Over the weekend, President Trump was asked if he thought there was a recession coming for the U.S. economy…
It’s a pretty good question considering the speed with which economists are lowering their growth estimates for the U.S. The Atlanta Fed says the economy is already shrinking…
It’s probably smart for the President to deflect the “recession” question. The U.S. economy is dynamic and has shrugged off recession calls before, most notably in 2022 and 2023 when inflation soared and the Fed stomped on the brakes with massive rate hikes.
In any event, after declining to speculate on the recession odds, the president went on to say:
"All I know is this: We're going to take in hundreds of billions of dollars in tariffs, and we're going to become so rich, you're not going to know where to spend all that money. I'm telling you, you just watch! We're going to have jobs. We're going to have open factories. It's going to be great."
Maybe?
It’s certainly possible to look at the unemployment rate of 4.1% and think there’s a paycheck out there for anyone who wants one.
And the total value of all factory output has surged above pre-COVID levels:
Granted, that flatline for the last couple of years looks less than ideal. But maybe it could be better helped by tinkering than taking an ax to the trade agreements the Trump administration signed with Mexico and Canada during his last term.
That chart on manufacturing output shouldn’t be a surprise. It is completely inline with what we know about the U.S. economy – it is largely a services economy. $7.2 trillion in manufacturing output is exactly in line with what you’d expect from a $24 trillion economy that is 70% driven by services.
Could the U.S. economy accommodate more manufacturing? Sure.
Is it worth a 20%-30% hit to your retirement savings to get more manufacturing into the U.S.?
Well, that’s kind of a different question isn’t it…
Recession and the S&P 500
The S&P 500 is currently down 8% from its all-time high from February 19.
Over the last 15 recessions, the S&P 500 has averaged a -30% decline.
If the U.S. economy is falling into recession, and the S&P 500 follows its average, we’d be looking at low for the index at 4,300. Yes, that’s another 1,300 points lower.
Recession would also mean a big spike for unemployment. And it won’t just be all those government workers getting canned.
That’s a little more than a mere “disruption…”
Especially if you’re approaching retirement.
You can bet that some of the selling we are seeing right now is panic-selling from people approaching retirement…
The Valuation Problem
The problem for investors right now is that less than a month ago, valuations were at extreme highs. Hammer and I have discussed this fact repeatedly over the last few months…
Still I’m well aware that it’s cold comfort for anyone seeing their net worth take a hit, yours truly included.
The forward P/E for the S&P 500 has come down to 21, it’s still above the 5-year average. But sadly earnings estimates for the current quarter are also coming down. At the start of 2025, analysts were expecting earnings to grow by 11.3% over last year. Now they say earnings growth will be 7.8%. And that may still be too high…
We looked at this chart last week, but it bears repeating:
The S&P 500 has now broken below its long term trend line, the 200-Day Moving Avergae (gold line). And the MACD at the bottom is hitting extreme oversold levels. Normally, I’d be thinking these are levels from which stocks could get a bounce.
The problem (for me at least) is that damage to the economy and the stock market so far are self-inflicted. It is being done on purpose. And I don’t know what it would take to backtrack from this elected course of action – or if there’s even any desire to.
Uncertainty? You betcha. Stocks don’t like it.
As always, Hammer and I will be here every day, sharing our thoughts and insights on how to navigate this suddenly very ugly market. One thing everyone should do is make sure you have some cash available to buy when this market does hit bottom – which it inevitably will. If that means trimming some of you holdings by 5% or 10%, that’s not a bad plan.
Cheers,
Briton Ryle
Chief Investment Strategist
Outsider Club
X/Twitter: https://twitter.com/BritonRyle
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