Stock and GDP Outlook, for Week Ending 04/11/2025
"Liberation" from prosperity?
Stock prices and the mean expected NGDP growth rate dropped more than 9% last week, representing the largest such drop since March of 2020, early in the pandemic, before quantitative easing. This was after Trump’s announcement of his new tariff list, which included some non-countries, and even a country Trump said was not a country. Despite the obvious great care and due dilligence invested into constructing the list, it sent US stock futures reeling, followed by sharp losses on the following trading day, Thursday. By Friday, when China announced its intention to retaliate, stock traders were in a full-blown panic, with the S&P 500 falling nearly 6% that day alone. The VIX nearly doubled for the week, from already elevated levels. Apparently, the Devil fools with the best laid plans.
The S&P 500 is now down more than 17% from its all-time high reached in mid-February, before the trade tantrum began.
The index fell about 20% during Trump’s last trade war, which began in late 2018. The current schedule of tariffs is vastly broader and deeper, representing what is likely the greatest tariff shock in US, and perhaps world history. That means, there’s still a long way to go down, if the US doesn’t change course, and index futures are currently down more than another 4% as I write this on Sunday afternoon.
As if the suddeness of these tariffs wasn’t problematic enough, the capricious nature with which tariff announcements are made and modified or withdrawn leaves an uncertainty which is freezing investment and purchasing decisions, threatening to turn real growth negative very rapidly. The US stock market is now essentially conditionally predicting recession. The NGDP growth forecast for this quarter fell 0.52% last week.
Note also that both the 5-year and 10-year inflation breakevens fell below the Fed’s 2% target, in its preferred core PCE terms last week. This means that, at least with respect to its targeting framework, the Fed is expected to lag a bit in its loosening of monetary policy. Policy is now a bit tight by this standard.
Since the Fed insists on discretion in inflation targeting that would be unnecessary in an NGDP level targeting regime, they are understandably hesistant to make a quick decision on a monetary policy response, especially given the uncertainty in the way in which tariff policy may continue to unfold. Trump is actually correct that the Fed should probably lower rates now to honor their target, but for the wrong reasons, as he’s demonstrated a thorough misunderstanding of monetary policy. He believes that currency devaluation for a floating currency has merit, for example.
So, as I’ve been writing for months now, we live in increasingly dangerous times, and I still see no reason to be in stocks at the moment. It is only recently I began to sharply disagree with market predictions for economic growth, when I began to favor pulling money out of stocks or delaying investment therein in mid-January, when the 5-year inflation breakeven was above the Fed’s target, in the context of significant potential real shocks due to the incoming Trump administration. I can’t take any unique credit for this view though obviously, since it is the view of the overwhelming majority of economists for example, and many others well-versed in finance and economics. Markets do seem to have been fooled by Trump, suggesting some of us outguessed them. I never claimed they were perfect, but just that they will not be beaten by the overwhelming number of investors or forecasters, on average. This should perhaps be a case study in market inefficiency, or at least cause me to define “efficiency” in this context more narrowly. I’m still a semi-strong EMH believer.
Good luck this week and be careful!
PS: Changes to the blog: As you can see, I’ve updated my dashboard. It is now a bit more automated, being produced in Python. In the interest of said automation, I replaced the CRB commodity index with the FTGC ETF, which tracks it pretty closely. I also replaced the direct 1-month brent oil futures quote with the ETF BNO, which tracks those futures closely. I’m going to drop my much less often used indicators, including the US dollar index, the 1-year oil futures curve figure, the S&P 500 1-year futures curve figure, and the expected Fed Funds rate, if there are no significant objections. Please let me know your opinion, if you wish to share. I am open to discarding changes, or adopting new ones.
PPS: The quarterly market-based NGDP forecasts and output rate gap forecasts were updated this week for paid subscribers. You can witness the supply and demand destruction more directly.
Note: This post, as is the case with all my posts, should not be construed as offering investment advice. Such advice should be tailored to the individual investor by qualified professionals who, ideally, are fiduciaries.
Economic Data Sources:
https://fred.stlouisfed.org/series/SP500
https://www.wsj.com/market-data/stocks/peyields
https://www.barchart.com/futures/quotes/ES*0/futures-prices
https://ycharts.com/indicators/sp_500_earnings_per_share_forward_estimate#:~:text=Basic%20Info-,S&P%20500%20Earnings%20Per%20Share%20Forward%20Estimate%20is%20at%20a,28.27%25%20from%20one%20year%20ago.
https://www.cnbc.com/quotes/.VIX
https://fred.stlouisfed.org/series/DTWEXBGS
https://fred.stlouisfed.org/graph/?g=Ee9i
https://fred.stlouisfed.org/series/T10Y3M#0
https://fred.stlouisfed.org/series/DGS10
https://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html
https://tradingeconomics.com/commodity/crb?user=nunote
https://www.cnbc.com/quotes/@CL.1
https://www.cmegroup.com/trading/en
https://www.spglobal.com/spdji/en/documents/additional-material/sp-500-eps-est.xlsx
https://www.cmegroup.com/markets/interest-rates/stirs/30-day-federal-fund.quotes.html