executive. And a lot of people said, oh, this is the business president. This is it. He’s watching the stock market. He knows all about — he doesn’t want the market to go down. And now we have got tariffs, and the market has been going down.
Trump: Well, not much, I mean, in all fairness, not much.
Bartiromo: You said, ‘Look, we’re going to have a disruption, but we’re okay with that.’ Is that what you meant? The stock market going down was the disruption?
Trump: There will be a little disruption.
Bartiromo: What other disruption were you alluding to?
Trump: Look, what I have to do is build a strong country. You can’t really watch the stock market. If you look at China, they have a 100-year perspective. We have a quarter. We go by quarters.
The stock market is indeed an imperfect measurement of the economy; the markets grew considerably during President Joe Biden’s four years, but Americans didn’t feel much economic optimism for long stretches because inflation was so high and the cost of living increased so dramatically. But as president, you’d rather the value of the markets go up, and people enjoy a bull market, rather than endure a bear market. (Obviously, bubbles are bad because they inevitably burst.)
The argument from the Trump team is that we’re going to endure short-term pain to enjoy a longer-term gain. The reaction of the markets indicates skepticism. As noted in this newsletter before, the markets generally hate (a) tariffs and (b) uncertainty, and the first two months and change of this new administration have basically been an assembly line pumping out tariffs and uncertainty.
Our David Bahnsen, chief investment officer at the Bahnsen Group, pops up in the markets coverage of the New York Times, saying, “The market volatility is much less about the bad news of tariffs and much more about the uncertainty of tariffs, especially uncertainty as to what the policy is, where it is headed, how long it will last and what the end result will be.”
Last night, former Clinton administration Treasury Secretary Larry Summers appeared on CNN and warned the U.S. was nearly at even odds for a recession in the coming year:
Kasie Hunt: Do you think we’re headed for a recession?
Larry Summers: I think we’re on the real possibility of it. I would have said a couple months ago that a recession was really unlikely this year. Now, it’s probably not 50-50, but it’s getting close to 50-50. And there’s one central reason, which is we’ve had economic policies that have been completely counterproductive. All of this emphasis on tariffs and all of the ambiguity and uncertainty created about tariffs has ironically both chilled demand and made businesses not invest, made consumers think they should hold off before making big spending commitments. And usually when you do something like that, prices go down. But this time, when people are worried they’re not going to be able to get supplies in the future, or not be able to get supplies without paying big tariffs, prices actually go up. Inputs to areas like cars and houses have been tariffed, pushing up their price. So, we’re getting the worst of both worlds — more concerns about inflation, and more concerns about economic downturn, and more uncertainty about the future, which just slows everything down. This is pretty much a self-inflicted wound.
I can hear the scoffing at Summers already — an old Bill Clinton guy, finance and Wall Street guy, “globalist,” blah blah blah. Just remember what Summers was telling the Biden administration in its opening months: “We’re taking very substantial risks on the inflation side.” Nobody in the Biden administration wanted to listen to Summers then, either. “There’s nobody suggesting there’s unchecked inflation on the way — no serious economist,” Biden confidently assured the country on July 19, 2021.
And when it comes to the risk of recession, the messages from the president and his commerce secretary do not quite align.
Maria Bartiromo: But are you expecting a recession this year?
Trump: I hate to predict things like that. There is a period of transition, because what we’re doing is very big. We’re bringing wealth back to America. That’s a big thing. And there are always periods of — it takes a little time. It takes a little time. But I don’t — I think it should be great for us. I mean, I think it should be great. It’s going to be great ultimately for the farmer. Don’t forget I made the deal with China on farmers where they had to buy $50 billion worth of product, $50 billion, from 15 to 50. And it was great.
Almost simultaneously on another channel, Commerce Secretary Howard Lutnick was insisting there was no chance the economy would go into recession:
KRISTEN WELKER: Alright, Mr. Secretary, consumer sentiment is dropping, inflation has ticked up, major banks like J.P. Morgan and Goldman Sachs now say a recession in the next 12-months is becoming more likely. Should Americans brace for a recession?
SEC. HOWARD LUTNICK: Absolutely not. Anybody who bets against Donald Trump. It’s like the same people who thought Donald Trump wasn’t a winner a year ago. Donald Trump is a winner. He’s going to win for the American people. That’s just the way it’s going to be. There’s going to be no recession in America. What there’s going to be is global tariffs are going to come down because President Trump has said, “You want to charge us 100 percent? We’re going to charge you 100 percent.” You know what they say? They say, “No, no, no, no, no, don’t charge us 100 percent. We’ll bring ours down.” We’ll unleash America out to the world. Grow our economy in a way we’ve never grown before. You are going to see over the next two years the greatest set of growth coming from America as Americans.
The Atlanta Fed projection is still grim, expecting U.S. GDP in the current quarter to contract by a bit more than 2 percent. But our old friend Kevin Hassett, now the White House National Economic Council Director, is as optimistic as ever:
If you look at the Atlanta Fed GDPNow number, it’s showing negative first quarter, which is kind of, if you like, a metric of the inheritance of President Biden. A lot of that is also from a big increase in the trade deficit, which, as you know, and you’ve been covering, Joe, is happening in part because people are anxious about future tariffs. And so they’re stockpiling. And so that’s a very, very temporary phenomenon. I think that medium term, what you’re seeing is the biggest tax cuts in history, a massive deregulation, a productivity boom from artificial intelligence and tariffs, which even if you take the high end estimates of the tariff revenue, they’re going to be just a tiny fraction of the size of the tax cuts, which are almost surely going to be in place. . . .
There are a lot of reasons to be extremely bullish about the economy going forward. But for sure this quarter, there are some blips in the data, including the negative GDP now, which are related both to the Biden inheritance and to some, you know, timing effects that are happening ahead of tariffs.
ADDENDUM: The argument from some quarters of the Left is that the dramatically dropping attempts to cross the U.S.-Mexico border does not reflect a widespread perception that the Trump administration takes enforcement seriously and is hell-bent on deporting anyone who enters the country illegally. No, it merely reflects that Donald Trump is so terrible and abominable, migrants no longer want to come to America.