Investors flee US stocks as Trump continues to improvise a potluck tariff stew

(Originally published March 31 in “What in the World“) Fears of stagflation are being stoked by the latest inflation data.

The Commerce Dept. reported that the index of personal consumption expenditures, excluding prices for food and energy, rose 2.8% in February from the same month a year ago. That was higher than economists expected. The news disappointed markets, which are already bracing for Trump’s next round of tariffs. The S&P500 dropped almost 2% Friday. It has fallen almost 7% since Trump’s inauguration.

After imposing a 25% tariff on imported cars, U.S. President Donald Trump has said he will announce new reciprocal tariffs Wednesday, which he has dubbed “liberation day.” On Sunday, Trump said the reciprocal tariffs would be imposed on all foreign countries’ products, contradicting earlier suggestions that they might be limited to 10-15 nation’s goods. Markets have been as vexed in recent weeks by Trump’s vacillating statements on his tariff plans than the tariffs themselves, with businesses complaining that policy uncertainty is making it impossible to plan investments.

Indeed, Trump and his advisers may not even know themselves what shape of “liberation day” might take. The Wall Street Journal reported over the weekend that the administration is still scrambling to finalize the specifics, with White House officials still debating whether to apply reciprocal tariffs that match each specific trading partners’ own tariffs on U.S. products, or to instead apply the kind of sweeping, flat tariff on all imports Trump campaigned on.

Policy uncertainty and growing pessimism about U.S. economic prospects are in turn driving investors out of U.S. stocks into cash, gold, short-term bonds, and the relative stability of foreign assets, particularly European stocks. Bank of America said its survey this month of 171 fund managers overseeing $477 billion in assets revealed that investors had cut U.S. equity allocations by the largest proportion ever: from 17% overweight in February to 23% underweight in March. At the same time, weightings for Eurozone stocks rose to its highest since mid-2021. Stocks with lower exposure to the U.S. are outperforming those with a higher reliance on U.S. sales.

Investors have also bought a net $11.4 billion in physical gold ETFs since the start of February, the most since mid-2020 during the height of the pandemic. That has helped drive the price of gold to a record $3,074.43 an ounce.

Trump’s policies, deportations and reports of tourists being hassled or even detained at the U.S. border are also driving away potential visitors. Airlines have been cutting capacity between Canada and the U.S. in response to a sharp decline in summer bookings by Canadians, traditionally the largest group of visitors to the U.S.

Had enough? Too bad: Trump says he’s serious about finding a way to serve a third term.