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

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By Christopher Norwood • June 2, 2025
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By Christopher Norwood • May 19, 2025
Executive Summary The S&P 500 rose 5.3% last week to finish at 5,958.38 The Dow advanced 3.4% and the Nasdaq added 7.2% A falling VIX means investor confidence is increasing A 90-day pause in the trade war sent the S&P higher Earnings estimates are falling along with GDP growth forecasts Earnings and interest rates drive the stock market over the long run Investors are chasing performance Small business hiring plans and job openings haven’t improved Norwood Economics continues to look for good companies on sale The Stock Market

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By Christopher Norwood • May 19, 2025
Executive Summary The S&P 500 fell 0.5%, to finish at 5,659.91 The Dow fell 0.3%, and the Nasdaq dropped 0.5% The 200-day moving average is the next resistance U.S. nominal GDP growth expected to slow significantly Bank of America shifts investment focus Norwood Economics already has exposure to gold for most clients Norwood Economics is overweight international stocks The risk of both higher unemployment and higher inflation has increased The Federal Reserve declined to lower the fed funds rate last week The Stock Market

Remain Diversified. Prepare for higher-than-normal volatility

By Christopher Norwood • May 5, 2025
Executive Summary The S&P 500 rose 2.9% last week to finish at 5,686.67 The Dow was up 3% last week, and the Nasdaq rose 3.4% The counter-trend rally is ongoing Investors are extremely bearish due to worries about the trade war Political prediction markets are back Exploding imports are not a sign of weakening demand The April jobs report was better than expected The Trade War continues Capital is flowing into international and emerging markets The US dollar will likely continue to weaken The Stock Market

Caution is the Watchword of the Day

By Christopher Norwood • April 28, 2025
Executive Summary The S&P 500 rose 4.6% last week and finished at 5,525.21 Dollar weakness is an unpleasant surprise Tariffs and the dollar's safe-haven status should have pushed the dollar higher The S&P managed to retake the 20-day moving average Investors are looking for a reason to buy Some strategists are advising to sell the bounce Negative supply shocks are bad for the economy Weakness in U.S. bonds, stocks, and the dollar has investors scared Data is beginning to point to an economic slowdown The Chicago Fed National Activity Index (CFNAI) is one of the most important and overlooked economic indicators The Stock Market The S&P 500 rose 4.6% last week and finished at 5,525.21. The Dow rose 2.5% and the Nasdaq gained 6.7%. The S&P’s gains were attributed to President Trump’s statements at a Tuesday press conference. He said that Chinese tariffs would come down, and he wouldn’t fire Fed Chairman Jerome Powell. The 10-year Treasury yield ended the week at 4.25%. The two-year Treasury yield finished at 3.79%. The dollar rebounded. The dollar index (DXY) ended the week at 99.587. It hit a 3-year low of 97.921 on Monday. The DXY has lost 9.6% since mid-January. Tariffs and the dollar's safe-haven status should have pushed the dollar higher, not lower. It is believed that foreigners are repatriating their money. America needs foreign capital. Interest rates will have to go higher to entice foreign capital to our shores if safe-haven status is lost.

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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

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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
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