A roller-coaster quarter for markets is ending with little relief, as U.S. President Donald Trump’s disruptive trade policies and rising stagflation fears drive investors toward risk aversion.
Stocks tumbled on Monday, with a gauge of global equities set for its worst quarterly performance since 2023. Amid a search for havens, a Bloomberg gauge of U.S. government bonds has risen 2.6% year-to-date, while gold continues to hit record highs.
Global money managers are scaling back risk or rebalancing portfolios amid an expanding global trade war and an increasing likelihood of a sharp slowdown in U.S. economic growth. Economist Ed Yardeni has raised the probability of a stagflation scenario to 45%, warning of a possible recession, and assigned similar odds to a deepening U.S. stock market correction.
Trump dashed hopes of a limited scope of tariffs on April 2, as he told reporters he plans to target “all countries” with reciprocal duties. Meanwhile, economic data Friday showing a drop in U.S. consumer sentiment, weak spending, and a pickup in prices has reinforced concerns about broader economic fallout of the trade policies.
“The expected fallout from Trump 2.0’s Reign of Tariffs undercuts our former bullishness,” Yardeni said in a note. “It has also drained confidence in the U.S. economy on the parts of everyone from CEOs to consumers to investors.”
The shift away from the theme of U.S. exceptionalism has eroded the U.S. dollar’s haven status, with the currency weakening against most major peers this year. Investors have turned to the euro in anticipation of more government spending on the continent and drove the yen higher as the Bank of Japan indicated it would continue on its rate-hiking path. The weaker dollar has also helped emerging-market assets outperform.
Another beneficiary has been U.S. Treasuries, which on Monday extended their year-to-date gains. The 10-year yield fell as much as seven basis points to 4.18%. Goldman Sachs Group Inc. economists now forecast both the U.S. Federal Reserve and European Central Bank will cut interest rates three times this year as the curbs on trade hurt momentum.
As some investors slash risk ahead of the tariff announcements, others are poised to jump back in, especially if the details prove less severe or signal an end to the back-and-forth on tariffs that has roiled markets for months. Some strategists say there’s a possibility that pessimism will ease in the second quarter.
“We expect any rally back in risk in the next few weeks to be linked to good news – either because tariffs are less dramatic than anticipated or are delayed because of negotiations,” said Bob Savage, head of markets macro strategy at BNY in New York. “The washout in risk in the first quarter makes for a short-term bounce back.”
With assistance from Greg Ritchie.
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