It seems this time, the stock market might indeed be mirroring the economy. In recent days, financial landscapes worldwide have nosedived following President Trump’s announcement of extensive tariffs, triggering what many see as a global trade war. Last week, the S&P 500 took a nosedive, falling over 10% in just two days, and continued its unpredictable dance on Monday amid updates of more tariffs and speculation about delays. Stock markets in Asia and Europe haven’t been spared, suffering significant drops as well.
Often, experts remind us that the stock market doesn’t always reflect the broader economy accurately. Share values can fluctuate due to a variety of factors—new technological advancements, consumer trends, or changes in tax and interest rate policies. Yet, sometimes the markets do send a clear economic message, and recently, that message has been alarmingly direct. The consensus among investors is that Trump’s tariffs and the expected retaliation from trading partners will drive up prices, slow down growth, and potentially tip the world into a recession.
The sharp decline in stock prices isn’t just an expression of recession fears—it might actually help usher one in. As people see their portfolio values dwindle, they’re likely to curb spending.
Ryan Sweet, chief U.S. economist at Oxford Economics, states that market volatility over a few days may not mean much. However, if such a downturn persists over weeks or months, the economic repercussions could accumulate rapidly. Tariffs will hit low- and moderate-income families hardest, as they expend more of their earnings on tariff-affected essentials like food and clothing and have fewer savings to cushion against rising prices. Meanwhile, stock market declines will be keenly felt by wealthier individuals who hold a larger portion of their wealth in stocks and similar investments.
These wealthier groups have been pivotal in sustaining consumer spending recently, as lower-income families have wrestled with rising costs, high interest rates, and sluggish wage growth. However, as wealthier individuals see their assets diminish, they too might start tightening their belts. Tara Sinclair, an economist at George Washington University, illustrated this with a friend’s comment: “I won’t be redoing my kitchen because my entire kitchen budget was wiped out in the stock market in the past three days.”
Moreover, the effect of falling stock prices doesn’t stop with the affluent. A considerable number of Americans own stocks, either directly or through retirement accounts, a figure that has grown partly due to the meme-stock trend that surged during the pandemic.
Sweet estimates that the “wealth effect” — the economic impact tied to changes in household spending as stock market values wax and wane — is now four times what it was pre-pandemic, leaving the economy more susceptible to market dips. “We’re talking about potentially hundreds of billions of dollars in lost spending,” he said. Such a decline could send ripples through the entire $30 trillion U.S. economy. Companies, already treading carefully in the face of tariff and policy uncertainties, might become even warier about hiring and investments. While job cuts haven’t been the norm yet, that might shift if sales begin to slide.
Michael Gapen, Morgan Stanley’s chief U.S. economist, explains, “That’s the recession trigger. Weaker demand among higher-income households could lead to business layoffs, typically impacting low- and moderate-income families first.”
Current market behavior indicates rising anxieties. Shares in tech firms, automakers, and companies heavily reliant on global supply chains have been hit hardest. However, the downturn isn’t confined to these sectors; businesses relying on discretionary consumer spending, like airlines and hotels, are also feeling the squeeze. “Both large and small companies are affected,” said Sinclair.
Additionally, there’s been a sharp decline in oil prices, suggesting investors predict a slowdown in activities like travel, shipping, and infrastructure investments, both in the U.S. and globally. Other nations, heavily reliant on exports, might feel these effects even more acutely than the U.S. Gapen remarks that while “the rest of the world is far more tied to global trade than we are,” this situation doesn’t bode well for global growth, potentially making a global recession more probable than one confined to the U.S.
There’s still hope among investors that Trump might reconsider his tariff agenda before it leads to widespread job losses or business closures. However, even a reversal may not fully repair the damage, especially with businesses doubting any lasting cessation of tariff threats after numerous policy flip-flops.
Businesses face a barrage of questions and a dearth of answers, which naturally drives them to play it safe, as Sweet observes. “They scale back on hiring and cut investments in infrastructure, equipment, and software when they’re uncertain.”
