Published March 28, 2025
As Delta Research outlines below, whether the recent struggles in the stock market are just a typical pullback or something larger rests with what ultimately happens to the economy. The widely-followed GDPNow economic forecast shows the economy shrinking in the first quarter. The question is whether that weakness will continue into the middle part of the year.Numerous companies, especially in the consumer space, have pointed to weakness or caution among their clientele. But consumers have often expressed caution in their words while continuing to spend strongly. Second quarter earnings reports begin in a few days. Those reports will be a good indicator for how companies see the next couple of quarters.
Here’s what Delta Research notes:
“From the 52-week high to the recent lows, the NASDAQ and S&P 500 traded down by over 10% in one of the fastest sell-offs in market history. Inflation and growth expectations changed principally in reaction to tariff announcements.
The Federal Reserve is projecting 2025 GDP growth of 1.5-1.9%, down from the December projection of 1.8-2.2%. It sees PCE inflation of 2.6-2.9%, up from its prior projection of 2.3-2.6%.
Much like when a car has a collision and airbags inflate to protect the occupants from a forceful impact, the U.S. economy has a cash airbag to reduce the force of a potential economic blow. U.S. checking accounts have a balance of $5.3 trillion (as of end of 2024), up from $1.53 trillion at the end of 2019 (pre-Covid). Funds in checking accounts are typically designated for near-term consumption. Bank of America’s CEO said this week that consumers are spending about 6% more this year than the same time last year. If you look at the combined balances of checking, savings and money market funds, the balance is $21.6 trillion, up from $14.8 trillion at the end of 2019.
There has been rising concern regarding consumer credit levels and default rates with automobile and credit card debt. Yet, household debt service as percent of disposable personal income is at a “normal” level relative to the past 45 years and consumer credit delinquencies remain at below “stressed” levels.
In addition to the cash airbag, the U.S. economy has an easy money liquidity airbag. The Federal Reserve announced this week it is slowing the pace of its quantitative tightening. Monthly redemptions of treasury securities will be reduced from $25 billion to $5 billion. This should ease financial conditions by keeping more money in the system. The money supply is rising at about a 4% annual rate.
More money in the system allows banks to make more loans. Banks are easing lending standards currently rather than making them more restrictive. Below are two examples showing banks making commercial and industrial loans to large and middle-market firms and auto loans easier to obtain. If banks were worried about rising delinquency rates and recession, they would not be making loans easier to obtain.
Fed Chairman Powell acknowledged yesterday that he doesn’t know anyone who has a lot of confidence in their economic forecast. On the other hand, the hard data (versus “soft” data like consumer confidence) suggests the economy is not headed for recession. Without a recession, stock market pullbacks of 10% are a buying opportunity (for longer-term buy-and-hold investors).”
Market Update
A tariff rollercoaster this week began with investors cheering “more targeted” tariffs and a Purchasing Managers report showing U.S. growth accelerating in March. The stock market rose +1.8%. The weakest consumer confidence reading in four years did not slow down the market bounce with stocks adding +0.2% Tuesday. A Chinese tariff response punishing Nvidia unnerved investors Wednesday bringing to an end the market rebound with a -1.1% decline. Additional fuel to the selling came from a report suggesting that Microsoft is cancelling leases for data center capacity. That news further pulled the rug out under AI-related stocks. After the close, President Trump announced tariffs on the auto sector which hit the stocks in that sector and kept investors cautious ahead of the Friday report on the Fed’s preferred inflation gauge. That report showed inflation remaining stubbornly high further dashing investor hopes for Fed rate reductions. The negative news of the week all seemed to culminate in a broad selloff Friday. Investors remain fearful of the impact of tariffs on economic growth, see consumer sentiment very weak, and inflation uncomfortably high. Stocks slid -2% Friday to completely erase the brief rally attempt of the prior week.
Bears returned this week to push the S&P 500 (SPY) index down -1.48% while the Nasdaq 100 (QQQ) fell -2.33%. Small-cap stocks (IWM) slipped -1.64%. All three indexes remain under their longer-term 40-week moving averages.
Warm wishes and until next week.