As the global trade war escalates due to unprecedented U.S. tariffs, this analyst has mapped out three possible economic scenarios, with the worst-case outcome forecasting a deep recession and a potential stock market plunge of up to 60%.
What Happened: Peter Mallouk, the CEO of Creative Planning, in a recent post on X, cautioned about the significant risks associated with the current policy shift.
Mallouk's "worst-case scenario" envisions the U.S. administration maintaining high tariffs for the long term to boost domestic production. He warns that this scenario would lead to soaring consumer prices, rising inflation, and a substantial decline in the living standards of average Americans.
“We'd likely fall into a deep recession, and the markets could drop anywhere from 30% to 60% in a short period of time. It's the classic stagflation scenario — slowing growth and rising prices — and it's brutal for everyone. No one wins,” says Mallouk.
However, Mallouk also presented a "best-case scenario" where the tariffs act as a strategic effort to secure better trade deals within six months. Successful negotiations could lead to lower interest rates, an avoidance of recession, and ultimately benefit U.S. consumers and businesses.
The third possibility, a "mostly bad scenario," suggests that even if negotiations are the eventual goal, delays exceeding a couple of quarters could still push the economy into recession. In this case, he predicts that “Supply chains are disrupted, companies hesitate to invest, and consumer confidence erodes before any deals are finalized.”
Why It Matters: Mallouk acknowledges that the current tariff situation is "messy," and it could have a potentially "devastating" impact if it lasts for a longer period of time.
“It's messy, the tariffs – as they sit – would be devastating if they lasted long, and there's a lot of uncertainty, but I'm optimistic this wild adventure will come to a conclusion before the swimming pools close.”
However, he adds that “I'm optimistic this wild adventure will come to a conclusion before the swimming pools close,” implying that he expects the countries to arrive at a resolution in the coming months.
Donald Trump introduced10% tariff on all trading partners on Wednesday and levied more duties on the countries he described as "bad actors".
Morgan Housel, a partner at the Collaborative Fund, quoted an investor in an X post and said that the market should have crashed 30-40% on Thursday. He said the market is either in denial or believes that the current scenario will soon be reversed.
As of Thursday, the S&P 500 declined 12.22% from its Feb. 19th peak, the Nasdaq 100 slumped 16.65% from its 52-week high, approaching the bear market territory, and the Dow Jones dropped 10.05%, suggesting that all three indices were in the correction zone.
Price Action: The SPDR S&P 500 ETF Trust SPY and Invesco QQQ Trust ETF QQQ, which track the S&P 500 index and Nasdaq 100 index, respectively, declined in premarket on Friday. The SPY was down 2.30% to $525.78, while the QQQ declined 2.52% to $439.32, according to Benzinga Pro data.
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