Slower Growth and Higher Inflation
Christopher Norwood • April 21, 2025

Executive Summary

  • The S&P 500 fell 1.5% last week to finish at 5,282.70
  • Counter-trend bounce started on April 7th
  • Counter-trend rallies are short and sharp
  • Thursday was an inside day 
  • Any trade war announcements will lead to more volatility
  • Uncertainty is high, and consumer confidence is low
  • The Federal Reserve is focusing on inflation
  • The Philly Fed and Empire State indices continue to rise
  • Small business owners are raising prices to offset input costs
  • The Stock Market is still in a downtrend


The Stock Market

S&P 500 5-Day Chart



The S&P 500 fell 1.5% last week to finish at 5,282.70. The Nasdaq was down 2.6% and the Dow was down 2.7%. The 2-Year Treasury bond yield ended the week at 3.81%. The 10-year Treasury yield fell to 4.33% from 4.49%. The 3M Treasury yield also finished the week at 4.33%. An inverted yield curve is a reliable indicator of recession. The 3M/10Yr Treasury curve has been inverted for much of the time since October 2022.

3Mth/10Yr Yield Curve


The problem with the indicator is that the lag before the recession hits can vary greatly. And that means it isn’t as useful as it otherwise would be for portfolio management.


The S&P 500 began a countertrend bounce on 7 April after hitting a low of 4,835.04.

S&P 500 6-month chart



Counter-trend rallies are short and sharp. This one ran into resistance near the 20-day moving average on Monday (see chart above). Tuesday’s trading failed to take out Monday’s high. It was enough for traders to start selling aggressively on Wednesday.

S&P 500 last 22 trading days


Wednesday saw a lower low after Tuesday’s trading failed to make a higher high (see chart above).


Thursday was an inside day. (chart above). An inside day occurs when the market doesn’t trade above or below the prior day’s range. It indicates consolidation. Traders will often wait to see which way the market goes, either a breakout or breakdown. They’ll place their bets once one or the other has occurred. A move above Wednesday's high of 5,367.24 will likely lead to another attempt to take out the 20-day moving average (5,450). A drop below 5,220.79 will likely lead to a breakdown that could see the market fall to the 7 April low of 4,835.04.


The stock market was closed on Friday.


Of course, big fundamental news would supersede any technical trading. From a technical perspective, we’ll need to see which way the market goes in the next few trading days. The odds favor an eventual re-establishment of the downtrend. The Federal Reserve is on hold, and earnings estimates are falling. Any trade war announcements will lead to more volatility.



There are winning and losing sectors within the S&P 500. The index is down 10.18% on the year. Consumer Staples and Utilities (not shown) are the only two positive sectors in 2025. Utilities are up 2.75% on the year. Consumer Staples are up 4.15%. Technology and consumer discretionary are the big losers. Technology is down 17.06% while consumer discretionary is down 17.36%.

Uncertainty is high, and consumer confidence is low.

Federal Reserve Chairman Jerome Powell spoke last week. He said nothing to soothe stock investors. Instead, he said on Wednesday that stocks are “doing what they’re supposed to do." Powell made it clear during his speech that the Fed is focusing on inflation. It is willing to let the stock market struggle, and the economy slow if necessary. Tariffs are expected to lead to both price hikes and slower growth. It is a toxic mix.



Still, investors are expecting three to four rate cuts in 2025. The Fed funds rate is currently 4.25% to 4.50%. Three rate cuts would lower it to 3.5% to 3.75%.

CME Fed Watch Tool predicts 3-4 rate cuts


Investor expectations will not be met. That is if the inflation rate shows signs of leveling off or rising. Some signs are already pointing to higher for longer inflation.

The Philly Fed and Empire State prices paid indices


The Philly Fed and Empire State prices paid indices continue to rise. They have reached levels not seen since the summer of 2022. It would be surprising if the pricing pressures did not show up eventually. The CPI and PPI are lagging indicators.

US Dollar inflation linked swaps


Michael Kramer of Mott Capital Management had this to say last week about the swaps market:


“Inflation swaps are also pricing higher inflation rates, at least over the next one to two years. A 1-year inflation swap is trading at 3.15%, and a 2-year swap is trading at 2.7%. Both are up considerably since bottoming in early September 2024. If the predictive values of these market-based inflation expectations and price paid indexes are correct, the CPI and PPI are at a low point and are likely to rise significantly.”



