Market Jitters Persist as Tariff Threats and Inflation Concerns Mount

Brent Schutte, CFA, is chief investment officer of the Northwestern Mutual Wealth Management Company.

Stocks and shorter-term Treasury yields fell over the past week (yields and bond prices move inversely to each other) as stronger than expected inflation readings, threats of more tariffs and further signs of weakening consumer sentiment had investors playing defense. Stocks in sectors such as consumer staples posted gains, while areas such as technology underperformed. 

Stocks in the technology sector have declined over the past several weeks as uncertainty about the economy has been on the rise. The tech sector is down 12.68 percent year to date, with the Magnificent Seven off 14.6 percent since the beginning of the year. The declines for equities marked the fourth week in five that the major equity indices posted losses. In each of the down weeks, the driving questions behind the selling were the same—will tariffs and sticky inflation cause the Fed to stay on the sidelines? If so, will economic growth stall or contract? While President Trump has suggested that tariff policy will take firmer shape this week (on what he has dubbed “liberation day”), when he announces details of his plans for implementing tariffs on goods and services from trading partners, it may still take some time before the questions that have been on investors’ minds will be answered. Until then, uncertainty is likely to continue and may result in volatility. Additionally, until a clearer picture emerges, there is a growing risk that consumers will grow increasingly cautious and may begin to pull back on spending.

Indeed, final results from the University of Michigan February consumer sentiment survey out last week show that caution is beginning to take root. Sentiment as a whole (including current perceptions and future expectations) fell 7.7 points in March to 57. The reading is off 22.4 points from the same period last year. While views of current conditions retreated modestly during the month, expectations for the year ahead tumbled to 52.6, down 11.4 points for the month and off 24.8 points year over year. The deteriorating outlook was consistent across the political spectrum and all demographic groups. Results of the survey show that the rising level of concern is being driven by ongoing changes to economic policies by the Trump administration. The result has been a notable deterioration in views about the job market. Final results from the March survey show that roughly two-thirds of consumers expect unemployment to climb during the next year. For context, that is the highest level since 2009, when the economy was still feeling the pain from the Great Financial Crisis. “This trend reveals a key vulnerability for consumers, given that strong labor markets and incomes have been the primary source of strength supporting consumer spending in recent years,” Survey of Consumers Director Joanne Hsu said in comments released with the survey results.

As concerns about trade policy have grown, inflation expectations have continued to rise. The latest results of the University of Michigan survey show that inflation expectations for the year ahead jumped 0.7 points to 5 percent, marking the highest reading since November 2022. Perhaps more importantly, expectations for inflation in the coming five to 10 years also rose, coming in at 4.1 percent, up 0.6 percent from February’s final reading. This marks the third straight month of deteriorating sentiment. While it is too early to tell if this is a sign that inflation expectations have become unanchored, the growing pessimism could begin to affect consumer buying behavior. Indeed, the latest Personal Consumption Expenditures (PCE) report from the Bureau of Economic Analysis, which we detail later in this commentary, shows that consumer spending came in at 0.4 percent for February, falling short of Wall Street expectations.

Although the current uncertainty has led to investors taking a pessimistic view, and recent data suggests that inflation remains sticky, we caution that the path forward has yet to be determined. The global economy is dynamic, and as we’ve already seen, economic policies can be adjusted as their impact (good or bad) becomes evident. As such, we don’t believe investors should make major adjustments to their long-term strategy. If you’ve worked with an advisor to develop your financial plan and investing strategy, your portfolio was likely designed to account for the fact that every economic cycle endures periods of uncertainty. An unpredictable future will lead to unpredictable opportunities for investors in the intermediate and long terms. And capitalizing on these unforeseen opportunities is best done through diversification.

While we believe uncertainty will remain elevated for a while, we also believe the best way to address it is by focusing on the long term and staying diversified to avoid concentrating too much on any one market segment or asset class.

Wall Street wrap

Inflation higher than expected: The latest reading of the PCE index from the Bureau of Economic Analysis showed that headline inflation rose 0.3 percent in February and is up 2.5 percent on a year-over-year basis, both unchanged from the prior month. Core inflation, which strips out volatile food and energy prices and is the measure that the Fed has the greatest influence over, rose 0.4 percent in February—above Wall Street estimates and up from January’s pace of 0.3 percent, marking the third consecutive monthly increase. The monthly uptick was also the largest increase since January 2024. On a year-over-year basis, core inflation was up 2.8 percent, marking the highest level since December of last year.

The cost of goods rose 0.2 percent in February after rising 0.5 percent in January. Services prices rose by 0.4 percent, up from January’s pace of 0.3 percent. On a year-over-year basis, inflation for services came in at 3.5 percent, up 0.1 percent from December’s reading. Meanwhile, goods prices are up 0.4 percent from the same period a year ago.

One of the secondary reports we follow, The Dallas Federal Reserve’s Trimmed Mean PCE, which removes outliers that can distort traditional PCE readings, shows that the one-month annualized inflation rate is at 2.97 percent, compared to 2.5 percent in January. On a six-month annualized basis, the measure is up 2.75 percent and is 2.57 percent higher year over year. This trend of rising price pressures could complicate the Fed’s decision-making process on interest rates.

