Why the Market is Girding for a Shake‑Up—and What It Means for Us
Daniel Lacalle points out a classic scene: the stock market pops a bump, and we rush to blame tariffs and trade wars. But what if the real culprit were deeper economic fears? If investors had genuinely panicked about the U.S. economy, German and Japanese bonds would have skyrocketed in value, not plummeted. The hard truth? They barely budged, revealing the market is simply cooling off after a whirlwind bull run.
Stock Tumble, Yet Still Persevering
- 493 S&P 500 stocks stayed flat in Q1, despite 2024’s record highs and 2025’s negative headlines.
- The Bloomberg US Large Cap Index, minus the “magnificent seven,” sits even‑ed out year‑to‑date.
- We’re in a “normal correction” – the market’s way of saying, “Hey, we’ve been riding a roller coaster lately.”
Bond Markets: The “Risk‑Off” Don’t Buy
Historically, German and Japanese sovereign bonds shine when risk‑off vibes hit. This time, they’re underperforming because investors aren’t dialing up fear of a recession. Consensus estimates of a recession hit a 30% probability, the same as October 2024, but still far below the 65% forecast from April 2023. The U.S. and euro zone share a roughly equal recession risk, per Bloomberg.
Growth Outlook” Still Up—If We Ignore the Headlines
Deloitte and Coutts expect GDP growth in 2025, while the Federal Reserve projects a gentle 1.8% rise in 2024. If the headlines have us anxious, remember that leading indicators largely favor expansion.
- Chicago Fed National Activity Index (CFNAI): +0.18 in February 2025 (up from –0.08 in January).
- S&P Global U.S. Composite PMI: 53.5 in March 2025 (up from 51.6 in February), the strongest growth since December 2024.
- Conference Board Consumer Confidence Index: Fell to 92.9 in March 2025, its lowest in four years, yet still far from the dire 26.9 seen in 2008.
- Job creation stays solid: March nonfarm payrolls expected to rise by 133,000 (Bloomberg lifted that to 200,000).
- Average real wage growth looks good for 2025.
Investor Concerns: Spend Cuts & Tariffs
Investors worry that cutting spending and tariffs could stifle growth. However, trimming the budget is essential to cut inflation and slash the deficit.
- 2024 spending jumped 10%, pushing the federal deficit to nearly $2 trillion.
- The U.S. economy has the worst growth‑adjusted-to‑debt ratio since the 1930s.
- Inflation tied to rampant government spending, skyrocketing the money supply and eroding dollar purchasing power.
- MIT research linked federal outlays to the 2022 inflation spike; the ensuing spiral left interest costs nearing $1 trillion.
- The Congressional Budget Office predicts debt-to-GDP could climb from 122.3% to 156% by 2055.
The solution? Cut spending, not fear the slowdown. A modest GDP dip from a leaner fiscal policy is actually a sign that the productive core of the economy is strengthening.
Tariffs: A Global Chill Factor
Tariffs bite harder than any trade headline. While some nations feel the sting, a worldwide pace‑down may force everyone to rethink how they trade. Let’s keep an eye on that when the next headline hits, but remember: the market’s big shifts are the normal calculus of risk and opportunity—no more doom‑laden drama.
Tariffs: The Quiet Champion of American Trade
Why the Market Doesn’t Breathe a sigh about Rising Trade Barriers
Picture this: The world’s investors, blissfully unaware of the sheer weight of European Union and Chinese tariffs, cheerily stick to their hovering charts. They see higher charges on the U.S. side and simply shrug it off—no dramatic panic in sight.
Top Five Nations Raising the Bar
- India
- Russia
- South Africa
- Brazil
- China
These countries score worst on the Trade Barrier Index, thanks to hefty tariffs that eclipse their own rates against America.
That’s Right, Euro & China Lift More on the U.S. Than the Other Way Around
According to ING and Bank of America, the EU and China not only slap higher tariffs on U.S. goods but also squeeze the U.S. dollar line after Biden’s tenure. Yet markets still hit record highs.
Tariffs: The Myth-Defying Tool
Contrary to popular belief, tariffs do not spark inflation. They’re not about pumping money into the economy; instead, they’re designed to level the playing field so U.S. exporters don’t have to fight a maze of legal and fiscal hurdles.
Think of it this way: Everything in the world is a trade dance floor, but some dancers keep throwing heavy walls across the rhythm. The U.S. trade deficit tripled from $43 billion in 2020 to $131 billion in early 2025, largely because other countries have lifted barriers on American products while still tightening restrictions on U.S. goods.
Market Reactions: Fear or Opportunity?
- Spooked? Maybe—tariffs and spending cuts make you think economies might freeze.
- Opportunity? Definitely—tariffs can negotiate a better trade balance.
History shows that these nudges, from 2016 to 2019, didn’t dent the U.S. economy as expected. The American market remains robust, quite the contrary to what some claim.
Balance-of-Trade: A Strong Vessel
All the tools—debt cuts, tax relief, balanced trade—are not just handy; they’re essential weaponry to boost real wages, financial fortitude, and keep the productive engine humming.
Short‑Term Pain, Long‑term Gain
Yes, the bumps happen; but they’re merely stepping stones toward a healthier, more balanced and dynamic economy. After all, a tough trade stance today could mean smoother sailing tomorrow.