Trump appears to be testing the market’s tolerance for short-term pain while promising long-term gain — with the economy hanging in the balance.

The latest: In an interview aired Sunday on Fox News, the president declined to rule out a recession this year even concern spreads that his on-again, off-again trade war could hit the economy hard.

“I hate to predict things like that,” Trump said. “There is a period of transition because what we’re doing is very big. We are bringing wealth back to America.”

On Friday, Treasury Secretary Scott Bessent warned in a CNBC interview that “there’s going to be a detox period” as the administration works to slash government spending and ramp up private investment. Policy won’t shift just to appease the market, he said.

Why it matters: Neither Trump nor Bessent has described what the “transition” or “detox” might look like.

In that vacuum, Wall Street is bracing for the worst: a possible recession (when the economy shrinks and unemployment soars) or “stagflation” (a toxic mix of weak growth and sharply rising prices).

• The Standard & Poor’s 500 index dropped 3.1 percent last week, its biggest weekly loss since September. The benchmark has coughed up all the gains it rang up following Trump’s election win in November.
• Investors are fleeing to the safety of Treasury securities.

Step back: Trump has laid out plans to remake the economy with sweeping changes never before attempted at the scale he envisions.

• The most aggressive move is the widespread implementation of tariffs, which the president says will bring manufacturing back to the United States and close the trade deficit.
• He also wants strict immigration controls, including mass deportations, to boost wages for American workers.
• And he’s set Elon Musk loose to cut the government workforce and federal spending programs to reduce the budget deficit.

Despite repeated warnings from economists that these policies would backfire, Trump won the political backing of many in the business world with promises to extend his 2017 tax cuts and deregulate industry.

A shift: Tensions are mounting now that the administration is putting its plans into action, sometimes chaotically, and the markets are retreating.

On Sunday, Commerce Secretary Howard Lutnick tried to calm nerves. “There’s going to be no recession in America,” he told NBC News.

That followed Federal Reserve chair Jerome Powell’s assessment in a speech on Friday that the economy “continues to be in a good place.”

But investors aren’t convinced. US stocks tumbled on Monday morning. The Standard & Poor’s 500 index fell 1.5 percent. The tech-laden Nasdaq dropped more than 2 percent.

A different take: Not everyone shares the worst-case view.

Michael Arone, chief investment strategist for Boston-based State Street’s $1.6 trillion ETF business, says he’s “uncomfortably bullish.”

Arone shares the concerns of investors who are trying to suss out the implications of Trump’s policies. But he doubts Trump wants to see the economy or market tank.

His advice: tune out what the president says and pay attention to what he actually does.

“Take a step back. Take a deep breath. And rely on the investment process you’ve put into place,” he said in an interview last week. The pullback in stock prices from “euphoric” levels will give stocks room to climb again, he said.

The outlook: Arone is sanguine about inflation, AI’s future, and the durability of the economic expansion.

• He expects consumer price gains to ease enough to allow the Fed to cut rates at least twice this year.
• He argues that while AI’s “Sputnik moment” — the January release of DeepSeek, a Chinese AI product that was produced at far less cost than US models like ChatGPT — let air out of the tech bubble, it doesn’t mean the end of the AI development boom.
• And like Powell, he believes that the economy is “doing reasonably well even though growth is moderating from last year.

His bottom line is that investors are in the grip of a “growth scare. And a growth scare is not the same as a recession.”

Final thought: Markets have been through a lot in five years — the COVID crash in 2020, the inflation bear market of 2022, and the regional bank scare after Silicon Valley Bank failed in 2023.

But this time feels different.

“I’m not even looking at the market,” Trump said last week, “because long term the United States will be very strong with what is happening here.”

Most investors aren’t buying it. To them, Trump is playing a dangerous game of chicken that nobody wins.

Larry Edelman can be reached at [email protected].