Then there is the NFIB prices survey. The NFIB is the National Federation of Independent (small) businesses. Small business owners are getting nervous about input costs. They are raising prices to offset them.

Meanwhile, there’s no sign of significant weakening in the jobs market. Weekly jobless claims are a good leading indicator of the jobs market. The one-year chart shows no weakening.

The stock market is in a downtrend. Earnings estimates are falling. The Fed is still on hold. Uncertainty is sky high. Caution is the watchword of the day. A retest of the 4,805.34 low sometime in the next few weeks wouldn’t be surprising at all.


(Nothing in the newsletter should be considered investment advice.)


Regards,


Christopher R Norwood, CFA


Chief Market Strategist

Expect the unexpected

By Christopher Norwood • April 14, 2025
Executive Summary The S&P 500 had its best weekly gain since 2023 due to the suspension of most tariffs The Trade War and tariffs have dominated stock market action Daily announcements on the tariff front have led to high volatility The market is still in a downtrend Tariffs will negatively affect the U.S. economy Rising prices will reduce consumer demand U.S. earnings estimates are coming down; currently $267 and falling Pay attention to what bond investors are thinking The weakening dollar fell to its lowest level since 2022 The U.S. needs foreign capital

Uncertainty is high. Don't Panic.

By Christopher Norwood • April 7, 2025
Executive Summary The S&P 500 fell 9.1% and ended the week at 5,074.08 Bond yields are declining as investors flee stocks CME FedWatch tool now forecasts 3 to 4 Fed funds cuts in 2025 Inflation is higher than the Fed’s target and trending in the wrong direction The Volatility Index (VIX) spiked on Friday. Investors are showing fear The Stock Market is due a bear market bounce The longer-term downtrend likely won't end until Trump’s Trade War ends Market strategists are raising the odds of a recession and reducing price targets The Fed has a dilemma. It doesn't have the tools to deal with rising inflation and slowing economic growth simultaneously

The economy is vulnerable to a declining stock market

By Christopher Norwood • March 31, 2025
Executive Summary The S&P 500 fell 1.5% and ended the week at 5,580.94 The energy & healthcare sectors are the leading gainers year to date The S&P early highs and late lows are a sign of market weakness The fixed income market is signaling higher for longer Mortgage rates seem high to younger home buyers Mortgage rates were higher from 1972-2002 Earnings & GDP growth estimates are coming down The stock market reflects the economy Consumer confidence plunged to a 12-year low The economy is vulnerable to a declining stock market

The Fed is leaving two rate cuts on the table for 2025

By Christopher Norwood • March 24, 2025
Executive Summary The S&P 500 rose 0.5% last week to finish at 5,667.56 breaking its four-week losing streak The uncertainty surrounding the trade war will weigh on the economy and capital markets for the foreseeable future. Economists and the public aren’t sure whether to worry about inflation, weakening economic growth, or both. The Summary of Economic Projections (SEP) signals two rate cuts and a higher year-end inflation number Invoking the Alien Enemies Act of 1798 will lead to higher prices U.S. stocks are the only asset class losing money in 2025 The Stock Market The S&P 500 rose 0.5% last week to 5,667.56. The Nasdaq rose 0.2% and the Dow was up 1.2%. The S&P broke a four-week losing streak. It was due for an oversold bounce. We wrote last week, “The S&P is primed to bounce this week, likely at least back to the 200-day moving average residing at 5,740.” The S&P did bounce but only reached 5,715.33 on Wednesday around 3 p.m. Fed Chairman Powell was speaking soothing words at the time to investors during his press conference following the Federal Reserve FOMC meeting. The S&P couldn’t build on Wednesday’s late gains though, although it did try.

