Investing.com - Since U.S. President Donald Trump first announced sweeping tariffs on most countries earlier this month, investors have been trying to assess if his aggressive trade policies will spark a recession in the U.S. economy.
Stocks have gyrated after logging one of the first fastest declines in decades, while credit spreads have widened, yield curves have steepened, and oil prices have slipped.
Still, it is clear that investors are not fully pricing in a downturn in the world’s biggest economy quite yet, according to Henry Allen, Macro (BCBA:BMAm) Strategist at Deutsche Bank.
In a note to clients, Allen pointed out that the fall in equities has actually been "shallower than recent recessions," as have widening in credit spreads and the drop in crude prices.
"Markets clearly don’t see a recession as inevitable," Allen said, adding that such predictions will likely become weaker if Trump’s reciprocal tariffs do not come back into effect after a recent 90-day pause.
Yet, because markets do not seem to be anticipating a recession, there is "significant downside risks if we do get one," Allen argued.
"[N]one of the major asset classes have seen moves consistent with the other recessions of recent history," Allen said.
Concerns over the scope of the Trump administration’s tariff plans have been somewhat assuaged in recent weeks, buoying investor sentiment.
The White House has said that it is aiming to secure dozens of trade deals during the temporary halt to the duties, although a 10% universal tariff and other import taxes on items like steel, aluminum and autos remain in effect.
Earlier this week, the Wall Street Journal said Washington is considering bringing down its punishing tariffs on China in a bid to de-escalate trade tensions with the world’s second-largest economy. Trump has lifted tariffs on China to at least 145%, sparking countermeasures from Beijing and fueling worries over a trade war between the world’s two largest economies.
Trump has yet to make a final decision, while the negotiations are fluid and several options remain in play, the WSJ reported, citing people familiar with the matter.