ClockWise: Trump’s Tariff Crisis isn’t over, could see inflationary aftermath

Markets are in full blown crisis mode after President Trump’s 2 April tariff announcement came in far worse than expected.

Trade wars are typically stagflationary, but rather than factoring in the prospects for higher long-term inflation, markets have focused instead on the potential for greater near-term economic weakness – a deflationary shock that is bad for stocks and commodities and good for government bonds.

Our composite investment sentiment indicator for equities is deeply depressed (chart 1), with Friday making the top 10 most panicked daily readings since 1991. Historically, it has often paid to buy when others are fearful but a sustained turnaround usually hinges on a positive policy change. The signs are not encouraging. With equity weakness and the risk of recession apparently part of Trump’s strategy to put pressure on trading partners over “the coming weeks and months”, we think volatility is likely to remain high.

Chart 1: Investor Sentiment Deeply Depressed

Source: RLAM proprietary investor sentiment indicator measured in standard deviations from normal. For illustrative purposes only

Interest rate cuts could boost sentiment in a more sustained way but tariffs raise prices and central bankers are unlikely to ease policy unless they see hard evidence of financial system stress or economic weakness. This could take a while. Our Investment Clock model is still in the inflationary Overheat phase (chart 2), the stage of the global business cycle in which central banks most often increase interest rates, rather than decreasing them.

Chart 2: Investment Clock in Overheat

Source: RLAM. Showing historical trail with the yellow dot representing current readings; the faint lines are an RLAM projection assuming current policy continues.

Trump’s tariffs fit into our 'Spikeflation' theme (chart 3). Structural changes in the world economy, including populism and deglobalisation, have ushered in a regime in which periods of low stable inflation are interrupted by sudden price level shocks that central banks are unable to prevent and unwilling to reverse. Weighing up short-term deflationary pressure against longer term inflation risks will require careful monitoring. It’s not beyond the realms of possibility that the Tariff Crisis ends up like Covid – a short-term deflationary panic that gives ways to an inflationary recovery.

Read 'Spikeflation' article
In Covid, investors had newsflow around the virus and vaccines to contend with. In the Global Financial Crisis, bank leverage and financial system stress was the problem. In 2025, we are trying to second guess the policy pronouncements of one man with a highly idiosyncratic world view. We’d argue that a more uncertain geopolitical world calls for broad diversification, including inflation hedges like commodities, and an active and disciplined approach to tactical asset allocation.

Chart 3: Structural drivers of ‘Spikeflation’

Source: RLAM. For illustrative purpose only.

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