Year-to-date the S&P 500 is down 5.9 percent. Over this same time, the NASDAQ is down over 10 percent.
Should you buy the dip? Should you sell the bounce?
The answers to these questions are dependent on whether you trust the stock market’s technical indicators or its fundamentals. Regardless, panic and uncertainty are spreading across America.
There’s the recognition that economic growth is retreating, consumer prices are rising, and jobs are disappearing. There’s also the observation that President Trump’s policies are making things worse.
Most people agree that the federal government is too big and too controlling. They are well aware that there’s rampant fraud and waste. They understand that $2 trillion annual deficits are not sustainable. And that the runaway growth of government debt is a complete disaster.
They also want these failings corrected without any trouble. On the day Trump took office, there was an unwarranted belief that he could magically clean up all the waste, reduce the size of government, and balance the budget without painful consequences. That perception is being shattered.
In addition, the Trump administration – so far – is determined to pursue its America first policies. These policies are very disruptive. Tariffs and threats of tariffs incite uncertainty.
How will ‘on again off again’ trade wars impact the prices of imported goods? How will price increases impact spending and investment?
What’s more, Trump and his cohorts don’t care if their MAGA policies trigger a stock market crash or a recession. In fact, Treasury Secretary Scott Bessent believes the economy needs a reset after years of growth driven by federal spending and rising asset prices. He recently told CNBC:
“There’s an adjustment. We’ll see whether there’s pain.”
This week, stock market investors felt a small pinch. And they didn’t like it.
Unofficial Recession
As the economy adjusts to Trump 2.0, and overvalued stocks look less promising, investors will also have to adjust their tolerance for pain. If a 10 percent decline in the NASDAQ caused them to squeal, how loud will they scream when it crashes by 50 percent or more?
In the same CNBC interview, Bessent clarified that “there is no Trump put.” With these words he ended the implicit agreement with Wall Street that’s been in place since 1987, where, in times of panic, the Federal Reserve places an elevated floor (i.e., a put option) under how far the stock market can fall.
While stocks are retreating, there’s also mounting evidence that the economy is slowing. Construction spending, international and wholesale trade, auto sales, and both the ISM manufacturing and services indexes are on the fade. These data points are all signaling an economy that is decreasing in size.
Gross Domestic Product for the first quarter of 2025 will not be released by the Bureau of Economic Analysis until April 30. But the latest estimate from the Federal Reserve Bank of Atlanta’s GDPNow forecast, shows a first quarter GDP rate of minus 2.4.
Trump, however, is blind to it. “I don’t see a recession at all,” he said on Tuesday.
If you want to get technical, Trump’s right. A recession generally cannot be officially confirmed until there’s been two consecutive quarters of negative GDP. Thus, by the time the National Bureau of Economic Research makes the official call, the economy’s already been in recession for at least six months.
In the meantime, based on current estimates, the U.S. economy is receding.
Stagflation
Recessions, of course, are all part of a healthy economy. They’re periods where mistakes are corrected. Where misallocated capital is redirected. Where workers are pushed into more productive employment. And where a solid foundation is established from which new growth can be built upon.
Still, these benefits don’t make recessions any easier. When you lose your job, miss your mortgage payment, and have your car repossessed, it’s no joke.
Moreover, the impacts of a recession can range from individuals to small businesses to corporations. As the economy slows, they all take their lumps. And if the contraction is deep enough, and enough debts go unpaid, the entire financial system can be put into peril.
Recall the 2008-09 meltdown in residential mortgages. Before it was over, Lehman Brothers, a bank that had been in operation since before the Civil War, had been wiped off the face of the earth.
Indeed, recessions are tough. But what can make recessions especially tough is when they happen while consumer prices are inflating.
For example, when the economy contracts while consumer price inflation increases, the result is stagflation. Under this scenario, the misery index – which is the unemployment rate plus the CPI – goes through the roof. Losing your job while having to pay higher prices for basic goods each month is ruthless.
Alas, stagflation is here. This week the Bureau of Labor Statistics released its CPI report. According to the BLS, the CPI increased 2.8 percent in February over the last 12 months.
Perhaps this is better than June of 2022 when the CPI peaked at 9.1 percent. But coming on the heals of the CPI highs of a few years ago, a CPI of 2.8 percent has compounding effects that cannot be ignored.
Truth Shall Prevail
By all honest accounts, the idea that consumer price inflation is subsiding is generally false. Prices are still going up. They may not be going up as fast as they were three years ago. But they are still going up.
More importantly, rising prices year after year are cumulative and compounding. Over the last five years consumer prices, as measured by the CPI, are up over 23 percent – from 258.115 in March 2020 to 319.082 in February 2025. If you go back 10 years, to March 2015, consumer prices are up over 35 percent.
So, when you add an additional 2.8 percent on top of today’s index, it has a greater compounding effect than 2.8 percent did pre-COVID. And this is according to the government’s own data. Everyone knows price inflation has been much greater than what’s been reported over this duration.
Thus, the unfavorable facts of what’s going on are as follows:
The economy has entered a recession. People are losing their jobs. Trade is slowing. Consumer prices are rising. Stocks are in retreat. And Houthi’s are resuming attacks on ships sailing past Yemen on the Red Sea as they make their way to or from the Suez Canal.
One way or another, these things will all work their way out. Adjustments must happen. They cannot be stopped.
But it’s not all doom and gloom. Spring in the northern hemisphere is less than one week away. With it comes breeding songbirds, greening foliage, warming weather, longer daylight, and major league baseball.
So, too, gold, which is true and honest money, is making another run at $3,000 per ounce.
In the end, truth shall prevail.
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Sincerely,
MN Gordon
for Economic Prism