Tariff Talk Creating Uncertainty

By Christopher Norwood • March 17, 2025
Executive Summary • The S&P 500 fell 2.3% last week to finish at 5,638.94 • The S&P is down 4.13% year-to-date • The Nasdaq fell into correction territory and is down 11.6% since mid-February • Market strategists are saying recession risk is rising • Tariffs hurt the economy • Consumers and small business owners are feeling the pinch • The NFIB Uncertainty Index rose to its second-highest level ever in February • The Trump administration is targeting a lower 10-year Treasury Yield • Interesting Charts below The Stock Market

All Eyes on Trump for now

By Christopher Norwood • March 10, 2025
Executive Summary The S&P 500 fell 3.1% last week to finish at 5,770.20 The S&P closed 50 points above the 200-day moving average on Friday A bearish crossover or a “dark cross” indicates a loss of momentum A correction of 10% or more is increasingly likely Founder of AQR, Cliff Asness makes some important observations Interesting Charts below The Stock Market The S&P 500 fell 3.1% last week to finish at 5,770.20, its worst week since September. The S&P is down 1.9% for the year. Technology (XLK) is down 6.01% year-to-date. Consumer discretionary (XLY) is down 8.33%. The other nine S&P sectors are up on the year, led by Health Care (XLV), which is up 8.51%. Consumer Staples (XLP) is the next best-performing sector, up 5.41%. The 10-year Treasury Yield rose to 4.31% from 4.21% last week. The two-year yield was unchanged at 4.01%.

The Economy is Growing but Perhaps Slowing

By Christopher Norwood • March 4, 2025
Executive Summary The S&P finished the week at 5,954.50 High government spending has kept the economy growing The S&P has been trading sideways for four months now The Magnificent 7 and technology are out. Healthcare, Financials, Real Estate, and Consumer Staples are in Uncertainty is high Interesting Charts below  The Stock Market The S&P 500 lost 1.0% last week, closing at 5,954.50. The Nasdaq fell 3.4% during the week. Treasury yields continued to fall. The 10-year Treasury closed the week at 4.21%. The two-year Treasury yield dropped to 4.01%. The 3-month yield ended the week at 4.34%. The yield curve inverted once more. The 3M/10Yr curve inversion increases the chance of a recession in the next 12-18 months. Of course, the curve was already inverted until last December when it began to normalize. The 3M/10Yr curve last inverted in late October 2022. The period from October 2022 until December 2024 marked the longest continuous stretch of inversion since 1962. And yet no recession materialized, at least it hasn't yet. The lack of a recession in 2023/24 was most likely because of massive fiscal spending. The federal government has run large deficits since the pandemic. Government spending was $6.9 trillion in 2024, almost 25% of GDP. The government's deficit spending has kept the economy growing.

Expensive Money Means Slower Economic Growth

By Christopher Norwood • February 24, 2025
Executive Summary The S&P finished the week at 6,013.13 Volatility is still low despite last week's rise to 18.21 The tech sector is trailing the S&P More stocks are participating in the U.S. stock market gains International & Emerging markets are outperforming the U.S. markets Interesting Charts below  The Stock Market

Rising Interest Rates are a Problem

By Christopher Norwood • February 17, 2025
Executive Summary The S&P finished the week at 6,114.69 The 2-year yield hit 4.38% after the Consumer Price Index (CPI) was released on Wednesday, but ended the week at 4.27% Investors dumped stocks when the CPI report was released Producer Price Index (PPI) has accelerated for five straight months PPI is a leading indicator of consumer inflation Inflation expectations are rising among fixed-income investors The 5- &10-year breakevens are rising The Stock Market

Reversion to the Mean is a Fact of Life

By Christopher Norwood • February 10, 2025
Executive Summary The S&P finished the week at 6025.99 The S&P has been trading sideways since 11 November Volatility (VIX) has spiked five times since last fall each time falling quickly back to mid-teen levels Microsoft, Alphabet, and Amazon have contributed to the negative tone with cautious guidance The Equity Risk Premium has been falling over the last 14 years Bonds have been a horrible investment over the last three, five, and ten years The jobs market continues to show strength Consumers' inflation expectations are increasing The stock market is expensive and will return less than its long-term average over the next decade Good stock picking will be critical if investors are to earn a return close to the long run average. The equity risk premium is too low which may make Treasury bonds a better investment than stocks on a risk adjusted basis over the next decade. Treasury bonds may outperform stocks over the next decade but not necessarily over the next few years since the 10-Year could rise another 100 basis points in the short term. The Stock Market
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