Trump Administration Could Bring an Economic ‘Detox.’ What It Means for Stocks.

As another week begins with more selling–all three major indexes are falling, with the Nasdaq Composite hit hardest–fear is undoubtedly running high in the market. The Cboe Volatility Index, Wall Street’s fear gauge, jumped 15% to 27 on Monday morning. That would be its highest close since Dec. 18, when it was at 27.62.

Uncertainty about government policy and the health of the economy is overshadowing positive data.

Tariffs are one part of the problem. Not only are they disruptive to global trade and lead to higher prices, but President Donald Trump has walked back their implementation and doubled down enough to give the market whiplash. And then there are worries about huge cuts to federal spending, including mass firings and slashing outlays for programs, with a budget fight that could lead to a government shutdown at the end of the week.

Investors have little incentive to keep the faith, especially because signs of economic weakness are starting to emerge.

“Prior to tariff uncertainty, Momentum factors were leading, and risk factor returns were stable,” notes 22V Research’s Dennis DeBusschere. “ Payrolls and PMI data indicate weaker growth at the same time tariffs are adding to uncertainty about the path of economic data and earnings.” The result is that stocks are swinging wildly, riskier names are out of favor, and defensive shares are the flavor of the month.

According to Sevens Report’s Tom Essaye, “until there’s some movement towards stable policy, the best we can hope for is a churn sideways between around 5,700 and 6,000 in the S&P 500.” The index broke below 5650 in morning trading Monday.

The problem is that the greater the losses, the more the market could be closing in on a “liquidation avalanche,” as Dohmen Capital Research’s Bert Dohmen puts it. The concern is that forced selling, such as to raise cash for margin calls on shares bought with borrowed money, or by money managers desperate to limit losses, creates a downward spiral.

Wall Street famously abhors unpredictability, but even more worrisome may be rhetoric from Washington, D.C., that indicates the Trump administration is fine with causing what it believes will be a short-lived downturn as it pursues long-term goals it considers more important.

Asked whether a recession on the way, the president declined to rule out the possibility. “I hate to predict things like that,” Trump told Fox News’ Sunday Morning Futures. “There is a period of transition, because what we’re doing is very big. We’re bringing wealth back to America.”

Treasury Secretary Scott Bessent, a former hedge fund manager, predicted “a natural adjustment as we move away from public spending to private spending, in an interview with CNBC. “The market and the economy have just become hooked, and we’ve become addicted to this government spending, and there’s going to be a detox period. There’s going to be a detox.”

As T.S. Lombard’s Dario Perkins notes, Elon Musk and others in Trump’s orbit have pointed to Argentina as a successful example of this strategy. President Javier Milei imposed strict austerity measures to combat inflation, leading to a brief recession in 2024.

Of course, “copying the policies of a country that had massive endemic corruption and was on the brink of hyperinflation is, er, problematic,” Perkins writes. “Yes, inflation is a bit high, but not so high that Musk and co should deliberately engineer a recession. Perhaps the new U.S. administration has forgotten what a ‘real’ recession is like.”

The 2008-2009 financial crisis was nearly two decades ago, and the U.S. only rebounded from the Covid-19 downturn so quickly and strongly because of huge government spending. That means it is “odd to see US policymakers talk as if they want to inflict damage on the economy, or at least do things that risk causing damage,” he notes.

The White House didn’t immediately respond to a request for comment.

Damage could snowball quickly. If big government layoffs continue at a time when hiring is already weak, it could lead to a further loss of confidence and even higher unemployment. And as history shows, recessions aren’t always quick or without damage.

“The US is not Argentina, and it is not facing an imminent debt crisis,” Perkins writes. “In any case, does anyone seriously think a recession in 2025 would lower America’s debt trajectory? Every recession I know has had the exact opposite effect.”

The good news is that we aren’t there yet. Earnings have held up well, and while the mention of tariffs in fourth-quarter conference calls was up 40% from their prior peak in 2018, mentions of a recession fell to their lowest point since the first quarter of 2018, as DataTrek Research’s Nicolas Colas notes.

“The dichotomy between record high ‘tariff’ and near-record low ‘recession’ mentions on investor calls neatly reflects the mood of corporate America,” he writes. “The C-suite is struggling to come to grips with tariff policy but remains fairly optimistic on the US economy. So far, anyway…Any change to the latter view would be unwelcomed.”

For his part, TS Lombard’s Perkins isn’t predicting a recession. Sevens Reports’ Essaye notes that concern about tariffs so far has been worse than their effects. While it makes sense to brace for volatility, “that negative scenario is not a foregone conclusion and actual facts on the economy and earnings [are] hanging on.” he says.

22V Research’s DeBusschere highlights that in aggregate, macroeconomic data still point to a very high probability that the U.S. economy is still expanding. “Over the past few weeks though, market internals have weakened to a level more consistent with economic slowdowns/heightened recession risk,” he says. “Markets are discounting a sharp slowdown that is not evident TODAY in actual data.”

The problem is that as long as chaotic moves in Washington, D.C., continue, that won’t matter for stocks.

“Although the U.S. will still likely avoid a recession this year, investor sentiment does appear to be headed toward another recession scare,” writes Paulsen Perspectives’ Jim Paulsen. “An actual recession would probably result in a bear market, but even an ongoing or worsening ‘fear’ of recession will likely magnify the current stock market correction.”

