Stock and GDP Outlook, for Week Ending 04/25/2025
Frozen Crisis
Stock prices and the mean expected NGDP growth rate fell last week, but with easing in the VIX, mostly due to remarks made by Fed Chairman Powell on Wednesday. Tariffs were once again top-of-mind, along with implications for monetary policy and whether Trump might try to fire Powell.
Trump has long wanted a weaker dollar, at least while he’s President, as he believes it could overcome the attempts of other countries to “cheat” the US in trade. He’s discussed competitive currency devaluation, and some of his advisers want to create a new fixed exchange rate system in which other countries peg their currencies higher against the dollar. These are seemingly pie-in-the-sky ideas, since there’s little reason to believe Trump can legally fire Powell or bring other countries together into a system designed to slow their economic growth. That said, Trump may seek to fire Powell illegally.
This would be bad, not only because it violates Scott Sumner’s principle of avoiding “reasoning form a price change”, but because it would increase inflation for Americans without meaningfully sustainably changing the balance of trade. Worse, the balance of trade doesn’t even matter.
The actual primary causes of US dollar strength and trade deficits are relatively high real GDP growth expectations versus long-term expected inflation, and large fiscal deficits. Tackling the problem of unsustainable deficits really would be positive for the US, while reducing the trade deficit somewhat, ceteris paribus. But, given Trump’s first term record and the seeming determination to extend tax cuts, there’s no indication of serious intentions to cut the deficit.
That doesn’t mean, however, that Trump hasn’t considered addressing the US Treasury debt. Unfortunately, since at least 2016, he’s talked about various ways to formally default on US debt or simply mentioned that money can be printed to pay for it. He’s also walked back such comments and/or said he wasn’t seriously considering such options. That he often makes reckless comments, constantly changes his mind, and lies means it’s hard to know what he's willing to do, if it even makes sense to think he makes anything resembling fixed permanent plans. That he’s made comments supporting Congress causing default while Biden was President seems to indicate he doesn’t care about the welfare of the US or the rest of the world, if you take him seriously.
So, this will be ultimately be a tale, ”Told by an idiot, full of sound and fury, …”, but signifying significant damage to the US economy and global alliances, at least in terms of some lasting effects on credibility. That seems to be the best case scenario at this point. The worst case is extremely uncomfortable to even contemplate, but it could mean at least the beginning of a global financial crisis and recession before Trump reverses course and/or is removed from office.
I would rather not “get political” if I can help it, but unfortunately US politics is dominating the US economic and stock market outlook, and is even the largest factor slowing growth expectations globally. The most economically and militarily powerful country on earth has an extremely unstable non-genius President who has seized more control of government than allowed. Given his proclivity to ignore laws — constitutional, legislative, or moral — there’s more uncertainty and downside risk for the US and the world than has ever been imposed from US shores. Obviously, these are not ideal conditions for long positions on stocks, at least until Trump is beaten up enough politically over the instability he’s causing and/or leaves office.
So, how to make investment decisions for now? It’s possible this crisis will ease, at least for limited periods of time. Also, company and industry exemptions are already watering down new trade restrictions, so long as Trump doesn’t change his mind about them. Perhaps his personal corruption will overome his desire to be a disruptor over time.
However, inflation breakevens are not far below the Fed’s target in core PCE terms, and the increased uncertainty regarding tariffs and inflation seem to mean the Fed will remain on the sidelines longer than usual if nominal growth again falters. The current situation increases the odds of Fed mistakes generally.
For now, the S&P 500 is still down more than 14%, along with GDP forecasts, such as that for this quarter which is now nearly down to 4%. There is certainly room for some modest stock market gains, potentially in the ~5% range under current conditions, but one would have to be a risk seeker or take a long-term perspective to be comfortable with the associated risks. A conservative approach would mean at least waiting for the VIX to fall below crisis levels, as illustrated in the Market Compass outlook indicator.
Yes, additional breakthoughs in AI could help and are obviously unpredictable, but at this point putting significant weight on such shocks in the short-term is to mostly rely on hope.
Good luck.
PS: You may notice that I’m now including not only the current quarter market-based NGDP forecast, but also the forecasted NGDP output rate gap. Forecasts for future quarters are available to paid subscribers.
PSS: I corrected an Excel error found in recent NGDP output rate gap charts that are available to paid subscribers. I regret the error.
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.
Links to Data:
Studies on Immigration:
https://www.hoover.org/research/economic-effect-immigration
https://www.hoover.org/research/immigration-innovation-and-growth
https://www.epi.org/publication/u-s-benefits-from-immigration/
https://www.nationalacademies.org/news/2016/09/new-report-assesses-the-economic-and-fiscal-consequences-of-immigration
https://www.cbo.gov/publication/60165
https://www.dallasfed.org/research/economics/2024/0702
https://link.springer.com/article/10.1007/s41996-023-00135-x?utm_source=chatgpt.com
https://ideas.repec.org/p/cpm/docweb/2202.html?utm_source=chatgpt.com
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