Trade Wars, Fed Moves And A 40% Recession Risk – Is Your Portfolio Ready?

Trade tensions, Fed policy shifts and weakening sentiment are creating a stormy outlook for the global economy.

JPMorgan’s Bruce Kasman just upped the ante on recession risks, pegging the odds of a 2025 U.S./global downturn at 40%. That’s not just a number—it’s a warning shot for investors navigating an increasingly volatile landscape.

Trade War Fears Are Back – ETFs Are Already Reacting

Kasman’s outlook hinges on one major factor: trade policy. With tariffs expected to push the effective U.S. rate above 10%, he sees a 0.5% GDP drag next year. But the real risk? A domino effect.

If business sentiment cracks, capital expenditures slow and inflation limits Fed maneuverability, markets could turn defensive fast.

Investors aren’t waiting for confirmation – ETF flows are already shifting. The iShares MSCI Emerging Markets ETF EEM has seen a surge in outflows as investors brace for trade turbulence.

Meanwhile, defensive plays like the Utilities Select Sector SPDR Fund XLU and iShares 20+ Year Treasury Bond ETF TLT are catching bids as risk appetite wanes.

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Can The Fed Hold The Line?

The Fed isn’t rushing to cut rates despite rising trade war concerns. Kasman notes that while policymakers remain “asymmetric” – ready to ease in a labor market downturn but unwilling to hike on strong growth – this stance leaves little cushion if sentiment nosedives.

That’s a potential headwind for growth-focused ETFs like Invesco QQQ Trust QQQ, which relies on a Fed-friendly backdrop.

But it’s not all doom and gloom. A front-loaded boost in global trade is temporarily lifting manufacturing ETFs, with the Industrial Select Sector SPDR Fund XLI seeing inflows as global industrial production spikes.

The question is: how long does that last before trade war fears fully set in?

ETF Playbook For Recession Risks

With uncertainty mounting, ETF investors are playing both offense and defense. Those bracing for more pain are rotating into SPDR Gold Shares GLD and Vanguard Consumer Staples ETF VDC, while bargain hunters are eyeing SPDR S&P 500 ETF Trust SPY for potential buy-the-dip opportunities.

Bottom line?

The 40% recession probability isn’t just a macro call – it’s already reshaping ETF positioning. If sentiment sours further, this shift is only getting started.

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