Are we Trying to Crash the Economy?
Authors: Faith Spalding
Editors: Andrés Larios
Intro:
Welcome to the Weekly BluRB, a newsletter catered to students and professionals to get the latest news and insights on global markets. Get prepared for the week by reading four weekly stories circulating around equity markets, macro trends, geopolitics, and new business developments. And the best part: we’ll give you an informed view about where we think prices, policy, and trends are going in the near future. The content in these writings is for informational purposes only and does not constitute financial or investing advice.
Equity Markets: Market Meltdown Continues?
The market response to the Trump Administration’s recent tariffs on Mexico, Canada, the European Union, and China has been remarkably sour. Last week, the S&P 500 landed itself in a slump nearing correction territory, and major indexes continued to plunge after a brief bounce. Short-term relief was initially found, as the S&P 500 is posting its first gains in days, and February’s surprise CPI report showing cooling inflation. However, Tuesday’s market closing was nearing dangerously in correction territory – as the SPX fell 1.47%, closing 0.8% lower at 5,572.07. A market correction is typically defined as a 10% drop from recent peak, so numbers were looking too close for comfort, since the S&P would have reached correction territory at 5,529.74. But sighs of relief were brief. As of last Thursday, the S&P officially breached correction territory, falling 1.4% to end at 5,521.52.
Friday has redeemed some optimism, with the S&P 500 up by 2.13%. However, losses may just be starting. Some estimates say that if this downturn into correction territory is typical, the S&P 500 will lose 13.6% overall, bottoming out in mid-May and recovering by September. While conditions could morph into a bear market, we still see this as fairly unlikely, as the market would need to lose 20% from its peak. Of all S&P 500 drops of at least 10% since the Great Depression, 60% of them stopped before the market fell through the 20% threshold.
Increased market volatility the last few weeks has occurred as a result of President Trump’s trade and tariff antics. Last week, President Trump slapped 25% tariffs on goods from Mexico and Canada, additionally increasing tariffs on Chinese goods from 10% to 20%. Despite announcing that he would delay tariff hikes until April 2nd, additional steel and aluminum tariffs began as of Wednesday. Ultimately, American consumers will bear the brunt of higher prices caused by sky-high tariffs, where higher costs could slow growth and raise unemployment.
Volatility has been felt around the board; the Russell 2000 Index, our preferred gauge for SMID-cap stocks, continues to slide, down by 1.62% as markets closed Thursday. By market close Friday, the index was up by 2.53%. Overall, the Russell 2000 was down 18% from its peak after President Trump’s November election victory. Uncertainties that the administration is supporting a business-friendly environment amongst tariff concerns has dampened initial optimism. As markets inch near a 20% drop from market peak, we continue dabbling near a bear market. As such, policy and geopolotical uncertainty leads us to proceed with caution in our outlooks because the market predictability has been thrown out of the window.
U.S. Economy: Recession Fears Continue
As market volatility ensues, recession fears have increased as the S&P 500 has fallen into correction territory. Survey data released Friday by the University of Michigan reveals consumer attitudes have also soured alongside the market slump. According to the survey, consumers expect the inflation rate to rise to 4.9% over the next year. The current inflation rate is 2.8%, 0.8% higher than the Fed’s 2% target rate. Combined with higher prices and economic uncertainty as a result of President Trump’s tariff announcements, the slump has the potential to scare off consumers. However, February’s Consumer Price Index (CPI) report illustrated cooling inflation, falling to 2.8% over the last 12 months. Core CPI is at its lowest rate in four years. Still, due to the rocky environment tariff fears are creating, Wells Fargo economists expect the headline CPI to increase to 3.2% by the third quarter. Moreover, in the last week Goldman Sachs has raised its odds for a recession from 15% to 20%.
Although uncertainty is in the air right now, some say consumers shouldn’t panic yet; the economy has withstood shocks to sentiment without falling into a recession. Oxford Economics reveals that over 70% of consumer spending is insensitive to sentiment shocks. Furthermore, if sentiment declined in the form it did during the 2021-2022 pandemic inflation surge, it would only reduce consumer spending growth by 0.3 percentage point this year. However, certain spending categories would be hit harder than others.
Global macro: International Tit-for-Tat Tariff Implications
Tit-for-tat tariff battles have become commonplace as a result of the Trump Administration’s escalations, most recently highlighted by several Canadian provinces’ decision to take American liquor off shelves in stores, planting the bourbon and whisky industries in the crosshairs of a tariff war. After tensions continued to rise with Ontario’s premier Doug Ford announcing 25% retaliatory tariffs on electricity, talks between Canadian and U.S. officials Thursday ended on a “very positive” note, according to Ford, who shortly backed down. However, President Trump’s 25% steel and aluminum tariff remains in effect, alongside Canada’s retaliatory tariffs on $21 billion worth of American goods.
