The past week has seen a continuation of the market volatility we wrote about a week ago.
On the face of it, this could be attributed to the on-again, off-again tariffs being implemented by the US government with little or no notice. But beneath it all, lies an old-fashioned ‘growth scare’. The market is concerned that these tariffs will feed through into weaker economic growth, particularly in the United States. More than that, markets are perhaps worried that the US President Donald Trump seems to care about the weak growth less than one might have expected.
It is understandable that such situations cause some anxious or particularly risk-averse clients to question whether they should be withdrawing from equity markets. Of course, the great challenge is that it is not really possible to predict the short-term behaviour of stock markets, and these growth scares can prove either real or illusory. In the famous quip of the prominent economist, Paul Samuelson: ‘the stock market has predicted nine out of the last five recessions.’
Our response to this challenge is relatively straightforward. Rather than focus on the news headlines we focus on data. In fact, we discipline ourselves in these situations to think data, data, data.
The challenge is that data always presents a mixed picture. For example, very real-time measures of GDP that seek to make forecasts ahead of the official data do show that there has been some slowdown in economic growth in recent weeks.
Yet the data is at best embryonic. Most major banks conduct research that tries to estimate the probability of recession, and these are generally suggesting it is somewhat unlikely. J.P. Morgan for example has estimated the probability at 40% whereas Moody’s Analytics has put it at 35%, up from 15% a month ago.
Although the biggest single new piece of information this week tells a slightly more positive story. This was the monthly data point on US inflation. Inflation is a key player in determining whether the US heads to recession or not. If inflation is lower, this enables the US Federal Reserve to ease interest rates to support the economy; if it remains stubbornly high, this makes it harder to cut interest rates even as the economy slows. The data this week was somewhat encouraging with the main US CPI number coming in at 2.8%, this is 0.1% lower than had been expected by economists. The Producer Price Index was also lower at 0% for February having been expected at 0.3% and the number of people becoming jobless in the United States was slightly lower than expected at 222,000 having been expected at 225,000.
Source: Bloomberg 13/03/2025
These data points suggest that the growth scare may not translate into a recession. However, our key observations are that none of this data is definitive.
Overall, we start from the position that it would be unusual for a recession to occur when interest rates are falling and where the labour market is close to full employment. But of course, we have never had a president quite like Donald Trump.
In the context of this uncertainty, we are not making any immediate trades in portfolios but are continuing to wait over the coming weeks for the data to build. Rest assured, this does not suggest intransigence but simply a desire to make good evidence-based decisions even in an environment of loud, and at times unsettling, news.