An excerpt from The Economist via Archive.ph
As the stock markets continue their downward fall
IN ITS SCOPE and severity, the trade war took markets by surprise. On April 3rd, the day after President Donald Trump laid out an unprecedented array of tariffs, the Russell 3000, one of the broadest measures of the American stockmarket, fell by 5%. It then fell by 6% on April 4th, when China announced that it would strike back with a duty of 34% on all American goods. Market pricing in a range of asset classes tells a worrying story: investors are expecting a severe economic slowdown.
Gold has fallen in recent days and the dollar has weakened—the opposite of what normally happens in times of trouble. But elsewhere things are almost unanimously gloomy. Oil has sold off, with the price of a barrel of Brent crude falling from $75 to $66, as has copper. In many countries bank stocks have tumbled; a bad sign, since financial firms are particularly exposed to the economic cycle. Boutique investment banks, which make money from mergers and acquisitions, have done especially badly. Klarna, Medline and Stubhub, three private firms that had hoped to list on public exchanges, have delayed their offerings. The VIX, a measure of stockmarket volatility, has jumped. Bank analysts are busy raising their estimates of the likelihood of a global recession this year. JPMorgan Chase now puts the chances at 60%.
There are also more precise measures of investors’ expectations for global growth. One is to compare “defensive” stocks and “cyclical” ones. Defensive stocks, comprising companies such as consumer staples and utilities, are not so exposed to the economic cycle, since the weekly supermarket shop is the last thing people cut back on. By contrast, cyclical stocks, such as airlines and carmakers, depend greatly on animal spirits. In the past week global cyclicals have underperformed global defensives by eight percentage points—the biggest gap since the beginning of the covid-19 lockdowns in 2020. Our analysis suggests that these price movements are consistent with a mild global recession.