When the market gets clarity about what comes next, prices can recover. But until then, it is hard to see how stocks can rise consistently. Just the fear of a recession is enough to weigh on markets.

Write to Teresa Rivas at teresa.rivas@barrons.com

Former New Hampshire Gov. Chris Sununu delivered a warning to Treasury Secretary Scott Bessent during a recent visit to Washington: Already-high airfares will surge if the war in Iran doesn’t end soon.

Sununu, a Republican who represents some of the biggest airlines as president of the industry group Airlines for America, has for weeks sounded the alarm to Trump administration officials about the economic fallout from high jet fuel prices. The war, Sununu has argued, must come to a close soon, or things will get worse.

Administration officials have gotten the message.

Privately, President Trump’s advisers are increasingly worried that Republicans will pay a political price for the rising fuel costs, according to people familiar with the matter. Many of those advisers are eager to end the war, hoping prices will begin to moderate before November’s midterm elections.

The fallout from the U.S.-Israeli attack in late February has slowed traffic through the Strait of Hormuz, a vital shipping lane, triggering a sharp increase in oil, gasoline and jet-fuel prices.

That means consumers are grappling with high costs ahead of the summer travel season, as they consider vacation plans.

Sixty-three per cent of Americans said they put a great deal or a good amount of blame on Trump for the increase in gas prices, according to a new poll conducted by NPR, PBS and Marist.

More than 8 in 10 Americans said struggles at the gas pump are putting strain on their finances.

Jet-fuel prices roughly doubled in a matter of weeks after the war began, and they have remained high. Airlines have said that will add billions of dollars of additional expenses this year, squeezing profit margins.

U.S. airlines spent more than $5 billion on fuel in March—up 30% from a year earlier, according to government data.

Carriers have been raising ticket prices, hoping to pass the cost along to consumers, and they are culling flights that will no longer make money at higher price levels.

In March, the price of a U.S. domestic round-trip economy ticket rose 21% from a year earlier to $570, according to Airlines Reporting Corp., which tracks travel-agency sales.

So far, airlines have said the higher fares haven’t deterred bookings and they are hoping to recoup more of the fuel-cost increases as the year goes on.

Earlier this week, Trump said the current price of oil is “a very small price to pay for getting rid of a nuclear weapon from people that are really mentally deranged.”

Secretary of State Marco Rubio told reporters that if Iran got a nuclear weapon, the country would have more leverage to keep the strait closed and “make our gas prices like $9 a gallon or $8 a gallon.”

Trump has taken steps in recent days to bring the war to an end. Late Tuesday, the president paused a plan to help guide trapped commercial ships out of the Strait of Hormuz, expressing optimism that a deal could be reached with Iran to end the conflict.

Crude oil prices fell below $100 a barrel on Wednesday, after reports that Iran and the U.S. are working with mediators on a one-page framework to restart negotiations aimed at ending the conflict and opening the strait.

Sununu said Trump administration officials are conscious of the economic fallout from the war: “They get it…and I think that’s why they’re trying to get through the war as fast as they can.”

But he cautioned that it could take months for prices to return to prewar levels.

“Ticket prices won’t go down immediately” after the strait is fully reopened, Sununu said. “You’re looking at elevated ticket prices through the summer and fall because it takes a while for the prices to go down.”

Since the initial U.S.-Israeli attack in late February, Sununu has met in Washington with National Economic Council Director Kevin Hassett, representatives from the Transportation Department and senior White House officials.

A White House official confirmed that Hassett and Sununu have discussed the effect of increased fuel prices on the airline industry. The official said the conversation touched on how the industry can mitigate the impact of high jet fuel prices on consumers.

“The president and his entire energy team anticipated these short-term disruptions to the global energy markets from Operation Epic Fury and had a plan prepared to mitigate these disruptions,” White House spokeswoman Taylor Rogers said, pointing to the administration’s decision to waive a century-old shipping law in a bid to lower the cost of moving oil.

Rogers said the administration is working with industry representatives to “address their concerns, explore potential actions, and inform the president’s policy decisions.”

A Treasury Department spokesman pointed to Bessent’s recent comments on Fox News that the U.S. economy remains strong despite price increases. The spokesman said Treasury officials have met with airline executives, who have reaffirmed strong ticket bookings.

“We’re cognizant that this short-term move up in prices is affecting the American people, but I am also confident, on the other side of this, prices will come down very quickly,” Bessent told Fox News on Monday.

The war has already contributed to one casualty in the industry: Spirit Airlines. Company representatives have said they were forced to close the airline because the sustained surge in jet-fuel prices derailed the company’s plan to emerge from chapter 11 bankruptcy.

The Trump administration and Spirit failed to come to an agreement for the company to receive a financial lifeline of as much as $500 million from the federal government.

Transportation Secretary Sean Duffy has argued that the Iran war wasn’t the cause of Spirit’s demise, pointing to the company’s past financial struggles, as well as the Biden administration’s decision to challenge a merger with JetBlue.

Other budget airlines have also turned to the federal government for help since the U.S.-Israeli attack. A group of budget airlines last month sought $2.5 billion in financial assistance to offset higher fuel costs, and they separately wrote to lawmakers asking for relief from certain ticket taxes.

Trump Administration Could Bring an Economic ‘Detox.’ What It Means for Stocks.

Investors may have nothing to fear but fear itself. But sometimes fear is more than enough.

Administration officials have spoken to the airline industry, which has voiced concerns about the rising costs.