Lewis Krauskopf and Saqib Iqbal Ahmed
NEW YORK (Reuters) - Despite new reports on GDP, investors were barely clear about the health of the U.S. economy on Wednesday, with President Donald Trump’s huge tariffs ambiguous.
On the surface, the first quarter data showing the first U.S. economic contraction since 2022 is shocking and puts immediate pressure on U.S. stocks.
But some economists are ready to shrink deeper and are encouraged by the data. This weakness stems from a surge in imports as companies try to avoid new tariffs, a phenomenon that many analysts say is expected to reverse in the coming months.
Investors face similar positions to those before the highly anticipated report, vulnerable to distortions and shifts in Trump’s unresolved trade war that would put markets on the edge and face the potential for recession in their seats.
"There are only huge distortion and volatility in the current economic data due to the attractiveness of tariffs," said Matthew Miskin, a joint Staff investment strategist at John Hancock Investment Management. The GDP report "does not help get rid of this fear of economic contraction that captures the market."
Last quarter, U.S. GDP fell by 0.3%. Imports were as high as 41.3%, causing a huge trade gap to cut a record 4.83 percentage points from GDP.
"It's even more frustrating for long-term investors because you don't really read about the work of the actual economy," said Mark Hackett, chief market strategist in the country. "We need to know what's going on in the economy... Reports like this don't give us a lot of useful data."
U.S. chief economist Larry Werther said consumer spending, which accounts for more than two-thirds of the economy, grew at a rate of 1.8%, indicating that "domestic economy is still normal" in the first quarter.
He said that starting from the beginning of the year, the recession was not a fundamental assumption of the recession.
The ongoing uncertainty itself poses a risk to the market, and the expectation of inflation rates due to tariffs complicates the situation at the Federal Reserve, which may not alleviate monetary policy to support the economy if price pressures remain higher.
“Discounts that are trying to be negotiated and recognized by the market make things extremely difficult to model, predict, etc. during this period,” said Peter Andersen, founder of Andersen Capital Management, Boston.
Stocks fall after GDP and then rebound
Stock futures fell sharply after the report, but a large amount of averages recovered during the meeting, with the S&P 500 ending with smaller gains. The benchmark U.S. stock index closed 9.4% from its record high in February.
The Fed's expectation of lowering interest rates tends to drop when the two-year U.S. fiscal yields (if the economy slows down) fell by about four basis points on Wednesday, while longer date yields are flat or even higher.
The benchmark 10-year yield lasted 4.169%, which was less than half of the day, while the 30-year yield reached nearly 4 basis points to 4.679%. The rate of return is inversely proportional to the price.
"The long-term poor performance of the (yield) curve (reflects) concerns that even if the inflation outlook may still be higher than the target, even if the Fed will be forced to focus on growth," said Robert Tipp, chief investment strategist and global head of global bonds at PGIM fixed income.
Wednesday’s data put investors at a crossroads: On the one hand, growth is unpredictable even if one-time tariff-related hits are allowed. On the other hand, with the worst impact on the market, any signs that exceed the expected data could cause a rally of risk sentiment in the coming months.
"People are in a conservative position ... When this happens, it doesn't take a lot of good news to move the market very aggressively to the market," said Nationwide's Hackett.
Meanwhile, investors are trying to locate various results. Lack of clearness about the tariff situation is that Sonu Varghese, global macro strategist at Carson Group, favors a "barbell" approach where one end is defensive, low volatile stocks, while high motorcycle growth stocks are on the other.
With the release of the U.S. Job Report, investors will quickly develop another view of the economy on Friday.
"Everything else is distorted by tariffs ... but now consumption is still bringing the economy together," Vargis said.
“If the labor market starts to falter here, then we will have a big problem.”
(Reported by Lewis Krauskopf and Saqib Iqbal Ahmed, other reports by Davide Barbuscia, Sukriti Gupta and Saeed Azhar; Editors by Nick Zieminski and Sandra Maler)