Last week was one of the most startling weeks in the market in my lifetime. To compare, the events must include both an action that will affect the economy as a whole (flash crashes don’t count) as well as a market rout.
I compare last week to:
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The bursting of the dot-com bubble in 2000 since both the SPX and Naz are driven into similar bubbles by the AI craze in 2025. The 2000 bubble pop was followed by a recession. The Federal Reserve cut the fed funds rate quickly but the SPX didn’t bottom until 2002.
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The 2008 Great Financial Crisis (GFC) since the entire economy was threatened by the housing bubble. Followed by the Great Recession. The Fed took many major actions, including cutting the fed funds rate to zero. The market bottomed in 2009.
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The Covid-19 pandemic since the entire economy was shut down. Pulled out by massive fiscal and monetary stimulus resulting in the worst inflation in 40 years. The asset markets rebounded quickly with a flood of money from the Fed and Congress.
S&P 500 (SP500) | FRED | St. Louis Fed -
The 1973 OPEC oil embargo which impacted the whole economy, resulting in stagflation that lasted until after the nasty recession of 1980 - 1982.
The inflation-adjusted SPX chart shows the result of these crises. The wounds took months, in some cases years, to heal.
The stock market has been in a bubble for many months, just waiting for a pin to pop it. The pin was President Trump’s so-called “Liberation Day.” China responded to Trump’s tariff increases by increasing tariffs by an extra 34% on all US goods and also put export restrictions on some rare earths.
https://www.reuters.com/world/china-impose-tariffs-34-all-us-goods-april-10-2025-04-04/
In Matter of Days, Outlook Shifts From Solid Growth to Recession Risk
The economy was chugging along. Then came Trump’s dramatic tariff increase.
By Paul Kiernan, The Wall Street Journal, April 6, 2025
The stock market went off a cliff last week after President Trump announced the highest tariffs in more than a century, vaporizing more than $6 trillion of wealth in two days.
Whether the real economy will follow is impossible to know. But the risks are tilting in that direction…
The duties unveiled by Trump on April 2 will raise the average effective U.S. tariff rate from 2.5% in 2024 to around 22.5%, according to the left-of-center Yale Budget Lab. Combined with narrower tariffs Trump imposed in February and March, that will push up prices by 2.3% in the short run, equivalent to $3,800 less purchasing power for the average household… [end quote]
Inflation is still stubbornly higher than the Fed’s target rate of 2%. Fed Chair Jerome Powell last week declared that the FOMC will not cut the fed funds rate unless the economy shows clear signs of recession. Predictably, Trump screamed on social media that the Fed must cut but Powell will ignore him. There will be no monetary stimulus sparked by the asset market meltdown.
Meanwhile, DOGE is cutting federal agencies so forget about fiscal stimulus. Congress is set to cut taxes but the effect won’t be immediate.
Suddenly, there is a high chance of recession. Trump took a nice, stable growing economy and set it on its ear. There’s no point looking at the Purchasing Managers’ Report for March because April is a new world.
The Control Panel shows a developing crisis. Every metric reflects fear. Every panel made me gasp. Stocks, junk bonds, USD, gold, silver, copper, oil…all fell off a cliff. Only Treasury bond prices rose. Junk bond spreads spiked, an indication that recession could cause defaults.
The trade is strongly risk-off. The Fear & Greed Index is in Extreme Fear at 4 which is the lowest I’ve ever seen. VIX hit 45 which is close to the crisis level of 50.
The Treasury yield curve fell along its entire length but especially in the 2-year duration which indicates recession fears.
Financial Stress is still low. This isn’t a financial crisis (yet) since the Fed is managing liquidity well. So far, it’s the popping of a stock market bubble and anticipation of a recession.
The Atlanta Fed’s GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the first quarter of 2025 is -2.8 percent on April 3, up from -3.7 percent on April 1. The alternative model forecast, which adjusts for imports and exports of gold as described here, is -0.8 percent.
The Atlanta Fed suddenly began to incorporate gold exports in its reports a month or so ago. That’s because the balance on gold was negligible for a long time but has suddenly spiked to -$5 billion. This shouldn’t be enough to significantly change the Net exports of goods and services which was minus -$226 billion in 4Q24. The United Kingdom, Hong Kong, and Switzerland are regional centers for trading refined gold and were the destinations for 86 percent of U.S. exports of gold bullion in 2012 but I don’t know if this has changed.
The damage caused by Trump’s tariffs won’t be reversed even if he changes his mind tomorrow. The whiplash caused by the uncertainty has led to market volatility. Some of the air has been let out of the bubble but there’s a long way to go. Previous comparable crises have taken a long time to bottom without major Fed support which won’t happen this time.
There may be some bargain hunting tomorrow but I think the crisis is just developing and may last a long time.
The METAR for next week is stormy. “Liberation Day” will liberate a lot of investors from their portfolio balances.
Wendy
https://www.usitc.gov/research_and_analysis/tradeshifts/2012/minerals.htm
