Why Consumer Spending Matters As Markets Struggle

Transcript

Hi and welcome to the market weekend review for the week ending April 4th. My name is Alex Kusley. I'm the senior investment strategist for Asia Pacific. And look, there's really only one topic to talk about this week and it's about liberation day. So, President Trump's reciprocal tariff announcement that happened on Wednesday, US time. Um what we have seen since that announcement is equities selling off uh on the the back of effectively this is increasing the recession risk in the United States. We think it's closer to a 50/50 or a coin toss right now uh because the increase in the effective tariff rate is about 14 percentage points which is higher than we had expected and is a really high uh increase in that tariff rate on a historical basis. Uh there's a couple of key takeaways or or key things that we saw. The first is that Asia was targeted more aggressively than the rest of the world and that included Japan, South Korea and Taiwan. The second as I mentioned is that tariff rates uh the recession risk has risen on the back of this. And the third is that we are still yet to see how countries will respond. We've seen some um nations particularly in Asia that have already come out ahead of it and said we'll look to lower tariffs. Alo Vietnam is one of the more prominent examples, but Japan and South Korea have also suggested they're more in a negotiating stance. Uh the two that we haven't heard from in a great deal is the European Union and China. China did say that they think that they are going to come back with some measures, but we haven't seen the detail uh of those. From a markets perspective, we saw US equities fall um 4 and a half% on Thursday on Thursday's trade. uh and we saw non- US markets also fall but by a lesser extent and then in US rates we saw um pretty aggressive rally in US 10ear and US 2year when we look at the 10-year yield though or fixed income in general as recession risk has been increasing on the back of this uh we do think that one the scope for more Fed cuts through the rest of the year has increased and secondly that those um after those rallies we still see that treasuries look close to fair value uh and on the shorter tends to look uh a little bit attractive in terms of valuation. So, you know, we've seen outperformance of treasuries, but because of this elevated recession risk or rising recession risk, uh those fair value um estimates have also kind of moved in line. And then the final one that we've seen that's been a continuation of a general trend, but is a little bit strange in the backdrop of recession risk rising is that the US dollar uh continued to sell off. So we saw a a barbell approach almost of eur European uh the euro um doing quite well on Thursday as well as the typical safe haven currencies of the yen and the Swiss Frank. Uh so that's really where we are in terms of the fundamental data that we got this week. We saw uh the ADP employment report looked okay. We'll get the payrolls on Friday and that will be very closely watched. Uh we saw the ISM surveys um generally softer than we had expected or that many had expected. And then we also saw jobless claims which looked a little bit healthier. So you know we're still seeing that generally the consumer is in a has been behaving in a decent manner. Uh we haven't seen that soft confidence flow through to softer spending. But with these tariffs uh and the impact that has on real income growth that is going to be a headwind to consumer spending uh moving forward. And that plus the uh the uncertainty that is coming from this and and the change to cap the potential change to capex plans is really what is driving uh a higher recession risk than we had coming into the week. Uh finally on our sentiment measures. So we talk a lot at Russell about cycle value sentiment. The cycle has deteriorated a bit on the announcement. Our sentiment measure for US equities uh is currently in the pessimism and heading towards panic. We haven't reached that wholesale panic moment which we tend to think of as an attractive opportunity to um you know for forward returns for equities. We haven't reached that point but we are certainly uh pretty firmly in the pessimism stage of our cycle indicator uh right now. So there a lot going on. Hopefully that gives you a good sense of how we're thinking about things. Uh and we'll be in touch very shortly. Thanks for listening. Hi, I'm Sophie Anton, head of portfolio and business consulting at Russell Investments. If you liked what you just saw and heard, consider subscribing to our YouTube channel or check us out on LinkedIn. Thanks for tuning in.

Key takeaways:

U.S. recession risks have increased
U.S. government bonds are rallying
The health of the U.S. consumer is an important watchpoint

On the latest edition of Market Week in Review, Director and Senior Investment Strategist Alex Cousley discussed the details of the Trump administration’s tariff plan and the market’s reaction.

Negotiate or retaliate?

Cousley began by noting that U.S. President Donald Trump’s reciprocal tariff plan could increase the effective U.S. tariff rate by 14%. He said this estimated increase is greater than expected and is also very large in a historical context.

“We believe these tariffs have increased recession risks in the United States. In our view, the chances of a recession in the next year are now close to 50%,” Cousley remarked.

He said the new U.S. tariffs target Asian countries—including China, Japan, South Korea and Taiwan—more aggressively than the rest of the world. While it’s unclear exactly how countries will respond, some nations—particularly in Asia—have signaled they’ll look to lower tariffs on U.S. imports.

“Vietnam is one of the most prominent examples of this, but Japan and South Korea have also suggested they’ll take a negotiating stance,” Cousley remarked.

On the other hand, in a significant move of retaliation, China announced Friday that it will slap a 34% tariff on all U.S. imports starting April 10.

Cousley finished by noting the European Union hasn’t been as vocal about any actions it might take.

Market movers

In the aftermath of the announcement, U.S. stocks sold off sharply on Thursday, with the S&P 500 declining by approximately 4.5%. Cousley said non-U.S. markets also fell, but by a lesser extent.

In U.S. government bond markets, yields fell as prices rose. “We saw a pretty aggressive rally in 2-year and 10-year Treasury notes as investors piled into bonds,” Cousley remarked. The outperformance is a result of rising recession risks, he said, adding that Treasurys still look close to fair value.

“With recession risks increasing, the U.S. Federal Reserve (Fed) may cut rates by more than expected at the start of 2025,” Cousley noted.

Switching to currencies, he said the U.S. dollar sold off Thursday in an unusual move. Meanwhile, the euro rallied, as did typical safe-haven currencies like the Japanese yen and Swiss franc.

Spending under scrutiny

Cousley wrapped up with a look at recent U.S. economic data, which was a bit of a mixed bag. The latest ISM (Institute for Supply Management) surveys were weaker than many economists were expecting, while initial U.S. jobless claims edged down last week.

“In general, the data shows U.S. consumers are still behaving in a normal manner. The decline in consumer confidence hasn’t led to a decline in consumer spending. However, we expect that the latest tariffs will be a headwind to consumer spending moving forward,” Cousley stated. He said uncertainty around the tariff situation—and how it could potentially impact U.S. capital expenditures—is what led Russell Investments’ strategist team to increase its recession risk this week.

Cousley explained the team uses a cycle, valuation and sentiment framework to guide its investment decision-making process. He said the business cycle outlook has deteriorated in the wake of the tariff announcement, while the team’s measure of investor sentiment has reached pessimistic levels.

“We haven’t seen sentiment move to a level of panic yet, but it’s firmly in the pessimistic stage,” Cousley stated, adding that reaching the panic threshold could present potentially attractive buying opportunities.

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