Donald Trump’s imposition of tariffs on America’s trading partners triggered a dramatic sell-off in stock markets around the world as investors feared a slowdown in global trade and a recession in the US and elsewhere.
Trump then rowed back on 9 April by reducing all tariffs to 10% (with the exception of China) and granting a 90-day reprieve from higher reciprocal tariffs.
Whether tariffs cause a recession will depend on whether higher ‘reciprocal’ charges come back into force in three months’ time and how long they last.
Kristina Hooper, chief global market strategist at Invesco, thinks a few months of higher tariffs would be likely to trigger a recession in the US.
“The situation is exacerbated by aggressive government spending cuts as well as the great unpredictability of the Trump administration, which might be a useful negotiating tool but is very problematic for business planning – uncertainty can be a potent deterrent to business investment. So yes, it seems more likely than not that the US will go into recession this year,” she said.
“The odds of a global recession are lower than the odds of a US recession as other countries can de-escalate trade barriers – or choose to focus on stimulating their economies in order to wait out the Trump administration. So, in my view, there will very likely be a global economic slowdown but not necessarily a global recession.”
In the UK, growth forecasts had already been slashed in half this year, said Susannah Streeter, head of money and markets at Hargreaves Lansdown. “Now the tariff storm is set to weigh heavily on the UK economy. It’s highly likely that the economy will slow back to a crawl and there is a risk it could go into reverse, given the maelstrom of worry taking hold.”
On Friday the UK’s latest GDP figures for February showed a sign of an improvement in the economy, which grew at 0.5%. It means growth over the past three months was a better-than-expected 0.6%. However, this does not take into account the Trump tariff chaos so far in April.
Whether a recession unfolds is a crucial question for investors because recessions turn equity corrections into deeper bear markets, said Tom Stevenson, investment director at Fidelity International.
“Historically, market corrections are more likely to become sustained bear markets – defined as falls of more than 20% – in the context of a recession. Investors will need to start to think in a calm way about how to position their portfolios for a tougher economic landscape ahead,” he said.
When it comes to preparing finances and portfolios for a potential recession, the first thing to consider is having a robust emergency fund, ideally enough to cover three to six months of essential expenses, said Neil Winstanley, chartered financial planner at Quilter Cheviot.
“Recessions can bring job losses and income shocks, so having enough cash set aside for unexpected events or is a key part of protecting your investment portfolio.”
In addition, he believes it is prudent to keep sufficient cash and lower-risk assets to fund expenses for the next few years.
Deciding how much cash to hold is, however, a balancing act, said Lydia Richmond, a financial planner at Finura. “Too much in cash risks erosion of your overall wealth by inflation; while holding too little may leave you exposed in an emergency, potentially forcing you to sell investments at a loss or rely on high-cost borrowing.”
As well as amassing a rainy day fund, people who are concerned about losing their jobs in a recession may wish to consider unemployment insurance.
Richmond said: “Revisiting the protection policies that you and your loved ones have in place can be a vital step to maintaining financial stability and peace of mind during volatile times. Make sure to review that the policies you have in place reflect your current financial circumstances and needs.”
She also believes investors should continue contributing regularly to their ISAs and pensions, even while stock markets are turbulent. “Pound cost averaging can smooth volatility and reduce timing risk. It can also help investors to take advantage of lower asset prices during downturns,” she explained.
Winstanley and Richmond both advise their clients to invest in well-diversified portfolios.
Richmond said: “Diversification remains one of the most effective strategies for navigating a recessionary environment. Spreading investments across a range of sectors and global markets can help cushion the impact of volatility. For instance, portfolios that were not overly concentrated in US equities have been better positioned to weather recent trade tensions and geopolitical events.”
Winstanley added: “In uncertain markets, recession-proofing your finances doesn’t mean retreating entirely from risk. It means being selective, strategic and resilient. Resilience comes from diversification and quality, not wholesale changes. Holding a broad mix of investments that are built to withstand changing conditions is more effective than trying to second-guess short-term market moves.”
Tech stocks have sold off savagely in recent weeks, whereas defensive strategies such as value-oriented funds and income-producing equities can help smooth the ride, he added.
“Recession-proofing isn’t about dramatic shifts or trying to time the bottom. It’s about maintaining discipline, focusing on fundamentals and building a plan that holds up not just in good times, but when markets are being tested. Staying diversified and resisting the urge to panic remains one of the most powerful ways to protect and grow your wealth over time.”
Remaining invested and, essentially, doing nothing is often the best course of action during market turbulence, Richmond concluded. “If your portfolio is well diversified, trust the process and allow the fund managers to do what they’re there to do and navigate the ups and downs and manage your investments accordingly,” she said.