Growth scare adds worry to the mix

Tariff fears, inflation worries, and now, an economic growth scare, have conspired to sour moods in the markets. The Trump trade has all but disappeared and in its place, investors are looking for defensive areas to protect capital.

Uncertainty is the bane of any market’s existence and right now that element is in abundance. Last week we have seen concerns over inflation take a back seat to an even greater worry—a slowing economy. It began with a recent retail sales number. The data was weaker than many expected as consumers pulled back on their discretionary spending.

That could have been explained away as simply a bout of buying fatigue after the strong holiday season, which is normal. However, the flash Services Purchasing Managers Index, which tracks business activity in the service sector, also showed slower growth.

Coupled with those signs, as I mentioned recently, Walmart issued a cautious outlook for the rest of the year based on fears of a fall in purchasing power among lower-income consumers. Data released on Friday Feb. 28, showed that consumers slashed their spending by the most since 2021 even as their income rose.

In addition, we have seen consumer confidence numbers and inflation expectations rise in the most recent consumer surveys. On Thursday, Feb. 27, the government announced that the real Gross Domestic Product slowed to 2.5% in the final quarter of the year versus a 2.7% growth rate in the third quarter of 2024. It also showed weaker real spending growth relative to the third quarter.

Weekly initial jobless claims at the end of February, on jumped to 242,000, above expectations of 221,000 and up from the previous week’s 220,000. Just think what will happen to jobless claims when the firing among federal workers starts to show up in the data. Pending U.S. home sales also slid to an all-time low in January as high mortgage rates, record-high home prices, and terrible weather kept home buyers away.

The Personal Consumer Expenditures Price Index (PCE), the Fed’s leading inflation marker, came in as expected at 2.6% in January and was a 0.3% increase over December. That was no surprise to me.

I have been writing for months that we would see a back-up in inflation. I also warned that the economy would begin to experience a slowdown about now. The two together would create a somewhat mild stagflation-type environment. So now that we have achieved that state of affairs, what’s next?

I expect the economy to continue to weaken and unemployment to rise somewhat in the coming quarter thanks to expected government actions on the spending, employment, immigration, and tariff fronts. There may even be a recession by the end of the second quarter or the beginning of the third quarter.

That potential outcome will depend on how deeply the Trump administration pursues its present policies.However, I also see inflation falling simultaneously for the same reasons. As a result, chatter of a rate cut or two by the Fed will be back on the table for this year, which could support markets.

On tariffs, the president insists that the 25% tariffs on Canada and Mexico are on track to begin on March 4. An additional 10% tax on Chinese imports (bringing the total to 20%) will also be imposed. He also stated that the April 2 launch of reciprocal tariffs will remain in “full force and effect.”None of those statements improved investor sentiment as we closed out February.

To add insult to injury, Nvidia, the AI semiconductor leader’s fourth-quarter earnings results did not help either. While earnings, sales, and guidance were all good, the company’s stock still fell as many investors believe that ‘the bloom is off the rose’ at least temporarily in the AI trade. At the same time, another of Wall Street’s darlings, Tesla, the EV maker, has given up almost all of its Trump election gains. The slowdown in sales and Elon Musk’s political involvement has driven the stock down 40%.

The risk-off mood has seeped into most other areas of the market. Gold and precious metals as well as bitcoin and other cryptos have fallen along with stocks. Technology shares continue to decline, and more and more analysts are expressing caution overall when it comes to the market.

Investor sentiment is negative wherever you look. The CNN Fear &Greed Index is registering “extreme fear.” The American Association of Individual Investors survey (AAII) had its lowest reading of bulls since March of 2023, while bearish sentiment is up over 60%. “In the entire history of the AAII sentiment survey, there have only been six other weeks when bearish sentiment was higher,” according to Bespoke Investment Group.

My view is that the S&P 500 Index to date, is off by just a few percent from the all-time highs made less than two weeks ago. March is a traditionally tough month in the markets and while I see this pullback as a much-needed pause, the jury is out on how much lower we can go. Could we see further declines, say 8-10% overall in the month ahead? That determination is in the hands of one single individual, Donald Trump.

Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires.

The views expressed here are not necessarily those of The Lakeville Journal and The Journal does not support or oppose candidates for public office.

Latest News

Voters approve wakesurfing ban

The July 31 referendum in Kent, Warren and Washington banned wakesurfing on Lake Waramaug.

Photo by Alec Linden

The sport of wakesurfing is now banned on lake Waramaug as the result of a decisive tri-town vote held on Thursday, July 31.

Voters in Kent, Warren and Washington, the three towns that border Lake Waramaug, approved the ordinance with 1452 residents ultimately voting in favor of banning the sport against 421 opposed to it.

Keep ReadingShow less
2025 Jubilee Luncheon
   We look forward to seeing you!

Ruth Franklin discusses ‘The Many Lives of Anne Frank’ at Beth David

Ruth Franklin and Ileene Smith in conversation at Congregation Beth David in Amenia.

Natalia Zukerman

Congregation Beth David in Amenia hosted a conversation on the enduring legacy of Anne Frank, one of the 20th century’s most iconic figures. Ruth Franklin, award-winning biographer and critic, shared insights from her highly acclaimed book “The Many Lives of Anne Frank” with thought-provoking questions from Ileene Smith, Editorial Director of the Jewish Lives series. This event, held on July 23 — the date Anne Frank would have turned 96 — invited the large audience to reconsider Anne Frank not just as the young writer of a world-famous diary, but as a cultural symbol shaped by decades of representation and misrepresentation.

Franklin and Smith dove right in; Franklin reading a passage from the book that exemplified her approach to Anne’s life. She described her work as both a biography of Anne Frank and a cultural history of the diary itself, a document that has resonated across the world.

Keep ReadingShow less
Prokofiev, piano and perfection: Yuja Wang at Tanglewood

Yuja Wang performs with the TMCO and Andris Nelsons.

Hilary Scott

Sunday, July 20 was sunny and warm. Nic Mayorga, son of American concert pianist, the late Lincoln Mayorga, joined me at Tanglewood to hear Yuja Wang play Prokofiev’s Piano Concerto No. 2 in G minor, Op. 16. I first saw Wang on July 8, 2022, when she filled in for Jean-Yves Thibaudet on the opening night of Tanglewood’s summer season. She virtually blew the shed down with her powerful and dynamic playing of Liszt’s Piano Concerto No. 1.

Nic was my guest last season on July 13, when Wang wowed us with her delicate interpretation of Beethoven’s Piano Concerto No. 4. We made plans on the spot to return for her next date in Lenox.

Keep ReadingShow less