President Trump has also targeted another major economic superpower; China. After President Trump’s introduction of 20% tariffs on Chinese goods, they have hit back with retaliatory 15% tariff increases to the U.S., targeting agricultural imports. China also put 15 US companies on its Export Control List, prohibiting Chinese firms supplying American companies with certain technologies, and 10 American companies on its Unreliable Entity List. The country is taking additional non-tariff measures, such as an anti-monopoly probe into Google. However, the country’s firewall has blocked Google from servers since 2010. It’s clear China’s taking a straightforward approach in responding to the Trump Administration’s tariff increases, although potential blowback from tariffs may be imminent as the country deals with its own economic woes; China’s national consumer price index fell by 0.7% in February from a year earlier, according to recent data published by China’s National Bureau of Statistics.
President Trump’s April 2nd tariffs will additionally extend to India as he seeks additional tariffs targeting critical exports, like medicinal and pharmaceutical products. These increases could be a “bitter pill” for Americans to swallow, as nearly half of all generic medications alone are exported from India. In 2022 alone, savings for the U.S. from Indian generics was over a staggering $219 billion, according to a study by consulting firm IQVIA. With no current trade deal, the Trump Administration’s tariffs could effectively put generic manufacturers out of business, forcing American patients and consumers to deal with potential fallout. Drug shortages, especially for ADHD medication, are already affecting Americans’ access to medications, and President Trump’s tariffs could further exacerbate the issue.
One country not majorly affected by Trump’s tariff accelerations is Russia, although President Trump recently quipped that he is “strongly considering large-scale sanctions” until a ceasefire and peace deal is reached in the ongoing Russo-Ukrainian war. This is a sharp shift in the ongoing conversation regarding Ukraine, as recent meetings between President Trump and Ukrainian President Volodymyer Zelensky ended in a shouting match. However, President Zelensky has indicated Ukraine would be receptive to a mineral deal with the U.S. in exchange for continued aid. Both in and out of office, President Trump has repeatedly praised Russian President Vladmir Putin, despite ongoing concerns about Russian election interference, Russia’s assault on Ukraine, and ongoing internal human and civil rights concerns. As such, new conversation for cooperation will likely ease tensions with Ukraine, and exacerbate them with Russia.
Story of the Week – Tesla’s Tribulations
American consumers are outraged by Elon Musk’s ploy for power, evident by his ruthlessly gutting federal agencies through his supervision of the Department of Government Efficiency, commonly coined as DOGE. From December to last Wednesday, Tesla has lost an astounding 49% of its market cap. Its peak value of 1.54 trillion from the end of last year, has fallen to roughly $777 billion. How has this happened at such an accelerated rate? What does this mean for Tesla in the long-run?
DOGE, created after a January, 2025 executive order by President Trump, has begun its mission of downsizing the government. Key regulatory agencies like the Consumer Financial Protection Bureau (CFPB) have been gutted, with employees told to remain out of office, and thousands more laid off. Long-standing government institutions like the Department of Education are being similarly eroded, with its force reduced by nearly half as of Wednesday.
Many Americans aren’t taking these vast announcements lightly; protests from Raleigh, North Carolina to Washington D.C. reflect a rising resentment towards the destruction of public institutions that advocate for U.S. citizens’ basic needs. Now, the controversy surrounding Musk’s moves is affecting Tesla sales as consumers call for a Tesla boycott. On Wednesday, JPMorgan analysts cut their price target on Tesla by around 41% —from $230.58 to $135. They also lowered vehicle deliveries estimates for the first quarter of 2025 to around 355,000 — an overall 8% year-over-year decrease from the first quarter of 2024. On Friday, Wells Fargo analyst Colin Langan cut his price target to $130 from $135, additionally cutting his first-quarter delivery estimate to 360,000 vehicles.
Although Tesla closed Friday with a 3.86% increase, it’s a small recovery from otherwise drastic losses. This also comes on the heels of a Tesla show at the White House, where President Trump acted as a salesman of sorts, promoting the company in its hour of need. Tesla is seeking to rebound to 450,000 cars in the next quarter, touting new Model Y pricing reductions.
While small relief for Tesla may be seen domestically, international lags in sales may be hard to come back from. German Tesla car sales fell by a dramatic 76% in February, Italy following at 55%, France at 45%, and Sweden at 48%. It seems that international consumers simply don’t have the capacity for Mr. Musk’s political play, just as his support for the far-right German political party AFD seems to have hurt Tesla sales.
As Musk continues his tirade on federal institutions, overhauling decades of precedent, Tesla will have to rely on right-wing advocates and supporters to fuel sales, especially as some liberals have sworn off the company entirely. As the second quarter unfolds, we shall see if Musk’s plans for government efficiency bode well for Tesla.