A Full Stock Recovery May Depend on Trump’s Economic Policies

U.S. stocks have been facing significant challenges due to uncertainties stemming from President Donald Trump’s tariffs. These uncertainties have put Wall Street in a precarious position as investors start to gauge the potential impact of these policies on consumers and the broader economy. Wednesday’s consumer price index (CPI) report has taken center stage as it could provide the clarity needed amid fears of stagflation—a detrimental combination of high inflation and a weakening economy.

According to economists surveyed by the Wall Street Journal, the headline inflation rate is projected to rise by 0.3% for February. If this holds true, the 12-month headline CPI would decline slightly to 2.9%, down from 3.0% the previous month. In contrast, core inflation—a critical measure that excludes volatile food and energy prices—is also expected to increase by 0.3% month-on-month and reach 3.2% on an annual basis.

The real concern lies with a CPI report showing higher-than-expected inflation. If such data emerges alongside indicators that Trump’s tariffs are indeed triggering an inflation surge, this could lead the Federal Reserve to reconsider its plans for lowering interest rates. A reluctance to cut rates may intensify the ongoing stock market selloff, edging the Nasdaq Composite closer to bear market territory, market analysts warn.

The Potential Impact of CPI on Market Sentiment

However, should the CPI report indicate more benign inflation, it could lift market sentiment by bolstering expectations for Fed rate cuts. Kathleen Brooks, research director at XTB, noted in her email commentary that a full stock market recovery may only be feasible if Trump “backtracks” on some of his most damaging economic policies.

Wall Street seems to be preparing for Wednesday’s CPI report to only provide a glimpse of the ramifications caused by Trump’s tariffs. The President applied a 10% tariff on Chinese goods earlier in February, which has the potential to elevate U.S. inflation given China’s substantial share of U.S. imports for various consumer goods like household furnishings, apparel, and electronics. A team of economists from BofA Global Research, led by Stephen Juneau and Jeseo Park, expressed that the clear impact of these tariffs on inflation may still be premature to gauge fully through the upcoming CPI data.

Investor Reactions and Broader Market Risks

The ramifications of an upward shift in the CPI due to Trump’s tariffs could lead to broad-based risk aversion across the financial markets, which would adversely affect both bonds and equities, cautioned Brooks.

Additionally, investors will turn their attention to the University of Michigan’s measure of consumer inflation expectations, released on Friday, to assess where consumers anticipate inflation to be a year from now. A noteworthy increase in inflation expectations was witnessed last month when the figure jumped to 4.3% in February from 3.3% in January, marking the highest level since November 2023. This was a significant one-month rise and only the fifth instance in the past 14 years to witness such a gain.

Tani Fukui, senior director of global economic and market strategy at MetLife Investment Management, indicated that while inflation expectations are crucial, they must be interpreted carefully as they reflect consumers’ reactions to prices they observe weekly. A drastic rise in expectations could strain the stock market and ultimately impact consumer costs in a negative cycle, whereas a moderate adjustment would less likely lead to substantial market shifts.

Looking Ahead: CPI and Inflation Expectations

The February CPI report is scheduled for release on Wednesday at 8:30 a.m. Eastern Time, with the University of Michigan’s inflation expectations set to follow on Friday at 10 a.m. Eastern Time. Investors and analysts alike will be looking closely at these reports to form a clearer picture of the potential impacts of Trump’s tariff policies on inflation amid ongoing economic uncertainty. As the market braves these turbulent waters, the onus remains on economic policy and its far-reaching effects on both stocks and consumer sentiment.