Recession Fears Spark Market Sell-Off

The US stock markets tumbled on Monday, 10 March, after President Donald Trump refrained from answering during a Sunday interview on Fox News whether he is expecting the US economy to enter a recession. 

Nasdaq (NQ) plunged 4% to its worst single-day drop since 2022, the Dow Jones (YM) lost more than 2%, and the S&P500 (ES) dropped around 2.7%.

Trump confronted a slew of pressing questions, though he maintained a persistent tone on tariffs despite adding to trade uncertainty.

With tariff angst heightened and federal layoffs under the Department of Government Efficiency (DOGE) run by Elon Musk occurring at an alarming pace, the sell-off weighed heavily on the Magnificent Seven stocks. Musk’s Tesla (TSLA) nosedived 15% following a series of weekly losses.

The expectations of an economic slowdown slightly raised the odds that the Federal Reserve would cut interest rates sooner than expected.

Wall Street is now patiently waiting for the next round of CPI data release tomorrow, Wednesday, 11 March, to evaluate the extent to which recent Fed hawkish commentary stands true.

Markets React to Trump's Tariff Stance

President Trump caused havoc in the markets on Monday as concerns exacerbated over the state of the US economy facing retaliation primarily from Canada and China. Despite growing concerns about the impact of tariff policies on US economic growth, the President still failed to address the now-rising issue of a potential recession when asked for his opinion. 

Trump said, “I hate to predict things like that,” and added that there will be “disruptions” and “a period of transition.” Instead of offering “predictability,” the US President even confirmed that tariffs may go up over time but not down.

Coming at a time when federal layoffs amounted to 10,000 in February, with most of the firings yet to appear on the Non-Farm Payrolls (NFP) data, Wall Street witnessed a flight to safety. Household expectations also showed the mean unemployment probability in the US unemployment rate jumping 5.4% higher to 39.4%.

Despite last Friday’s NFP data signalling some stability, Bloomberg analysts forecasted the Fed to proceed with three rate cuts this year. Monday’s events, however, slightly increased the odds of an earlier rate cut in June.

Fed Not Expected to Proceed with Cuts

Despite markets foreseeing rate cuts this year, Fed Chair Jerome Powell said in a recent speech that the board is not in a rush to proceed with further rate cuts. With the upcoming CPI data offering some clarity on whether Trump’s tariffs are pressuring inflation and, in turn, consumer spending, the release of February’s inflation data remains in focus. 

Economists expect annual headline and core inflation rates, which exclude food and energy items, to rise to 2.9% from 3% and 3.2% from 3.3%, with the month-on-month figure also expected to accelerate at a slower pace of 0.3% from 0.4% in January. Still, analysts at Wells Fargo (WFC) said that despite inflation in February being expected to slow down, they anticipate CPI to be near 3% in 2025. 

Meanwhile, spending and consumer confidence have fallen, credit card payment delays have increased, and US stocks continue to fall. Although the jobs market remains resilient for now, most recession indicators point to a slowdown. Recent forecasts by the Atlanta Fed also point to a contraction of 2.4% annual rate in Q1 GDP.

Recession Odds Rise, But US Economy Still Firm

Goldman Sachs (GS) hiked last week its 12-month forecast of a recession to 20% from 15%, noting that they may increase the chances of Trump remaining committed to trade policies as US economic data disappoints. JPMorgan analysts blamed the Trump Administration's “extreme” policies for placing their recession odds for this year at 40% from 30% before. (Source: The Wall Street Journal)

Notably, Goldman Sachs's recession model had forecast a 30% chance of a recession in the summer of 2023, which was followed by a series of positive quarterly GDP growth figures instead. Moreover, despite the Atlanta Fed estimating a contraction, the New York Fed forecasted a growth rate equal to 2.7% in Q1. The US economy may be slowing down, but slower growth does not necessarily signal recession. Mentions of the word “recession” in earnings calls in Q1 were at a 2018 low.

Recession fears may be roiling markets as tariff uncertainty creates anxiety in business expectations. However, if Trump takes the rhetoric down a notch, as he has been seen doing earlier this year, this certainty may cause the recession alarm to flash off.

Conclusion

The US stock markets saw a sharp selloff on Monday, 10 March, as President Donald Trump failed to address concerns about a potential recession, exacerbating fears about the impact on US economic growth.

Federal layoffs, along with expectations of an economic slowdown, further weighed on the markets, slightly raising the odds that the Fed would have to cut interest rates sooner.

Wall Street is awaiting the release of CPI data on Wednesday to evaluate the extent to which recent hawkish Fed commentary stands true or if increasing odds of a recession are justified.

*Past performance does not reflect future results.