However, GlobalData TS Lombard senior macro strategist Daniel von Ahlen worries that investors may be underestimating the likelihood of a recession. If he is correct, this might cause further suffering later in the year, particularly for stocks.
Von Ahlen cited some alarming indicators drawn from recent economic statistics and headlines in a research he shared with MarketWatch on Wednesday. Just as the hiring rate has slowed, federal government employee layoffs will put the labor market’s resilience to the test.
Additionally, as income growth has slowed, Trump’s tariffs should increase the cost of numerous goods, reducing consumers’ purchasing power.
China’s retaliatory tariffs may harm American exporters. The work force may decline as a result of a crackdown on immigration, and the expenditure cuts required to maintain Trump’s tax cuts from his first term may also deprive the American economy of a crucial source of stimulus at a particularly bad time.
“Collectively, these factors could be powerful enough to push the U.S. economy into recession, especially as rapidly cooling real personal income growth leaves little room for error,” von Ahlen stated in the research.
The macro strategist calculated the pace of economic growth that is now priced into U.S. markets to strengthen his case.
Even though Wall Street experts’ consensus growth rate projection has significantly decreased, his model demonstrated that investors have not yet given up on their prospects of robust economic growth.
Wall Street analysts were still overly optimistic about the chances for corporate earnings growth in 2025, which could be another drawback for equities. Even while analysts have begun to lower their projections, the bottom-up consensus still called for growth of 8.9% in 2025.
In a recession, earnings usually grow slightly or not at all.
Furthermore, since equities have recently contributed a larger portion of typical household wealth, a decline in the stock market may also have an impact on consumer spending.
Von Ahlen’s concern that investors may be caught off guard by what happens next is not unique. In remarks recently sent to MarketWatch, Pepperstone senior research strategist Michael Brown also voiced some reservations.
“Sectoral tariffs on computer chips, and pharmaceuticals are on the way; a 10% blanket tariff is still in place on the vast majority of U.S. imports; Sino-U.S. trade is still essentially blockaded, with China having now halted deliveries of Boeing jets; and, even if it’s still early days, progress towards trade deals to eradicate the ‘reciprocal’ tariffs altogether seems rather slower than most would like,” Brown stated.
As a result, I continue to worry that participants are being led into a rather deceptive sense of security. There is still a lot of trade uncertainty, and we haven’t completely discounted the risks of either upside inflation or negative growth that tariffs will have on the US and global economies.”
What is the best way for investors to prepare for a recession? Von Ahlen made several trade recommendations. One strategy involved betting against ETFs associated with more cyclical sectors, such as the Financial Select Sector SPDR Fund XLF, and going long defensive sectors through well-known ETFs, such as the Utilities Select Sector SPDR Fund XLU.
Additionally, he advised purchasing long-dated inflation-protected bonds, possibly through an exchange-traded fund (ETF). One choice was the Pimco 15+ Year U.S. TIPS Index ETF LTPZ.
Given the Japanese yen’s reputation as a safe-haven currency, it would also make sense to fund a long position in the yen (MXNJPY) with Mexican pesos. The Japanese currency was still appearing incredibly cheap, even with its recent increase in value relative to the US dollar.
Following Trump’s announcement of his “liberation day” tariffs on April 2, Wall Street analysts, including a group at Goldman Sachs Group, have issued warnings about the possibility of a recession. The Goldman team swiftly modified their projections, though, after Trump declared on April 9 that some of the taxes would be suspended for 90 days.
After Nvidia Corp. (NVDA) announced late Tuesday that the White House had prohibited the export of more of the company’s AI chips to China without a license, U.S. stocks were once again in the red on Wednesday. The S&P 500 SPX was down 1.3% in recent trading, while the Nasdaq Composite COMP was down more than 2%.
Bloomberg News also revealed on Tuesday that Beijing had directed local carriers to cease receiving Boeing aircraft deliveries.
