MAGA, Markets, and the Recession: A Marriage on the Rocks

It was a bruising week on Wall Street. The S&P 500 and Dow Jones Industrial Average both fell as low as 8% below their pre-Trump levels, as investors started to get jitters about what MAGAnomics actually means for the US growth outlook

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Investors had cheered Trump’s election. The S&P hit a then-record high on November 6, with Goldman Sachs analysts at the time forecasting it to climb by 9% over the following year. The downturn marks a sharp reversal in market sentiment, and has stoked speculation that the US economy may be lurching into recession. 

This is awkward for Trump, who has consistently used the stock market as a barometer of his own political success and the Democrats’ failures. The president already appears to have retreated from this methodology, saying that “you can’t watch the stock market” when making policy decisions. 

Changing his tune…

Unfortunately for the new administration, the underlying data on the US economy is also flashing orange lights. Data from the Atlanta Fed’s GDPNow estimates, which are computed from successive rounds of economic data, reduced its 2025 Q1 growth forecast from just over 2% to -2.3% in late February.

The data points to a worsening trade deficit and weakening consumer spending. The US trade deficit jumped 34% month-on-month in January, as importers rushed to bring in goods ahead of expected tariffs. 

Source: Atlanta Fed

While it’s worth pointing out that this is likely a short-lived result of the change in administrations and, as the FT observes in this article, stockpiling of gold, there are signs of slowing momentum in other indicators. 

On Friday, March data from the University of Michigan’s consumer sentiment index fell to 57.9, the lowest level since 2022. That was down from 64.7 last month and well below expectations of 63.2. This is undoubtedly bad news for the real economy, because a slowdown in consumer spending will impact growth regardless of how investors feel. 

US job creation - long the envy of the developed world - also appears to be decelerating. U.S. employers added 151,000 jobs in February, below economist estimates of 160,000, in a  Reuters poll. This has already had an impact on monetary policy, with Fed chair Jerome Powell saying that he was not in a “hurry” to cut rates after the lukewarm data. 

What does this mean?

So cracks are beginning to show. But does this explain the sudden reversal in investor sentiment? 

The prospect of tariffs is certainly not new, and their likely impact is well-understood by the markets. Trump has been consistent in his intention to place tariffs on US trade partners. His belief that the global trade system is taking advantage of America is, indeed, one of the very few consistent threads in his policy positions over the years. He slapped tariffs on $380 billion of imported goods in his first administration, and threatened consistently throughout the campaign that he would go further in his second. It shouldn’t come as a market-correcting surprise to investors that tariffs were going to be introduced. 

Perhaps then, it’s not what he has done, but how he has done it. Trump’s tariff announcements so far have been nothing if not erratic. The new administration has announced, postponed, and reintroduced tariffs on both Mexico and Canada, while sticking to a planned 10% additional hike in levies on imports from China. But as confusing and unpredictable as this is, it is again vintage Trump. Trump has been on the US political scene for 10 years now, and investors should have long understood that his decisions are sudden and driven by short term impulse.

What might be at play this time, however, is a dawning realization that Trump might now be more ideological than before. The old Trump was closely focused on the stock market, job numbers and GDP figures as an index of presidential success. But what if Trump 2.0, unleashed from the constraints of having to win a popular mandate in four years time, no longer cares about these metrics? His recent statements - around “disturbances”, a “period of transition” and “[building] a strong country” seem to suggest that Trump is willing to endure short-term economic pain in a way that investors did not expect. 

The social contract between Trump and Wall Street is coming under strain. Investors liked Trump (and donated to his campaign) because, while they dislike tariffs, they see him as pro-business. They expected him to deliver tax cuts and sweeping deregulation that would juice corporate profits, while his more heterodox impulses on trade and foreign policy were to be kept in check by the market. This thesis is now being tested. The bull is in the chinashop, and there’s no telling what will be smashed next.

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