Weekly Economic Update: March 26, 2025
Presented by Nicholas Wealth Management
Market slide stops for now
The market stopped its decline last week after briefly entering correction territory. There was no additional major news on tariffs, which had been the major reason given for the decline. Markets were looking for a reason to sell off based on soft economic data and declining consumer sentiment, and the tariff turmoil was just the catalyst to set things in motion.
We have yet to see the impact the tariffs will have on prices, but markets priced in all the negatives in anticipation of what might be.1 We had a very steep decline from what many considered was a market “priced to perfection” and was perhaps overbought. The market let off some steam and when it was done, the realization set in that maybe we had overdone it a little.
The free fall abated last week and, barring any new developments, this leg of the correction is over. Now markets will begin studying the true condition of the economy and what that will mean going forward. Currently, the S&P 500 is sitting at -3.64% for the year, and the recent low of 5,521.52 on March 13 was the same level we were at last July.2,3
Somewhere between 3% and 4% isn’t a lot of ground to make up — we practically did that in January. The challenge going forward will be the strength of the economy and the psyche of the U.S. consumer. Will all this talk of prices increasing due to tariffs (real or perceived) affect how consumers spend? Credit cards are already stretched, and prices remain stubbornly high.4 It wouldn’t take much negativity to put us into a bind and into a possible recession, which has become a real possibility versus a few months ago.
We need to start seeing some economic momentum begin to build, whether that’s from a new tax bill, more deregulation or lower energy costs. Or maybe it will be as simple as lower egg prices to get the mood to be more positive. Right now, the market has a hint of dourness to it, and optimism is not front and center. Last week we stabilized and at least caught our balance for the moment. Corrections are normal and healthy, but prolonged periods of selling are never good because they beget a feeling the selling will never end, and that leads to a negativity spiral.
Fed leaves rates unchanged
It was no surprise that the Fed left rates unchanged, but the post-meeting statement left much to be desired.5 First, the Fed said it was anticipating inflation to rise as a result of the fallout from all the tariffs, bolstering the case for keeping rates higher or possibly even increasing them. The Fed also said it saw economic weakness ahead, which you would think would mean the chances of more rate cuts would be on the table.
So, which is it — higher or lower rates? Markets seemed to like the mixed message and rallied last week, but was it the Fed’s message or just selling fatigue? The data points to economic weakness, but this anticipation of higher inflation due to tariffs is not as obvious. First off, it seems these threats of tariffs are bargaining tactics to get a “better deal” (as President Donald Trump would say), and without the threat of following through, the tariff talk is just an empty threat. Second, tariffs are a business cost input; whoever is getting “tariffed” will probably try to find a way to offset the additional cost at first before making their product more expensive and less competitive.
The Fed jumping on the bandwagon of “tariffs are going to make inflation go higher” is not what we would expect from all those learned economists and analysts without more context. All that said, we think rates are fine just where they are, and the Fed needs to not inject more confusion into an already chaotic situation.
Coming this week
- Get ready for a week of Fed speakers now that the meeting is over. Any additional clarity about rates, inflation and the overall state of the economy would be welcomed.
- We’ll get a fresh take on consumer confidence on Tuesday. The data will probably be bad, given the constant bombardment from the media about how tariffs are going to lead to higher inflation. New home sales and the S&P Case-Shiller home price index will also come out on Tuesday.
- On Wednesday, we’ll see MBA mortgage applications, followed by weekly unemployment, pending home sales and the second revision of fourth-quarter gross domestic product (GDP) on Thursday.
- We’ll finish the week with personal income and spending on Friday, which are an indicator of economic strength or weakness.
- One more note about rates: Currently, the fed funds futures are predicting an over 80% chance that the Fed will drop the rate between 50 and 100 basis points (0.50% – 1.00%) by the end of the year.6
Sources:
1 Greg Iacurci. CNBC. March 20, 2025. “Tariffs are ‘simply inflationary,’ economist says: Here’s how they fuel higher prices.” https://www.cnbc.com/2025/03/20/tariffs-are-simply-inflationary-economist-says-heres-why.html. Accessed March 24, 2025.
2 Morningstar. “S&P 500 PR.” https://www.morningstar.com/indexes/spi/spx/quote. Accessed March 24, 2025.
3 Yahoo! Finance. S&P 500 (ˆGSPC).” https://finance.yahoo.com/quote/%5EGSPC/. Accessed March 24, 2025.
4 Federal Reserve Bank of St. Louis. Feb. 20, 2025. “Large Bank Consumer Credit Card Balances: Total Balances.” https://fred.stlouisfed.org/series/RCCCBBALTOT. Accessed March 24, 2025.
5 Darla Mercado, CFP®. CNBC. March 19, 2025. “Fed decision recap: Powell says tariffs could delay progress on lowering inflation.” https://www.cnbc.com/2025/03/19/fed-meeting-live-updates.html. Accessed March 24, 2025.
6 CME Group. “FedWatch.” https://www.cmegroup.com/markets/interest-rates/cme-fedwatch-tool.html. Accessed March 24, 2025.
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