Recession Chatter

Stocks opened lower again this morning as the correction continues. From all-time highs on February 19, the Dow is down 6.5%, the S&P 500 is down 9% and the Nasdaq is off by nearly 12%. The VIX fear gauge is up around 27. Treasury bonds, seen as a safe-haven asset, are rallying. And recession chatter among investors and the media is back.

The Trump Administration’s trade policies—whether bluster & bluff, or substance—have created a lot of uncertainty for both businesses and consumers. That uncertainty means more risk needs to be priced-in to stocks. Of course, that’s not all that’s happening right now. Stock valuations, especially in the technology sector, surged to unrealistically expensive levels at the end of last year. The ratio of the S&P 500’s current price to its 2025 expected profits (called the P/E ratio) climbed to nearly 24 in early February compared with a long-term average of around 16 -18. It has now fallen to about 21.

But admittedly, the biggest reason for the souring mood among investors is certainly politics. The American Association of Individual Investors (AAII) publishes a weekly survey which currently shows only 19% of respondents are bullish about the stock market over the next six months. That’s unusually low. In addition, the University of Michigan’s consumer sentiment survey dropped in each of the last two months. And the National Federation of Independent Business’ (NFIB) optimism survey has also come off of its Trump election highs. It’s fair to say people are increasingly on edge.

From our perspective, this “soft” survey data is clearly flashing yellow. But as CNBC economics reporter Steve Liesman points out, “Recession is not in the hard numbers. It’s in the soft numbers.” In other words, data on actual consumer spending, hiring & layoffs, and industrial production are still relatively strong. He concludes, “There is no inevitability of recession.” Today’s JOLTS (job openings & labor turnover) report is a case in point. The total number of open job positions rose to 7.7 million in January, which is higher than pre-pandemic averages, and higher than the total number of unemployed Americans. The layoff rate fell to 1% (lowest since June), and the quit rate rose to 2.1% (highest since July). Other recent data show the unemployment rate remains low (4.1%) and wages are rising at a 4-5% annual rate.

Of course, there is a risk that weak sentiment begins to spill over into behavior, such as hiring freezes and lower levels of consumer spending. This week Delta Airlines (DAL) warned that profits will be sharply lower this quarter due to weakening domestic travel demand. Dick’s Sporting Goods (DKS) reported the strongest holiday season in the company’s history, but reduced its growth outlook for 2025 due to the “dynamic macroeconomic environment.” That’s apparently a euphemism for trade war fears. CEOs, unsure of how tariffs will impact sales, are understandably cautious in their projections.

The big question for investors focuses on how far this correction will go. And that will ultimately be determined by the trade war’s damage to US corporate profits. Coming into 2025 economists were already anticipating slower, more normal economic growth compared with a super-charged 2024. Will broad-based imposition of tariffs exacerbate the slowdown and cause a recession? If so, the correction has much farther to run. Or will the worst-case scenario be avoided as negotiations between governments progress? In that case, we’re likely experiencing yet another very temporary growth scare similar to mid-2024.

It’s impossible to know, of course. But basing long-term investment decisions on day-to-day political policy announcements is usually not a good idea. And it isn’t lost on us that just one contradictory headline—cease fire in Ukraine, delay in tariffs, or more carve-outs to limit their impact—could spring-load markets higher. We’re watching the soft data, but will rely on hard data to confirm the economy’s trajectory.