Commentary: 'A recession may be worth it' – as markets shudder, it's not the Fed everyone's watching anymore

SINGAPORE: What a difference a few months make. This time six months ago, United States Federal Reserve chairman Jerome Powell was the main character in every market story. Interpreting Fedspeak became a major pastime on Wall Street. Markets moved every time the Fed lowered rates or suggested that prices were still high.

Today, interest rates are no longer the main factor moving markets. It’s the White House that has investors on edge, fretting about recession, stagflation and trade disruptions caused by the Trump administration’s new policies. Wall Street is whiplashed every time there is a new statement or signal from Washington.

The S&P 500 stumbled into correction territory on Mar 13, closing more than 10 per cent below its all-time high in February. Meanwhile, the Magnificent Seven stocks - Alphabet, Amazon.com, Apple, Meta Platforms, Microsoft, Nvidia and Tesla - are down some 15 to 20 per cent from their 2024 peaks as questions about their valuations swirl in the aftermath of the emergence of DeepSeek and other China-originated technology. 

Talk of recession, once on the sidelines, is now front and centre.

Commerce Secretary Howard Lutnick told CBS News earlier this month a recession would be “worth it” to implement President Donald Trump’s policies. Mr Trump - who in his Jan 20 inaugural address promised Americans a “golden age” - has declined to rule out the possibility of a recession, saying there will be a “period of transition” and “disruption”.

Going forward, markets remain angsty about the impending Apr 2 Trump tariffs.

US EXCEPTIONALISM IN QUESTION

While Mr Powell calmed nerves by playing down the chances of a US recession and hinting that the Fed remains on course for rate cuts this year, the question is whether such cuts will have the same impact on the economy where policy uncertainty triumphs over geopolitical and trade norms. 

Meanwhile, falling consumer sentiment and spending, potential slowdown in hirings, falling factory output, diminishing business confidence and rising import prices threaten to take the shine off “US exceptionalism”.

This is important because for the last 80 years, it is this so-called “exceptionalism” that has fuelled the growth of numerous economies around the world. More than just US military dominance, it is US “economic exceptionalism” and dominance that has supported economies from Peru to Poland, Jamaica to Japan, and Austria to Australia. Even China lifted itself on the back of US consumer demand.

For now, projections of an outright US recession seem somewhat exaggerated, given the intrinsic strength of that economy. That said, economists had as early as mid-2024 projected a US economic slowdown sometime later this year. Mr Trump’s muscular trade policies might simply accelerate and intensify the process.

On Mar 13, the Organisation for Economic Co-operation and Development (OECD) published its interim report Steering Through Uncertainty, where it warned of a softening of global growth prospects.

While the organisation still expects the US economy to grow by 2.2 per cent this year, this growth could slow to 1.6 per cent in 2026 as uncertainty and tariffs play out their full effects.

Canada and Mexico, the subject of US tariffs, will see greater impact, OECD reckons. OECD took down Canada’s growth to 0.7 per cent this year and next, while Mexico is expected to slide into a recession. China, facing 20 per cent tariffs while coping with an ailing economy, will struggle. 

But Europe, despite facing the threat of higher sanctions, could see a revitalisation, if government stimulus (Germany, Europe’s largest economy, just announced a massive €500 billion (US$540 billion) stimulus package) and increased defence spending have their intended effect.

WHAT ABOUT ASIA?

This is a question investors in this part of the world have to ponder as Mr Trump and his team currently keep their guns trained on Canada, Mexico and Europe. There is no certainty that this region won’t come into his crosshairs.

But here’s the thing.

In recent weeks we have seen a rotation from US equities into European and Asia ex-Japan and Chinese equities. This has accelerated the correction of US stocks and led to US markets losing some of its mojo.

DBS, in a recent report, advised for the upcoming quarter that investors should look beyond US equities given the revival of growth and policy headwinds.

While this rotation may continue for a while longer, it will not be wise to write off US equities. US exceptionalism is taking a breather. But it’s probably not quit the race yet. 

If tariff fears ease, and once Mr Trump starts shifting his focus to his other market-positive agendas - like extending and deepening the tax cuts he implemented in 2017 - we could see US stocks regain their lost lustre. The impact could be positive for APAC markets as well. 

It is very difficult for investors to make investment decisions in this uncertain environment. It remains unclear how long the US tariffs will remain, and whether they are more of a negotiation tactic, rather than the start of a long and drawn-out trade war. For now, it is better to manage risk through portfolio diversification and dollar-cost averaging instead of panicking and bailing out of markets. 

Investors should also spread their eggs beyond the basket of Wall Street stocks. Asian markets, like Singapore, offer stability and yield - qualities that were somewhat underrated during the pre-Trump years. In Singapore, the Straits Times Index has held steady despite some volatility.

Going forward, uncertainty abounds. While the global economic outlook is difficult to predict with any degree of certainty at the moment, Asian markets should be resilient. But it will take strong stomachs and active portfolio management to ride out the volatility. 

Ven Sreenivasan is a former editor and journalist who has covered financial markets, economic and corporate news and aviation for over more than 30 years.