Economic activity picks up as prices jump: Preliminary data from the latest S&P Global Purchasing Managers Index (PMI) showed that the pace of growth picked up steam in March, with activity in services rising to a three-month high but manufacturing slipping back into contraction following two months of expansion. The latest preliminary data, which tracks both the manufacturing and services sectors, shows that the Composite Output Index came in with a reading of 53.5 (levels above 50 signal growth), up from February’s final reading of 51.6 and the highest reading in three months.

Manufacturing PMI came in at 49.8, down 2.9 points from February and the lowest level in three months. The Manufacturing Output Index dropped 5.7 points to 48.8, as goods-producing companies saw less demand from domestic customers trying to buy ahead of expected tariffs. It’s worth noting that export sales eased by the smallest amount in nine months as orders from Canada, Germany and other countries in the European union grew. The uptick in demand from those locations suggests that the overall numbers may still be influenced by demand being pulled forward in anticipation of new levies. Meanwhile, the Services Business Activity Index rose to 54.3, up 3.3 points from February and the highest level in three months. However, the uptick on the services side of the economy may have been influenced by abnormal factors. New orders on the services side were boosted by good weather after poor weather dampened demand in recent months.

Input prices rose sharply for both sides of the economy, with costs for service providers rising at the fastest pace in 18 months, while manufacturing costs rose at the fastest clip in 31 months. Once again, tariffs were cited as the driving force behind higher costs. Escalating manufacturing costs translated to higher prices being charged to customers. The pace of price hikes for end users was the highest in more than two years. Services prices also rose, but at a more modest pace as firms noted they needed to compete for clients in an environment of softening demand. Combined, the pace of price inflation was at the second highest level in six months with only the sharp uptick in January coming in higher.

“Firms’ costs are now rising at the steepest rate for nearly two years, with factories increasingly passing these higher costs onto customers. Thankfully, from the Federal Reserve’s perspective, services inflation remains relatively subdued, but this reflects the need to keep prices low amid weak demand, which will harm profits,” Chief Business Economist of S&P Global Market Intelligence Chris Williamson noted in comments released with the report.

Consumer confidence weakens further: The Conference Board’s Consumer Confidence Index released last week came in at 92.9 for March, down 7.2 points from February, marking the fourth consecutive month of declines. Views of current economic conditions weakened, coming in at 134.5, down 3.6 points from the prior month’s final reading. Expectations for the future dropped 9.6 points for the month to 65.2, marking the lowest reading in 12 years and significantly below the 80-point level that has typically served as a threshold indicating a recession was approaching. Declines were seen in four of the five measures used to gauge consumer views. Views of the present job market inched up modestly.

The labor differential, which measures the gap between those who find it hard or easy to get a job, rose for the first time in four months to 17.9 from February’s final reading of 17.6 percent. Still, the level is well below the record high of 47.1 recorded in March 2022. Respondents aren’t optimistic about the future of the job market, with the latest reading showing the outlook for jobs dimming. Decreases in this measure have historically coincided with an increase in the unemployment rate. Compared to February, more respondents expect the number of available jobs to decrease in the next six months, and more expect their income to decrease.

Write-in comments by respondents also showed inflation as well as a rise in uncertainty related to economic policies and tariffs are concerns for consumers. Worries about tariffs may be showing up in consumers’ views on spending. While plans for buying homes and cars fell on a six-month moving average basis, there was an uptick in the portion of consumers who planned to buy big-ticket items like appliances and electronics. Given that many of these items could become more expensive if they were included in new tariff policies, the rise in buying expectations may reflect a plan to buy ahead of increased levies.

Existing home prices continue to climb: The latest S&P CoreLogic Case-Shiller Index report shows that home prices nationally rose 0.6 percent on a seasonally adjusted basis from the prior month. January’s reading shows home prices are up 4.1 percent on a year-over-year basis, compared to December’s year-over-year pace of 4 percent. While the pace of year-over-year gains has eased since July 2024, mortgage interest rates have mostly moved higher. The continued rise in selling prices and rise in mortgage rates means affordability issues continue for average buyers.

The week ahead

Tuesday: The Institute for Supply Management (ISM) releases its latest Purchasing Managers Manufacturing Index. Last month’s report showed manufacturing in expansion territory for the second consecutive month, although the pace slowed. We will be watching to see if the latest data points to an inflection point for the sector. We will also be evaluating the data for signs of increased input cost pressures.

The Bureau of Labor Statistics (BLS) will release its Job Openings and Labor Turnover Survey report for February. We’ll watch for changes in the gap between job openings and job seekers. We’ll also keep an eye on the so-called quits rate to see if workers are feeling confident in their ability to find different or better jobs.

Thursday: The ISM will release its latest Purchasing Managers Services Index mid-morning. Recent data has shown increased inflationary pressures and moderating growth in the services sector. Given that the services side of the economy has driven much of the economy’s growth over the past two years, we will be looking for signs of any changes in underlying strength in this report.

Friday: The BLS will release the Jobs report. We’ll be watching to see if last month’s weaker than expected hiring continued. Importantly, we will be monitoring the pace of wage growth. Last month’s data showed the pace of wage growth was still above the pace the Fed believes consistent with its long-term inflation goal, and we will be looking to see if that trend continues, as it could weigh into the Fed’s actions on rates in the future.

Follow Brent Schutte on X and LinkedIn.

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