Two Black Swans that Should Not Be Overlooked
In pessimistic scenarios, tariffs are merely the tip of the iceberg
Disclaimer: I am not generally a pessimist, but I do believe in acknowledging potential risks. I translate those risks into scenarios that help guide my decisions in the stock market.
So far, the impact of tariffs has been significant: a 15% drop in a single week and a 20% decline since the ATH of the S&P 500. The recent 90-day pause triggered a rally in the stock market, but we may not be out of the woods yet. I believe the immediate impact of tariffs (if they eventually take effect) is not the main concern. Far more serious challenges could arise if other negative factors come into play.
Let’s dive in!
A strong recession
The likelihood of a recession in 2025 has surged from virtually zero to 60% in just a few weeks. Even the CEO of BlackRock stated that the United States is “probably in a recession right now.”. It means that economy was weak even before the tariffs.
Recessions are among the most disruptive events for the stock market. They slow economic growth, reduce EPS, and lower valuation multiples: a one-two punch that often leads to bear markets.
Typically, central banks respond to a recession by cutting interest rates to stimulate growth. However, a recession triggered by tariffs could also drive up inflation, making it harder for central banks to implement rate cuts and placing them in a difficult position.
The bond market
In a typical market downturn, investors flock to safe-haven assets like gold, the Swiss franc, and government bonds, driving interest rates lower. During the market downturn, the 10-year US Treasury yield rose from 4% to 4.4% in a single week, a highly unusual move under these circumstances.
In 2025, the United States faces the need to refinance approximately 25% of its sizable debt, around $9.2T out of $36T. Some skeptics could suggest that this trade war is a ploy to destabilize the stock market, compelling investors to shift into US government bonds and thus enabling the government to refinance its debt at more favorable rates. Whether by design or not, this outcome wasn’t panning out as expected!
Refinancing $9.2T at 4.4% instead of 4% translates to a cost of $404B versus $368B, an additional $40B burden on the US budget.
And this doesn’t even account for the possibility that President Trump could refuse to pay the debt altogether, a move that would spark a massive economic shock. Japan and China are the 2 largest foreign holders of US debt, at roughly $1T and $760B respectively, just something to keep in mind.
A default or a substantial surge in interest rates could trigger a global shock with far-reaching consequences.
A Potential Turnaround
The situation could shift at any moment. If the tariff issue disappears once President Trump secures the terms he wants in negotiations with various countries, market sentiment could shift dramatically (just as we saw during the 90-day pause) causing this crisis to vanish as abruptly as it arose.
For investors, it is crucial not to panic, fear is not a strategy. While the worst can happen, so can the best. I focus on identifying promising stocks, building watchlists, pinpointing buying zones, and progressively deploying capital. This remains my core strategy, and I intend to stick with it.
Share your thoughts on the current market environment and how you plan to respond in the comments. I look forward to hearing your strategies and insights!
Thanks for the article. I think Drumpf probably won’t pay back what’s owed to China. Wouldn’t be surprised if he just throws out some random reason—like he did with the tariff stuff—to justify it.
Thank you for sharing this insightful and well-researched analysis.
I appreciate your balanced approach and the reminder to focus on long-term strategies rather than succumbing to fear.