This is Armchair Economics with Hamish McRae, a subscriber-only newsletter from The i Paper. If you’d like to receive this directly in your inbox every week, you can sign up here.
The recent turmoil in the US stock market in response to Donald Trump’s tariffs has caught the attention of many. The sharp decline in values observed on Monday, followed by a modest recovery, has raised questions about the implications of these tariffs. The S&P 500, a key indicator of US stocks, has decreased nearly 5% this year, while the UK’s FTSE 100 has seen an increase of over 3%. But does this divergence truly matter? Should we be concerned about the sentiments of American investors, as opposed to those of voters? Furthermore, what could a sustained downturn in US share prices mean for the global economy?
To better understand the current situation, it’s crucial to consider the context. Trump assumed office during an extended period of economic growth, marked by rising equity prices. Since the pandemic’s darkest days five years ago, the S&P 500 has more than doubled, and the US has exhibited the most robust recovery among G7 nations. Therefore, some correction was inevitable. Initially, Trump’s bold and often unpredictable demeanor seemed to bolster share prices, peaking just a month ago. However, the introduction of tariffs – particularly those affecting Canada, a significant trade partner due to their intertwined economies – may have triggered the recent market downturn. This reaction was likely compounded by emerging signs of economic weakness.
Current Economic Sentiment
Recent analyses, particularly from the Atlanta Fed, suggest that the US economy may have contracted at an annual rate of 2.4% in the first quarter of this year. This decline is symptomatic of broader issues, such as sluggishness in the housing market and disappointing retail sales figures. Moreover, layoffs among government employees have dampened consumer sentiment further. While the President’s actions have exacerbated the situation, a correction following a prolonged period of economic exuberance was always on the horizon.
There are two primary perspectives to consider regarding the current market dynamics. One viewpoint posits that market fluctuations are typical after a period of growth, leading to what is known as a “correction” (a drop of 10% from a peak) or a “bear market” (a decline of 20% or more). The ongoing adjustments might be part of a normal cycle, though it remains uncertain how severe this decline will become. For instance, Goldman Sachs recently revised its year-end target for the S&P 500 to 6,200, down from its previous expectations, reflecting a relatively modest recovery outlook.
Impact on Consumer Confidence
Conversely, another analysis highlights the interconnectedness of share markets and consumer confidence, emphasizing how declines in stock prices can further undermine the real economy. While the main indices have dropped, many individual companies have experienced more significant declines. It is estimated that approximately 40% of the S&P 500 companies are already in bear territory, with their share prices down by 20% or more from their peaks. Notably, companies like Tesla have seen their valuations halved recently, and the so-called Magnificent Seven tech giants have also suffered, with only Meta Platforms showing any gains this year. Major players like Apple, Microsoft, and Nvidia have all seen their stock prices retreat, contributing to a broader sense of unease among investors.
In the US, consumer sentiment is heavily influenced by share prices, akin to how housing prices affect the mood in the UK. A significant portion of American households—over half—have retirement plans tied to the stock market. The average balance of these accounts in 2022 was around $334,000, likely exceeding $400,000 today due to previous market gains. However, with the S&P 500 dropping nearly 10% in recent weeks, many households are witnessing a decrease in their retirement savings by approximately $40,000, which can lead to more cautious spending behaviors.
Global Economic Considerations
So, what are the implications for those of us across the Atlantic? While share values do not exert the same direct influence on the UK economy as they do in the US, the interconnectedness of global markets means that significant downturns in the US could still have repercussions here. For instance, despite the German economy contracting for two consecutive years, the DAX index remains close to its all-time high, illustrating that stock market performance does not always correlate with economic health.
There’s an age-old adage that suggests when America sneezes, Europe catches a cold. This phrase typically pertains to the broader economic implications rather than stock market fluctuations. However, many UK investors hold shares in American companies, and a substantial decline in the US stock market would undoubtedly affect British investors as well. Regarding tariffs, the consensus among US businesses seems to be that while the current environment is confusing and damaging, a resolution is likely. For the UK, the impact of these tariffs is expected to be minimal since most exports are in services or goods that currently fall outside the tariff scope.
Despite the challenges presented by US policy shifts, any significant crash in share prices would invariably affect us here. Nevertheless, history has shown that downturns can represent buying opportunities for those willing to take the risk.
Key Takeaways
The statistic that over half of US households—54%, to be precise—have pension pots invested in the markets raises several intriguing questions for the UK. For example, finding a comparable figure for UK households has proven challenging due to the lack of timely data. The Office for National Statistics recently released figures from 2020 to 2022, indicating a significant lag in data collection. While there are figures available regarding pension wealth, it took a Freedom of Information request for RBC Brewin Dolphin to reveal that the largest individual pension pot in the UK was worth £11 million. It is concerning that many individuals are unaware of how much they will need to comfortably retire, and most with occupational pensions do not know their pot’s value.
There is much to learn from the US in terms of providing individuals with real-time information about their pension savings and entitlements. While some may already have access to this information through Self-Invested Personal Pensions (SIPPs), it is not universally available.
Another pressing issue is whether Rachel Reeves’s proposal to include pensions in estates for inheritance tax will deter individuals from saving into them. With a two-year lead time before this change takes effect, many savers may believe that it will be reversed by a future government, leading them to continue saving. However, retirees might feel compelled to deplete their funds rather than reinvest income from their pensions. This potential behavior shift could undermine equity investments, although quantifying its impact is inherently difficult.
Ultimately, we must consider how to enhance public understanding of the importance of saving and investing. While there is ongoing debate surrounding cash ISAs, it remains largely negative, focusing on preserving the current system rather than fostering a positive narrative around equity investment. In the past, initiatives like the ProShare plan encouraged employees to invest in their companies, but this approach carries risks. It is essential to educate the public about the power of compound interest, the superior long-term returns of equities compared to bonds, and the necessity of diversifying investment risks.
As highlighted in the recent UBS Global Investment Returns Yearbook 2025, equities consistently outperform bonds over the long term. I encourage everyone to download a summary of this report, as it underscores that investment principles remain unchanged despite historical upheavals.
This is Armchair Economics with Hamish McRae, a subscriber-only newsletter from The i Paper. If you’d like to receive this direct to your inbox every week, you can sign up here.
