Consumer sentiment has been severely damaged by worries about government layoffs, tariffs, and inflation during the second Trump administration.
Even while the credit spreads in the bond market are close to multiyear lows, that caused consumer stocks XX:SP500.25 to enter correction territory in February and unnerved equity investors.
Though investors haven’t precisely been abandoning the market, recession rhetoric is making a comeback. Trump’s repeated threats of tariffs, however, seem to be having a negative impact and may make it more difficult for the Fed to lower interest rates this year.
Andrzej Skiba, head of U.S. fixed income at RBC Global Asset Management, stated that “soft” economic indicators had mainly undone their gains after the presidential election. “We’ve seen some quite tangible deterioration in sentiment readings,” he added.
Hard economic data suggests a strong start in 2025, such as the most recent monthly jobs report and GDP figures. However, weekly jobless claims become more concerning in the wake of Elon Musk’s vigorous cost-cutting drive through the so-called Department of Government Efficiency, and retail sales were disappointingly sluggish in January.
“So, that’s the conundrum the market is facing,” RBC’s Skiba said. “With the new government making headlines almost every day about a range of policy initiatives, is the negative change in sentiment just due to the increased degree of uncertainty? Or are we genuinely witnessing the initial indications of a more concerning aspect of the economy?
Businesses have long noted that increased borrowing rates put strain on lower-income consumers while causing less stress for those with higher incomes. While other businesses have not yet reported a significant decline in consumer behavior, Walmart Inc.’s (WMT) most recent quarterly report highlighted slowdown among its customer base.
The divide between “a secure consumer and a stressed consumer” has gotten larger in the United States, according to Simeon Wallis, chief investment officer at Aprio Wealth Management.
Homeowners are safe because they have cheap 30-year fixed-rate mortgages and equity in their homes, especially if they also hold stocks and have profited from two years of significant equity increases.
As long as the Federal Reserve maintains high interest rates, borrowers who rent and depend on floating-rate debt, such as credit cards, have been falling behind on their payments.
“The consumer accounts for 70% of the economy,” stated Wallis to Aprio. “If we see increased stress, that’s a bigger risk.”
Declining self-assurance
Household sentiment has soured, as seen by a notable increase in worries about the future of available jobs in the Conference Board’s February consumer-confidence survey.
According to Torsten Slok, chief economist at Apollo Global Management, there are around 9 million government employees and contractors that may be concerned about their jobs out of the 160 million people who work in the United States.
“The risks are rising that households may begin to hold back purchases of cars, computers, washers, dryers, vacation travel plans, etc.” Slok said in a client message on Thursday.
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According to Jay Menozzi, a portfolio manager at Easterly Orange, “there was euphoria surrounding the election, but the reality is starting to settle in.” “It is obvious that inflation has negatively impacted consumer spending. The trajectory of inflation may make that worse or offer some respite.
Price pressures in January did not worsen, according to the Fed’s preferred inflation measure, which was uncomfortably above the central bank’s 2% annual target on Friday. It also revealed a decline in spending.
Spreads of credit
Stocks have had a rough February due to market uncertainty, particularly in the megacap tech and consumer discretionary sectors. Bonds, however, continue to offer some of the highest yields in recent memory and should do well in the event that the economy falters and stock prices continue to decline.
In contrast, credit spreads have historically stayed low, showing relatively small compensation for bond investors over risk-free benchmarks, despite increased recession risks and economic uncertainty in 2025.
In light of this, Menozzi at Easterly prefers housing bonds, especially those with higher yields and no government support. “We are now in a situation where the value of the underlying asset is strong, especially relative to the debt against it.”
Credit spreads have decreased as a result of pension-fund purchases of lengthier bonds, according to Dan Siluk, head of global short duration and liquidity at Janus Henderson. The goal of many of those funds is to hold the debt until it matures, which can help control volatility.
However, Siluk added that he has been concentrating on corporate credit in countries like Europe, Canada, and Australia, where spreads have not compressed as much, as well as the capacity to implement comparatively inexpensive hedges for portfolios. “You want to buy insurance when it’s cheap, not when you really need it,” he stated. “Because then it’s too expensive.”
Others anticipate a more difficult journey ahead. According to Skiba at RBC, he is keeping an eye on the proposal Republicans just advanced on Trump’s one “big, beautiful bill” for the budget, including the estimated savings on U.S. debt-service expenses and proposed spending cutbacks.
In the last few months, his team has been lowering risks, mostly through “reinvesting in places you can hide, and be safe” and selling longer-term corporate bond holdings, such as 10-year and 30-year bonds. This includes shorter corporates and fast-repaying securitized products while the policy’s future direction is being determined.
Skiba stated that his team had changed their strategy to book profit on that trade “in a pretty impressive rally in spreads in the past few months.” “We wanted to run long into the election,” he added.
Despite a slight increase on Friday, stocks were still expected to see large losses in February. While the Dow Jones Industrial Average DJIA was up 2.2% and the Nasdaq Composite Index COMP was down 3.2% to begin the year, recent volatility has wiped the majority of the S&P 500 index’s SPX gains for the year, according to FactSet. Following a recent peak of 4.8%, the 10-year Treasury yield BX:TMUBMUSD10Y was now at 4.26%.
