March 18, 2025 - 1:15pm
After a rough few weeks in stock markets, many were hoping that there might be respite. But Deutsche Bank has bad news: announcing that equities are set to fall another 6%. Highlighting significant declines in consumer and corporate confidence, the bank is arguing that the S&P500 index is set to fall to around 5,250.
It is difficult to understand these moves from an economic perspective. The market seems to be in a panic about President Trump’s tariffs. But there is no reason to think that tariffs would lead to a slowdown in economic activity in the United States. In fact, they should in theory have the opposite effect: by encouraging consumers to buy American products rather than foreign alternatives, they should boost the earnings of American firms.
The threat that tariffs pose is not of recession or slowdown, but rather of elevated prices. Higher prices would presumably mean that the Federal Reserve would have to raise rates. Yet we are seeing precisely the opposite prediction by markets, which are raising their bets on the central bank cutting interest rates in 2025. The assumption here appears to be that the economy might fall into recession.
Economists appear to understand that the threat from tariffs is inflationary rather than directly risking a recession. Former Kansas City Fed president Esther George told Yahoo Finance: “Even though the market is pricing in three rate cuts, I’m just looking at this landscape and saying the Fed has an inflation problem too.” RSM economist Tuan Nyugen agreed, telling the publication: “In March and April, we’re going to see a pretty big pickup in terms of inflation.”
Why this disconnect between economists and the markets? The answer lies in the fact that markets are often creatures of sentiment rather than of rational analysis. Sentiment tends to latch onto the decisions made by others, and sentiment in American markets is increasingly latching on to actions undertaken by the President.
The “Trump put” is the idea that the new administration will consider the effect of its actions on the stock market. So, for example, if Trump’s trade rhetoric starts rattling markets — whether this is a rational response or not — the Trump put would assure investors that the new administration would pull back from such scary rhetoric.
But this is not the way the new administration is behaving. Indeed, it is disregarding the markets. A cynic might say that the term “Trump put” itself is designed to focus attention on the fact that the Trump administration is not acting in a manner that is amenable to markets. Any time the new administration “misbehaves”, a slew of articles is published highlighting that it is acting irresponsibly. Stock market traders then sell stocks, and the Trump put becomes a self-fulfilling prophecy.
How will the new administration manage this? Tariffs, while pushing up prices, should not cause a recession, though a self-fulfilling stock market doom spiral might. The Trump administration needs to take active control over the market narrative and highlight these realities. The key is getting stock markets to focus their attention elsewhere and stop obsessing over trade policies. This is a PR problem, not an economic one. As things stand, the administration is suffering from bad optics.
Philip Pilkington is a macroeconomist and investment professional, and the author of The Reformation in Economics
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SubscribeDid Deutsche Bank predict the Great Financial Crisis? If not any predictions it makes can be safely ignored.
True!
A lot of confusion is sowed (often deliberately) when authors conflate “rising prices” with “inflation”.
Sometimes prices rise because of changes in the real world (tariffs, scarcity of materials, increases in demand).
Other times they rise because the central bank has printed a lot of money.
Price rises driven by real-world changes tend to be self-correcting.
Money printing, on the other hand, can get into a positive feedback loop, culminating in hyperinflation.
er … ‘inflation’ is the measurement of ‘rising prices’, which is why they are ‘conflated’! And the reason prices rise when central banks ‘create’ money is because that raises demand because people have more money to spend.
I can’t be bothered to go beyond Google’s AI Overview on this one:
I believe you’re confusing the definition of inflation with how we measure it. Erstwhile’s definition below is correct. However, there’s no way to really track ‘inflation’ directly, so the government and banks use a formula that measures the price of a particular basket of goods. The mathematics that goes into the calculation is more complicated than that, and I’m not sure what’s actually in the basket or whether it changes, but the inflation numbers that are being reported are that. The reason that works is because there’s enough different goods that the factors Erstwhile discussed will be a mix of positive and negative and will mostly cancel out in the aggregate. If the price index stays the same, then the money supply is in balance with the needs of the economy, although it might have grown or shrunk in absolute terms. If the price index rises, then too much money is being printed, lowering the value of the currency. If the price index declines, then not enough money is being printed. That’s deflation and most economists consider it to be much worse than inflation, so the Fed tends to keep inflation low, but above zero, as a way to be cautious, and there are some economists who assert some inflation is good or necessary.
Further, there are some economists who believe Trump is deliberately trying to devalue the dollar versus other currencies to correct trade imbalances, while others maintain that tariffs are a way to push other nations to further devalue their own currencies to keep the existing trade balance intact so that their exporters don’t see declines in demand, thus paying for the tariff through inflation. The real chaos comes from the fact he’s dealing with nations individually and essentially pitting them against each other for favored status and the right to export at low tariff rates. It’s too early in the process to say how successful it will be. We have to wait and see. I will say very few of Trump’s voters care much about stock prices, but they do care about inflation.
This reads like Pilkington blaming the market if Trumps policies cause a crash in the market
The markets giveth. The markets taketh away….
Tariffs inflationary, lower US dollar inflationary for the US, government cuts and layoffs and shrinking the fiscal deficit recessionary. Trump policies will lead to stagflation or recession or even depression if they go further. Business investment will stagnate as companies wait for the outcome, they need stability and less uncertainty to make long term plans, especially if a recession causes lower profits. The US consumer has benefitted greatly from low prices and trade deficits, if this reverses consumption will decline as prices rise and consumer confidence collapses. A recession will also increase government deficits and debt. The combination of all these policies could become catastrophic for the US economy.
It will also cause a stock market crash and maybe a financial crisis. Americans are not prepared for what’s coming in the next year or 2.