MW How the stock market could suffer a 'black swan' event from Trump's policies

By Peter Morici

6 ways the U.S. could get into real trouble from Washington's misguided economic decisions

President Donald Trump's arbitrary, personalized and quixotic policymaking is at odds with creating tax and regulatory reforms that foster investment and economic growth, and the predictability businesses and investors need to make sound decisions.

As a result, recession risks are rising as American consumers become more pessimistic. In recent months, the richest 10% of U.S. households have accounted for an unusually large share of consumer spending, making the recent S&P 500 SPX correction even more worrisome.

While stocks have rebounded somewhat, stock investors still have reason to be on watch for a "black swan" event - a destabilizing event that could turn a market correction into a full-scale rout.

Black swans are unexpected, but investors can be aware of adverse conditions so they can prepare their portfolios accordingly. Here are six areas of the economy where the risk of a black swan is heightened:

1. The tech industry's massive spending on artificial intelligence and data centers could evaporate if another disrupter such as China's DeepSeek upends investor confidence in those bets and deflates big-tech stocks. That would pose major risks for the U.S. It could trigger an economic recession and a prolonged bear market for stocks.

2. Bird flu threatens global food supplies and could spawn another epidemic. A recent variant caused the hospitalization of a Canadian teenager and a death in Louisiana. Signs of the virus have turned up among three American veterinarians.

With this threat looming, it is not comforting that the Secretary of Health and Human Services is a vaccine denier; the Centers for Disease Control and Prevention is enduring disruptive staff cuts; and a U.S. government contract with Moderna $(MRNA)$ to develop bird flu shots is being re-evaluated.

3. After the global financial crisis of 2008-09, U.S. bank regulations were tightened and loans became tougher to obtain. Many businesses turned to private credit aggregators such as Apollo Global Management $(APO)$, Ares Management $(ARES)$ and BlackRock $(BLK)$. These companies collect pools of money from private investors and sovereign-wealth funds to make loans deemed too risky for conventional FDIC-insured deposits.

Now big, traditional banks including JPMorgan Chase $(JPM)$ are exposed to this debt, either by directly entering the market or lending to aggregators seeking to leverage their investors' funds.

This is not supposed to create risks for FDIC-insured deposits. But that was supposed to be true for structured investment vehicles, which repackaged dodgy real-estate loans to sell to private investors and precipitated the GFC.

4. U.S. commercial real estate $(CRE.UK)$ is finally turning over because private investors believe rental markets are stabilizing. Banks can no longer extend loans on office buildings whose occupancy rates have declined as a result of COVID and more employees working from home.

Many CRE mortgages are held by regional banks - the same smaller institutions that were victims of the savings and loan crisis of the late 1980s.

The critical thing to understand is that both private credit - by intent and design - are inherently risky. Many U.S. banks are vulnerable.

At the same time, the Trump administration promises much lighter bank regulation. It also promises to inject political intervention into the regulatory process. That could prove a genuine peril to America's financial stability.

5. Since 2016 the U.S. federal deficit has grown to 6.6% of GDP from 2.9%. The government's framework for renewing the 2017 Tax Cut and Jobs Act and funding Trump's agenda could take the deficit well above 7% of GDP.

The ballooning national debt has investors demanding higher yields on U.S. Treasury bonds. Last fall, as the U.S. Federal Reserve cut the federal-funds rate a full percentage point, the benchmark 10-year Treasury BX:TMUBMUSD10Y yield rose.

Investors demanding higher interest rates to compensate for heightened U.S. inflation risk could undermine the U.S. dollar's (DX00) reserve currency status that American consumers enjoy, and force the federal government to cut spending and raise taxes. Any one or combination of those threats could lead to another Great Recession.

6. Trump wants to emulate William McKinley, the pro-tariff U.S. president of the late 1890s. Just the threat of new tariffs is encouraging America's trading partners to seek greater autonomy in agriculture and other key industries. Businesses are having to shoulder more expenses to rearrange supply chains.

Much like the McKinley tariffs, Trump's tariffs will push prices of everyday goods out of range for many Americans. Moreover, supply disruptions and reduced real incomes and business profits could easily instigate a recession and stock market collapse.

Trump's economics team must be aware of this history and these risks. But any caution premised on this knowledge may not be welcomed by a president who requires absolute loyalty to his agenda. Because of that, the next black swan could be hatching in the White House right now.

Peter Morici is an economist and emeritus business professor at the University of Maryland, and a national columnist.

More: Forget trade wars and tariffs. This is the real threat to your money.

Also read: Bird flu could break the economy. High egg prices are just the beginning.

-Peter Morici

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March 25, 2025 07:05 ET (11:05 GMT)

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