The U.S. economy and stock markets are facing heightened uncertainty as a mix of inflation concerns, political instability, and recession fears weigh heavily on investor sentiment. While economic indicators present a mixed picture, the prevailing market sentiment is one of caution, with consumer confidence plummeting and gold surging above $3,000 per ounce as investors seek safe-haven assets.
Consumer Confidence Hits New Lows
Consumer confidence, a key indicator of economic health, has taken a sharp downturn. Worries about rising prices, job security, and economic instability have led to a widespread decline in sentiment. This lack of confidence often results in lower consumer spending, which, in turn, slows economic growth. Adding to the unease, inflation expectations are rising, further eroding purchasing power and increasing pressure on both the Federal Reserve and the Bank of Canada as they navigate an already complex balancing act.
University of Michigan, University of Michigan: Consumer Sentiment [UMCSENT], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/UMCSENT, March 15, 2025
Inflation Concerns, Policy Uncertainty, and Stagflation Risks
Although inflation data has not been catastrophic, the market remains wary due to unpredictable policy shifts under President Trump. His administration’s sudden tariff implementations, regulatory changes, and trade policies have created an environment of uncertainty. Businesses and investors alike struggle to make long-term plans, leading to hesitation in capital expenditures and hiring. While inflation itself may not be at crisis levels, the instability surrounding economic policy continues to fuel market volatility.
University of Michigan, University of Michigan: Inflation Expectation [MICH], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/MICH, March 15, 2025.
These conditions are increasing fears of stagflation, an economic scenario characterized by high inflation, slow growth, and rising unemployment. Stagflation is particularly difficult to manage because traditional policy tools—such as raising interest rates to curb inflation—can worsen economic stagnation. A historical example occurred in the 1970s, when oil price shocks led to soaring inflation while economic growth slowed, creating a prolonged period of economic hardship.
For investors, stagflation presents unique challenges. Equities often struggle, particularly in growth sectors like technology, while commodities, gold, and real assets tend to perform well as hedges against inflation. Short-duration bonds and inflation-protected securities (TIPS) can offer some protection, while consumer staples, utilities, and healthcare stocks often remain resilient. If stagflation emerges, commodities, defensive equities, inflation-protected bonds, and real assets are likely to outperform. While investment decisions depend on individual risk tolerances and time horizons, investors should primarily focus on stable cash flows, essential industries, and inflation-resistant assets while avoiding high-growth stocks that suffer in rising-rate environments.
While investors may be hesitant to deploy capital during this period of heightened uncertainty, the situation could help bring overvalued segments of the market back to rational levels. As noted in previous commentary, valuations in parts of the U.S. equity market have been near historic highs after rising sharply over the past two years. President Trump’s policies—whether intentional or not—may serve as the catalyst that forces a market reset, prompting a more disciplined approach among investors.
Trump’s Justification for the Trade War
Donald Trump justified the trade war against Canada, Mexico, and China by citing unfair trade practices, large trade deficits, and the need to protect American industries. He accused China of intellectual property theft and forced technology transfers, while arguing that Canada and Mexico benefited from trade deals that disadvantaged U.S. manufacturers. His administration imposed tariffs to reduce the trade deficit and encourage domestic production, particularly in industries like steel, aluminum, and auto manufacturing. Trump also used tariffs as leverage to renegotiate NAFTA during his first term, resulting in the USMCA trade deal. Additionally, he justified some tariffs under national security concerns, though this claim was disputed. While his supporters argued that these policies protected U.S. jobs, critics pointed out that they raised costs for consumers, hurt businesses reliant on imports, and disrupted global supply chains. The uncertainty caused by these policies has been a key driver of market volatility and investor anxiety.
Political Influence and Market Volatility
A recent survey shows that a majority of Americans believe President Trump’s policies will harm the economy in the long run. Despite these concerns, many business leaders have been reluctant to voice opposition. Some executives privately acknowledge that it may take a significant market downturn—potentially a 20% correction—before they are willing to publicly challenge the administration’s approach. This hesitancy contributes to a fragile market environment, where confidence can erode quickly in the face of unexpected events.
Recession Worries on the Rise
The growing uncertainty has reignited fears of an impending recession. While economic growth remains positive, warning signs are becoming harder to ignore. Anxious investors and analysts point to slowing corporate earnings, weaker hiring trends, and the Federal Reserve’s delicate balancing act between curbing inflation and avoiding economic contraction. These concerns have led to increased market volatility, with sharp swings driven by both fear and fleeting moments of optimism.
Temporary Market Rebounds Fail to Inspire Confidence
In recent weeks, markets have experienced several short-lived recoveries, often referred to as “relief rallies” or “dead cat bounces.” These temporary rebounds occur when investors buy into dips, hoping for a sustained recovery, only for the market to quickly resume its downward trend. While some traders attempt to capitalize on these brief upswings, the overall market sentiment remains weak. The persistence of these false rallies suggests that underlying fundamentals have not improved, and uncertainty continues to dominate trading behavior. Until clearer economic direction emerges, investors should remain cautious about interpreting these rallies as signs of a lasting recovery.
Gold Surges as Investors Seek Safe Haven
Perhaps the most telling sign of investor anxiety is the historic surge in gold prices. Gold has risen above $3,000 per ounce, reflecting a rush to safe-haven assets amid economic uncertainty. Historically, gold serves as a hedge against inflation and political instability, and its dramatic rise signals deep concerns about the future trajectory of the economy and markets.
The Road Ahead
As investors and businesses navigate this turbulent period, all eyes will be on upcoming economic data, Federal Reserve decisions, and potential shifts in policy direction. The stock market remains fragile, and with stagflation risks and recession fears mounting, market participants may need to brace for further volatility. Unless stability returns through clearer policy direction and stronger economic fundamentals, uncertainty will likely continue to dominate the financial landscape.
Garnet O. Powell, MBA, CFA is the President & CEO of Allvista Investment Management Inc., a firm with a dedicated team of investment professionals that manage investment portfolios on behalf of individuals, corporations, and trusts to help them reach their investment goals. He has more than 25 years of experience in the financial markets and investing. He is also the Editor-in-Chief of the Canadian Wealth Advisors Network (CWAN) magazine. He can be reached at gpowell@allvista.ca