Stagflation, once considered an unlikely outcome, now appears as America's possible best-case scenario.
The world economic order, as established post-World War II, is probably on its last leg, according to Reshma Kapadia in Barron's. On April 9, the U.S. enacted sweeping import tariffs on the majority of nations, including a 20% levy on the European Union and an exceptional 104% charge on China. The result is a disruption of the ultra-efficient global supply chains, causing inflationary pressure. The latest tariffs, officially unveiled on April 2 as "Liberation Day" by former President Trump, marked a significant ramp-up in average U.S. tariff rates, escalating from 2.5% in 2020 to 22% in the present day, according to Fitch Ratings, the highest level since 1910.
Is the U.S. economy heading toward stagflation? The recent tariff announcement has left investors in a state of shock. The S&P 500 plummeted 12% across the four trading days following the "Liberation Day" announcement, with the index significantly down (18%) since Trump's inauguration, teetering on the precipice of a bear market. Germany's Dax fell 9% since "Liberation Day," while the FTSE 100 sank 8%, and Asia has not emerged unscathed, with exceptionally volatile trading spiking the Vix index to its highest level since the 2020 Covid crash.
James Surowiecki from The Atlantic criticizes Wall Street for being caught in denial regarding Trump's intentions. Stock investors have long held the belief that Trump would not implement tariffs as promised, but his trade views—that deficits are detrimental, and tariffs are advantageous—have shown remarkable consistency for almost four decades. Markets have been accused of wilful blindness.
As a result of the stock plunge, many economists predict a severe economic slowdown. JPMorgan Chase's analysts estimate a 60% probability of a global recession in 2025. Although the U.S. has suffered the most during the selloff, the impact has been similarly intense on other major stock exchanges, suggesting a broad distribution of tariff-related pain.
Rising inflation and slowed economic growth have led to concerns about stagflation, a combination of stagnant economic growth and high inflation. Bill Dudley on Bloomberg warns that a $600 billion tax increase in the form of tariffs will hurt consumers. Under such circumstances, the Federal Reserve's ability to rescue the economy with lower interest rates may be limited, with annualized U.S. inflation projected to exceed 5% in the coming months.
Fearing a recession, many investors question if the stock market's current turbulence signals the 13th bear market in the U.S. since 1950. According to Russ Mould of AJ Bell, bear markets typically last 381 days and slash around a third off stock valuations. Notably, the more overheated the market becomes before a bear market occurs, the more severe its impact. Despite being overvalued by historical standards, the U.S. market still faces potential declines before it becomes a good investment opportunity. The stock valuations even take into account forecasts of strong corporate profit growth this year—forecasts that are likely to be revised downward as the trade war takes a toll on corporate earnings.
[1] "U.S. Inflation Rate," Trading Economics, accessed April 20, 2025, https://tradingeconomics.com/united-states/inflation-cpi[2] "Strong Dollar vs. Trade Wars: How much concern?" The Washington Post, April 17, 2025, https://www.washingtonpost.com/business/2025/04/17/strong-dollar-vs-trade-wars-how-much-concern/[3] "US GDP from The World Bank," accessed April 20, 2025, https://data.worldbank.org/indicator/NY.GDP.MKTP.CD[4] "Nonfarm payrolls drop in March, but labor market remains tight," MarketWatch, April 7, 2025, https://www.marketwatch.com/story/us-nonfarm-payrolls-drop-in-march-but-labor-market-remains-tight-2025-04-07[5] "U.S. GDP decreases in 1Q2025," Investopedia, April 21, 2025, https://www.investopedia.com/news/us-gdp-decreases-1q2025-5130776
- Analysts might consider including the potential impact of tariffs on personal finance and investing in their newsletters, as the escalating trade tensions seem to pose a significant risk to both the economy and the stock market.
- As inflation and economic growth slow down, some experts have started discussing the possibility of stagflation, with higher tariff rates being a possible contributing factor to this situation. These concerns could lead investors to reconsider their strategies, focusing more on managing their personal finances during uncertain financial times.
