Recession risk and market volatility after tariff shock

Key takeaways:

  • Economic data has led us to raise our assessment of recession risk. 
  • However, some indicators suggest that equity markets are being heavily oversold.
  • Russell Investments are closely monitoring market developments and policy announcements. Register for our client webinar tomorrow on Tuesday 8 April where we will discuss our position in greater depth.
 

After President Trump announced higher-than-expected reciprocal tariffs on virtually all trading partners of the U.S. last Wednesday, volatility spiked in financial markets.

As of this morning, S&P 500 futures have fallen by 20% from their December 2024 highs, which is considered a (somewhat arbitrary) threshold for a bear market.

The tariff announcements and recent economic data have led us to raise our assessment of recession risk from 30% to about 50%, resulting in us seeing roughly even odds between a downturn and continued, though slower, growth. 

However, markets have already moved to price increasing recession risk. Money markets discount more than 4 rate cuts of 25 basis points by the U.S. Fed by end of the year. 

Some indicators also suggest that equity markets are heavily oversold, and sentiment has reached a state of panic:

  • The VIX indicator measuring implied volatility of the S&P 500 index reached 58 this morning (7:45 GMT), a level that roughly matches the peaks seen during the 2008 Global Financial Crisis.  
  • Our proprietary contrarian sentiment indicator of U.S. stock markets triggered a Stage 2 oversold signal on Friday. An oversold signal can mean that the selloff is stretched, and a rebound is becoming more likely. Markets are likely to remain volatile until there is more policy certainty. 

Oversold condition

The Contrarian Indicator aggregates sentiment signals from market prices, surveys, and investor positioning to gauge whether a market move is extended, i.e. oversold (panic) or overbought (euphoria). At the sentiment extremes, the likelihood of a move in the opposite direction rises.

Composite Contrarian Indicator (U.S.)

Source: Russell Investments, as of 4 April 2025

The portfolio managers at Russell Investments are closely monitoring market developments and policy announcements and we continue to manage our investments according to our long-standing Design-Construct-Manage framework through the current volatility.

We are holding a client webinar tomorrow on Tuesday 8 April. Please reach out to your Russell Investments contact for details.

Any opinion expressed is that of Russell Investments, is not a statement of fact, is subject to change and does not constitute investment advice.