Wall Street is worried that Trump will ruin the soft landing
Over the last year, economic policymakers in the United States have concentrated their efforts on attaining a soft landing, aiming to reduce inflation while avoiding a recession. A newly assembled team of pilots is contemplating a strategic adjustment that, as they themselves recognize, could potentially steer the economy towards a hard landing. Concerns on Wall Street are mounting regarding the potential impact of Trump’s actions on the prospects for a soft landing. In recent days, President Trump and his senior advisers have exhibited a notable indifference to the escalating risks associated with trade uncertainty, which may dampen private-sector investment. There is a contention that a recalibration in expenditure and recruitment may be necessary, that declining equity valuations should not be a significant concern, and that inflationary pressures could increase in the near term.
During a Sunday interview on Fox News, Trump avoided addressing the question of a potential upcoming recession. “We are currently experiencing a significant transitional phase due to the magnitude of our undertaking,” he stated. “My objective is to establish a robust nation.” Observing the stock market in real-time is not a feasible endeavor. When afforded the opportunity to clarify his earlier statements on Sunday, Trump chose instead to reinforce his position during comments made to reporters aboard Air Force One that evening. “Tariffs will represent one of the most significant policy achievements in our nation’s history.” It is poised to restore our nation’s wealth,” he stated. The remarks triggered volatility in stock markets on Monday. The Dow Jones Industrial Average experienced a decline of 890 points, representing a decrease of 2.1%. The S&P 500 experienced a decline of 2.7%, whereas the Nasdaq, heavily weighted towards technology stocks, saw a more pronounced drop of 4%, marking its most significant decrease since 2022. All three principal indices have fallen below the values observed on Election Day in November of the previous year.
Delta Air Lines reported a decline in domestic demand, prompting a reduction in its first-quarter earnings and revenue forecasts following the market’s closure on Monday. The firm experienced a notable change in consumer sentiment in February, with Chief Executive Ed Bastian indicating on CNBC that consumer spending began to plateau. The demand for business travel has exhibited a notable decline. “In environments characterized by uncertainty, firms are adopting a more cautious approach,” he stated. Recently, advisers such as Commerce Secretary Howard Lutnick have cautioned that tariffs may lead to a temporary surge in prices. Treasury Secretary Scott Bessent indicated that the U.S. economy might require a recalibration after a prolonged period of expansion driven by government expenditure and increasing asset valuations. “We will observe if there are adverse effects,” he stated on CNBC on Friday.
It is important to note that Trump took office amidst an economy characterized by consistent growth and elevated stock market performance, yet it also faced significant vulnerabilities stemming from a stagnant housing sector and a decelerating labor market. At the outset of the year, investors exhibited a degree of indifference towards these imperfections, anticipating that the incoming administration would prioritize stimulating economic growth. Following Trump’s election in November, stock prices experienced a significant increase as investors projected a favorable combination of tax reductions and deregulation, reminiscent of the economic conditions observed during his initial year in office in 2017.
“Individuals tended to focus exclusively on the favorable aspects of Trump’s proposed initiatives. “That has essentially dissipated, and now we find ourselves once again monitoring for signs of recession,” stated Dario Perkins, an economist at GlobalData TS Lombard in London. Observers have interpreted the recent change in rhetoric from the president and his advisors as notably significant. The administration appeared to prioritize downplaying the potential risks associated with rising government bond yields stemming from an increase in inflation, while also preemptively attributing any ensuing growth concerns to the outgoing Biden administration. “On Friday, I would have posited that the administration appeared concerned about their policies potentially decelerating economic growth, and they seemed to be establishing a narrative suggesting they inherited a faltering economy,” stated Michael Strain, head of economic-policy studies at the right-leaning American Enterprise Institute. Recent observations appear to have extended beyond that initial scope. “Currently, there appears to be a prevailing sentiment that if the economy encounters difficulties, it is acceptable,” stated Perkins. “This situation is inducing considerable anxiety, as pushing the economy into a recession does not come with assurances of a swift recovery.”
Market economies generally gravitate towards a state of equilibrium. Heightened expenditure and recruitment perpetuate further expenditure and recruitment until an external shock—such as a conflict, a surge in oil prices, or a significant rise in borrowing costs—disrupts the economic momentum, leading to a detrimental feedback loop. Analysts at JPMorgan Chase indicated on Monday that the probability of a recession has increased to 40% from 30%, attributing this shift to “extreme U.S. policies.” Goldman Sachs, having reliably forecasted growth exceeding consensus expectations in prior years, now projects a slowdown in growth relative to the broader Wall Street outlook. Their economists have increased the probability of a recession occurring within the next 12 months to 20%, up from the previous estimate of 15%. “We maintain the perspective that this situation represents more of a growth scare rather than an impending recession,” stated George Mateyo, chief investment officer at Key Private Bank. “This situation is predominantly the result of human actions.”
