- Read more about why economists call stagflation an economic “double kiss of death” here.
U.S. stocks began Wednesday with a thud after a report suggested the U.S. economy may have shrunk at the start of the year.
But the big losses soon eased in the latest sharp swings to hit Wall Street amid uncertainty about what President Donald Trump’s trade war will do to the economy.
The S&P 500 was down 1.2 per cent in afternoon trading and on track to end a six-day winning streak.
The Dow Jones Industrial Average was down 316 points, or 0.8 per cent, as of 1:10 p.m. Eastern time, and the Nasdaq composite was 1.7 per cent lower.
They had been on track for much worse losses earlier in the morning, when the S&P 500 was down as much as 2.3 per cent and the Dow dropped 780 points.
Stocks sank after the report on the U.S. economy fell well short of economists’ expectations, a sharp turnaround from the economy’s solid pace of growth at the end of last year.
Importers rushed to bring products into the country before tariffs could raise their prices, which helped drag on the country’s overall gross domestic product.
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Such data raises the threat of a worst-case scenario called “stagflation,” one where the economy stagnates yet inflation remains high.
Economists fear it because the Federal Reserve has no good tools to fix both problems at the same time. If the Fed were to try to help one by adjusting interest rates, it would likely make the other problem worse.
“Even if today’s weak GDP may have partially reflected companies trying to get ahead of tariffs, it was still a stagflation warning shot over the bow of the economy,” according to Ellen Zentner, chief economic strategist for Morgan Stanley Wealth Management.
Financial markets got some better news later in the morning when a report said the measure of inflation that the Fed prefers to use slowed in March.
Inflation decelerated to 2.3 per cent, closer to the Fed’s goal of two per cent, from February’s reading of 2.7 per cent. Stocks more than halved their losses following the report.
Still, much of Wednesday’s economic data raised concerns about a weakening economy. A separate report on the job market from ADP suggested employers outside the government may have hired far fewer workers in April than economists expected, less than half.
It’s discouraging because a relatively solid job market has been one of the linchpins keeping the U.S. economy stable. A more comprehensive report on the job market from the U.S. government will arrive on Friday.
Wednesday’s reports add to worries that Trump’s trade war may drag the U.S. economy into a recession. The president’s on-again-off-again rollout of tariffs has already created deep uncertainty about what’s to come, which could cause damage by itself.
The uncertainty created severe and historic swings in financial markets, from stocks to bonds to the value of the U.S. dollar, that battered investors through April. The S&P 500 at one point dropped nearly 20 per cent below its all-time high set earlier this year, with scary headlines at one point warning of the worst April since the Great Depression.
But the uncertainty has been two-sided, and hopes that Trump may relent on some of his tariffs and reach trade deals with other countries helped the S&P 500 claw back much of its losses. It’s set to finish April with a loss of less than two per cent, which would be milder than March’s, and it’s roughly 10 per cent below its record.
Stronger-than-expected profit reports from big U.S. companies have also helped support the market, and Seagate Technology jumped 8.7 per cent for one of Wednesday’s biggest gains after the maker of data storage joined the parade.
But potentially discouraging trends within the artificial-intelligence industry helped offset such gains for storage makers. AI stocks have been pulling back sharply on worries that their prices shot too high in prior years, when a frenzy around the industry drove them to breathtaking heights.
In the bond market, Treasury yields held relatively steady. The yield on the 10-year Treasury eased to 4.18 per cent from 4.19 per cent late Tuesday.
Yields have largely been sinking since an unsettling, unusual spurt higher earlier this month rattled both Wall Street and the U.S. government. That rise had suggested investors worldwide may have been losing faith in the U.S. bond market’s reputation as a safe place to park cash.
In stock markets abroad, indexes finished mixed across Europe and Asia.
© 2025 The Canadian Press
