myICLUB Blog

At the end of March 2025, the US economy faces a tsunami of challenges, marked by plummeting consumer confidence, market turbulence, and rising inflation fears.

The Conference Board's Consumer Confidence Index dropped 7.2 points in March to 92.9, its fourth consecutive monthly decline. This drop was driven primarily by pessimism about future business conditions and employment prospects, with the Expectations Index hitting a 12-year low of 65.2. Notably, only 37.4% of consumers expect stock prices to rise over the next year, down from 47.4% in February.

Similarly, the University of Michigan's preliminary sentiment survey for March revealed an 11% drop in consumer sentiment, reaching its lowest level since late 2022. Respondents' inflation expectations surged, with a one-year outlook of 4.9%, up from 4.3% in February, and a long-term outlook rising to 3.9%, the largest one-month rise since 1993.

Financial markets have been extremely volatile, with the S&P 500 entering correction territory at the end of February before rebounding in March. While some strategists see the potential for a decisive market rebound, evidence suggests that the stock buying surge was largely led by individuals, with professionals holding back from reengaging in the turbulent markets.

The market downturn was largely attributed to escalating trade tensions, including new tariffs on countries like Mexico, Canada, China, and foreign-made automobiles.
 
Investors and executives alike are struggling to interpret President Trump's announcement of "reciprocal" tariffs on various trading partners. These measures have led to significant fluctuations in equities and bonds, with copper prices soaring in anticipation of added tariffs on imported metals.

Analysts warn of persistent inflation and slower economic growth due to these protectionist policies, and company executives are also on high alert. According to FactSet Research, 259 of the S&P 500 companies that conducted earnings conference calls from December 15 through March 6 cited “tariff” or “tariffs” during their earnings calls for the fourth quarter.

Even worse, according to the majority of chief financial officers responding to the quarterly CNBC CFO Council Survey, the economy will enter a recession in the second half of 2025. CFOs describe themselves as uncertain about the stock market and generally “pessimistic” about the overall state of the US economy.

95% of these CFOs said policy is impacting their ability to make business decisions, with the presidential administration’s chaotic, disruptive, and extreme proposals being too difficult for businesses to navigate effectively.

The news about inflation is also dreary. Consumer prices climbed 2.5% in February compared to February 2024, exceeding the Fed’s target rate of 2%, the Commerce Department reported in late March.

Core inflation, the closely watched measure that strips out volatile food and energy prices, increased 2.8% year-over-year and above January’s figures.

The uptick poses significant challenges for the Federal Reserve, which faces the delicate task of responding to inflationary pressures without hindering economic growth.

Ongoing trade tensions and tariffs have contributed to rising inflation concerns, and Fed Chair Jerome Powell blamed tariffs for a "good part" of recent inflation. The central bank predicted weaker economic growth and inflation for the year higher than it had projected in December 2024.

According to The Conference Board, the proportion of US consumers anticipating a recession remains at a nine-month high. Consumers' expectations about inflation have turned bleaker, with both one-year and long-term prospects worsening.

Purchasing plans for both homes and cars both declined in February, with many consumers moving ahead with plans to buy big-ticket items like appliances in a likely move to lock in prices before they increased on those items.

Confirming the fears of consumers, the nation’s biggest retailers have noted a shift in consumer behavior. Walmart slashed its earnings forecast for 2025—and those expectations do not include the potential impact of tariffs.

Target saw sales and profits miss its targets in the holiday season and cautioned about a “meaningful pressure” on earnings due to tariffs. Macy’s, Best Buy, and Dollar General also have addressed “economic uncertainty” in their recent earnings calls.

Consumer spending accounts for about two-thirds of US economic activity, so economists closely monitor these trends to interpret likely consumer actions and patterns.

Is a recession inevitable at this point? No one can predict with absolute certitude, but the uncertain economy and market conditions call for a more careful approach than usual.

Investors can take heart that even a prolonged recession won’t last forever and will be resolved by historical standards before 2030. Far greater damage to a portfolio of well-selected stocks might arise from overreacting to market or economic conditions, such as by panic selling. The annals of the modern market show that most individual investors are best served by holding portfolios of quality companies through even the darkest of times.

It is always good to be an educated and informed investor, ever monitoring the atmosphere of Wall Street and Washington, D.C., for signs of storms, but always being prudent in action and remaining positive in intent.

Our focus stock in this issue is new to the newsletter, an industrial operator in an essential underlying segment of the U.S. economy.

Stay the course!

• DOUG GERLACH

Subscribers can read Doug's complete commentary and the in-depth profile of our recommended small company stock in the February 2025 issue of the SmallCap Informer stock newsletter. Not a subscriber? Subscribe to the SmallCap Informer and get monthly small company stock recommendations and updated buy/sell prices for each of the 45 high-quality small company stocks currently covered in the newsletter.