Recent developments in U.S. trade policy have heightened concerns among investors about the potential onset of a recession and the possibility of U.S. stocks entering a bear market following their recent correction.
U.S. Treasury Secretary Scott Bessent, in a recent interview with NBC's "Meet the Press," characterized market corrections as "healthy" and expressed minimal concern over the recent equity selloff. He noted that corrections often serve to recalibrate overvalued markets. The S&P 500 recently recorded its fourth consecutive week of declines, marking its longest losing streak since August 2024, while the Dow Jones Industrial Average experienced its most significant weekly drop since March 2023.
On March 13, the S&P 500 officially entered correction territory, defined by a 10% decline from a recent peak. A bear market is typically identified by a more severe decline of at least 20%, which can have broader economic implications. Yardeni Research observed that bear markets seldom occur without accompanying recessions but suggested that if a recession is not imminent, current high valuations might persist.
Deutsche Bank Research analyzed historical S&P 500 corrections and found that in 12% of cases, a recession had already commenced, while in 56% of instances, no recession occurred within a year of the correction's onset.
Addressing recession concerns, Bessent acknowledged the possibility of an "adjustment" as new policies are implemented. He emphasized that while a recession is not guaranteed, the administration is focused on establishing sustainable fiscal policies, moving away from previous patterns of extensive government spending.
Yardeni Research highlighted that the economy is undergoing a stress test due to recent trade policies and reductions in federal payrolls. The firm pointed out rapid corrections in major indices like the Nasdaq and S&P 500, suggesting that market participants are signaling disapproval of current policies. This sentiment could potentially drive stock prices into bear market territory, leading to a negative wealth effect that might precipitate a self-fulfilling recession.
Despite recent downturns, U.S. stocks showed resilience on Monday, with the S&P 500 rising 0.6%, the Dow increasing 0.9%, and the Nasdaq Composite advancing 0.3%. The Nasdaq had entered correction territory earlier on March 6.
Bessent reiterated that stock market corrections are a normal aspect of market dynamics, contrasting them with unsustainable euphoric market surges. The ongoing bull market, which has seen the S&P 500 gain over 20% in both 2023 and 2024, has faced challenges in 2025, with the index down 3.5% year-to-date.
CFRA's Chief Investment Strategist, Sam Stovall, noted that the S&P 500's struggles since its record peak on February 19 are partly due to the headwinds created by newly imposed tariffs, which have rekindled recessionary fears.
Yardeni Research further explained that corrections often occur when markets anticipate a recession that ultimately does not materialize, typically due to a decline in the forward price-to-earnings ratio while forward earnings remain stable or continue to rise. In contrast, bear markets are usually associated with actual recessions, leading to declines in both valuation multiples and earnings expectations. Notably, only a few bear markets, such as those in 1962, 1987, and 2022, have occurred without accompanying recessions.
Some investors remain optimistic, believing that President Trump's tariff strategies are intended as negotiation tools to secure lower tariffs from major trading partners. They anticipate that if these strategies do not yield the desired results, political pressure may compel a policy reversal. However, there is concern that any delay in policy adjustment could lead to a consumer-led recession and a subsequent bear market.
Recent economic data indicates that U.S. retail sales rose in February, rebounding from January's decline but falling short of Wall Street's expectations. Yardeni Research maintains confidence in the resilience of consumers, the economy, and corporate earnings but acknowledges that heightened recession fears could suppress valuation multiples. The firm emphasizes that much depends on the unpredictable nature of the President, who has openly identified as "Tariff Man," reflecting a strong stance on protectionist trade policies.
Economists surveyed by the Financial Times have expressed concerns that President Trump's economic policies, including sweeping tariffs and efforts to downsize the federal government, are expected to slow U.S. economic growth and raise inflation. The poll highlighted fears that economic uncertainty could reduce consumer spending and investment, leading to a projected growth rate of 1.6% for 2025, down from the previous estimate of 2.3%. These policies are anticipated to increase core inflation to 2.8% by the end of the year.
Amid mounting recession concerns, financial markets are closely monitoring the Federal Reserve and Chairman Jerome Powell for guidance on the economic path ahead. Investors are expecting multiple interest rate cuts, but the Fed may be hesitant due to a recent spike in inflation, partly driven by tariffs. The Fed remains cautious, with Powell emphasizing the need to understand the cumulative effects of the administration's policies before acting.
The stock market experienced a brief rally recently, but persistent fears of tariffs and recession may hinder sustained recovery. Analysts emphasize that market confidence hinges on resolving tariff disputes. Falling consumer confidence and potential lower earnings due to tariffs could exacerbate market declines.
Trump's tariffs on imported goods could significantly reduce the affordability of consumer products in the U.S. Historically, cheap imported items have provided a sense of comfort amidst rising costs of essential services such as healthcare, housing, and education. However, the new tariffs could disrupt this trend, leading to higher costs on everyday items and challenging the existing consumer culture.
The OECD has reported that rising U.S. tariffs on imports will likely slow global economic growth and increase inflation.