The recent actions of the administration have caught both Washington and Wall Street off guard, as it embarks on a dual strategy aimed at significantly reducing the federal workforce while also imposing substantial tariffs on its major trading partners. The Trump administration has enacted significant tariff hikes on China, affecting a variety of products, including consumer electronics and apparel, which had previously been granted exemptions six years prior. The administration appears to be assessing the limits of the economy’s capacity to endure increasing tariffs. “And it remains uncertain about the delineation of those boundaries,” stated Strain. The challenges associated with predicting fluctuations in the prices of imported goods suggest that investment spending may experience a significant slowdown in the first quarter, he noted. Numerous risks are present. For instance, initiatives aimed at reducing the federal workforce, while avoiding a prolonged increase in unemployment, may depend on the private sector’s capacity to integrate those employees. However, one must consider whether private-sector enterprises are adequately equipped to respond, given the uncertainty surrounding the potential increases in tariffs on imported goods and materials. The Trump administration, by implementing various policy experiments simultaneously, jeopardizes the delicate “slow-to-hire, slow-to-fire” equilibrium that has characterized the post-pandemic economy.
Strain expressed concern regarding the potential impact on consumer expenditure stemming from apprehensive employees—specifically, those directly engaged by the federal government, as well as the multitude of individuals whose employment is contingent upon federal funding or contracts—reducing their purchasing activities. Harvard University declared a moratorium on new hires this past Monday. The U.S. government has historically implemented significant fiscal reductions. The federal workforce experienced a contraction exceeding 10% during the period from 1992 to 1998. However, a consistently expanding economy facilitated this process without any significant disturbances.
In November, the proportion of households anticipating an improvement in their financial circumstances over the next year reached a 4½-year peak, as reported by a survey conducted by the New York Fed among consumers. The recent survey, published on Monday, indicated that household financial sentiment experienced its most significant monthly decline last month since 2023. The anticipated likelihood of defaulting on a debt obligation has reached its peak since April 2020. Certain analysts have warned that Trump’s messaging might represent a calculated attempt to enhance the nation’s negotiating position with trade partners, as well as to influence bond investors and the Federal Reserve to sustain a tendency toward reducing interest rates. Trump’s erratic approach to trade and security has already led officials in China and Europe to implement measures aimed at boosting economic stimulus and enhancing defense expenditures.
Recent analyses indicate that the previous fortnight has played a crucial role in recalibrating expectations on Wall Street, demonstrating that Trump is unlikely to alter his trajectory in response to a market downturn. “His actions convey a serious intent, indicating that he is not to be taken lightly.” Regarding tariffs, Andy Laperriere, head of U.S. policy research at Piper Sandler, expressed a deep-seated conviction.
Laperriere cited an anecdote from Bob Woodward’s 2018 publication, illustrating how Trump’s economic advisors operated discreetly to temper the more aggressive aspects of his trade policy. “The absence of a figure like Gary Cohn means that the Peter Navarro memo remains unaddressed.” The individuals present have accepted the reality that he will pursue his own agenda regarding tariffs,” he stated. Business executives have expressed a preference for larger-than-expected tariffs, provided there is clarity regarding the administration’s long-term intentions.
During the interview on Sunday, Trump dismissed the call for clarity by indicating that “tariffs could increase over time.” Faced with criticism that his response failed to alleviate the concerns of businesses, Trump pivoted to a critique of multinational corporations: “For years, the big globalists have been exploiting the United States.” Laperriere indicated that investors are justified in their concerns that policy measures may shift towards disorder rather than a balanced approach should economic growth falter. “Rather than a sluggish economy prompting Trump to reassess his policy framework, it is more probable that it will lead him to explore alternative policies that could destabilize the economy,” including a more assertive push to pressure the Fed into lowering interest rates, he stated.
Given that tariffs are expected to elevate prices, at least temporarily, it is probable that Federal Reserve officials will adopt a more measured approach in mitigating potential growth threats compared to the previous year, when interest rates were elevated and inflation was on a consistent downward trajectory. “One cannot be certain that the response of monetary policy will materialize swiftly enough to disrupt that possible feedback loop.” Perkins expressed concern regarding the situation.
