The wait-and-see economy presents downside risk

In his daily newsletter, Apollo's Chief Economist, Torsten Sløk writes that we are in a "wait-and-see economy" where systemic caution has infected decision-making across sectors.

Small businesses—representing 80% of all US employment—show record-high uncertainty amid deteriorating fundamentals. The same is true for the American consumer.

Sløk argues that credit markets' apparent optimism represents not resilience but dangerous complacency, creating significant downside risk that will materialize once sentiment translates into hard data contractions.

So what?

• Credit market complacency masks fundamental deterioration. Historical precedent shows spread widening typically lags sentiment indicators by 3-4 months before accelerating dramatically.
• Small business uncertainty at historic highs creates a dangerous employment vulnerability given their 80% share of the labor market, potentially triggering a rapid negative feedback loop.
• The wealth effect multiplier is becoming a wealth destruction accelerant. With 50% of consumption driven by the top 10% who are experiencing portfolio depreciation in real-time.
• The contagion from trade tensions has metastasized beyond directly exposed sectors into a broader economic paralysis that precisely mirrors pre-recessionary patterns from 2000 and 2007.

Historical parallels signal deeper trouble ahead

The current economic environment exhibits striking similarities to pre-recessionary periods that markets initially misread. In late 2000 and mid-2007, credit spreads remained stubbornly tight despite deteriorating small business sentiment—precisely the pattern we observe today.

Historically, the sentiment-to-fundamentals transmission follows a predictable sequence: first comes deteriorating confidence, then capital expenditure reductions, followed by hiring freezes, and finally layoffs that trigger consumer retrenchment. The 3-6 month lag between these phases creates the illusion of resilience that tricks markets until the deterioration becomes undeniable.

The current economic vulnerability is amplified by the extreme concentration of consumption power. With 50% of consumer spending driven by the top wealth decile, portfolio deterioration creates an immediate spending multiplier effect that operates faster than historical precedent. If it starts to impact housing prices the risk of recession increases exponentially.

Trade wars and tariffs

The escalating trade tensions introduce another parallel to the 1930s Smoot-Hawley tariff sequence, where initial "manageable" trade restrictions cascaded into a global trade collapse.

Today's emerging tariff structure threatens to disrupt supply chains and business models that were optimized for frictionless global commerce, creating adjustment costs that markets have consistently underestimated.

The evidence suggests we're not merely witnessing a sentiment-driven pause but rather the initial phase of a structural readjustment with significant downside potential.

Markets are repeating their historical tendency to maintain optimism until deterioration reaches their doorstep. By then strategic positioning options will have dramatically narrowed for investors and business leaders alike.