Why you can't keep the US economy and stock market down for very long

Yahoo

18-05-2025

A version of this post first appeared on TKer.co
One of the benefits of aging as an investor is that you accumulate invaluable experience and perspective by living through a lot of very bad economic and financial market events.
These include events when, in the moment, it felt like things had permanently taken a turn for the worse. But time after time, you're reminded that you can't keep the U.S. economy and stock market down for very long.
I like to reflect on those events and recall the unpleasant memories because it helps me better process current and future periods of turmoil and crisis. And the more I reflect, the more I feel like I understand why we keep bouncing back.
In the late 1990s, I was just another immature high school kid without many cares in the world. I didn't really keep up with current events. But I remember the Asian Financial Crisis because it was one of the topics in prayers my dad would give at his church in Kentucky. I'll never forget hearing "IMF" come up in those Korean prayers because it was so unusual.
Among other things, the Korean won collapsed by more than half against the U.S. dollar over a very short period at the time. This was a particularly big problem for immigrants closely tied to family back in Korea. I didn't quite understand it at the time, but I remember the mood being disturbingly gloomy for a while.
The Asian Financial Crisis saw major currencies quickly collapse. (Source: FRED)
I don't have many memories from the Dot-com Bubble bursting. Back then, I had little interest in or exposure to the stock market, and neither did the people around me. But I do remember watching 9/11 live on TV in my dorm with my roommates at Boston University. I remember not being able to get a hold of family members in New York and Kentucky because the phones were overloaded. I remember the extreme range of reactions from my friends: some fled Boston out of fear; some used it as an excuse to skip some classes; some explored joining the armed forces. Everyone was rattled. Everyone felt less safe.
And for my college friends and I, it soon became clear that we would all be entering a tighter job market with an elevated unemployment rate. Things weren't great.
The economy looked great when I entered college in 2000. It wasn't as great when I graduated in 2004. (Source: FRED)
After graduating from college in 2004 and after months of searching, I randomly got a job as a contract paralegal where I got my first serious introduction to equity research. I quickly became hooked on learning about what made the stock market move. In 2006, I got a job at Forbes Newsletters researching and writing up stock picks. I also enrolled in the CFA program that year, which helped me develop a sophisticated understanding of things like mortgage backed securities, collateralized debt obligations, derivatives, and value-at-risk models.
This education super-charged my fear and my feeling of hopelessness as the world tipped into recession in 2007 and spiraled into Global Financial Crisis (GFC) in 2008. The more I understood, the more I felt like there was no way out of it. And many pundits seemed to agree. I remember respected financial market prognosticators going on TV and proclaiming that the government's bailouts of the big banks, the automakers, and the GSEs were proof that it was "the end of capitalism."
The S&P 500 fell 57% from its Oct 2007 high of 1,565 to its March 2009 low of 666. (Source: Yahoo Finance)
It wasn't the end of capitalism, though many were convinced the housing market would never come back as we entered a "new normal" of slow growth. Another popular phrase in the wake of the crisis was "secular stagnation." Admittedly, I was sold on the idea that economic growth would forever be a long slog. You can't blame me. In 2010, I got laid off from my job and I re-entered a job market flooded with unemployed people with backgrounds in finance.
But the post-GFC recovery helped me appreciate the resilience of the consumers and businesses propelling the economy forward. I got a great job in 2011, and over the next decade my income soared. Those years were riddled with numerous macro hiccups, but nothing could keep the economy and the stock market from accelerating again and blasting through record highs.
And then came the COVID-19 pandemic.
Those first 6-9 months were surreal. I remember feeling like I was living in a sci-fi horror film. At many points I thought this new strange way of life would be permanent. Meanwhile, I was constantly worried that the whole economy would collapse on itself.
COVID-19 caused the economy to nearly screech to a halt. (Source: FRED)
The discovery of the vaccine certainly helped things turn around. Fast forward a few years, and most things in the economy are back to normal. Notably, cruise and air travel have more than recovered as most people have gotten comfortable again with being in tight spaces with strangers — unless it's in an office for work.
So despite the pain, the trauma, and even the loss of life, all these experiences eventually confirmed that we'll always bounce back.
The economy and the stock market have always had an upward bias.
This makes sense if you think about it. There are way more people who want things to be better, not worse. And that demand incentivizes entrepreneurs and businesses to supply better goods and services. The winners in this process get bigger as revenue grows. Some even get big enough to get listed in the stock market. As revenue grows, so do earnings. And earnings drive stock prices.
I can't imagine anything changing these attitudes. Sure, there will be periods of when we feel angry and hopeless along the way. But we're never gonna wake up one day and decide we have everything we want or settle on the idea that what we've got can't be improved on.
And there will always be a sense of urgency. Even during difficult periods, people understand that life won't wait. You're getting older. Your kids are getting older. Your parents are getting older. If you have the resources, you won't put your lives on hold. This is bullish as it keeps the wheels on the economy spinning.
Sure, many things change after all the events I mentioned. But things are always changing. Importantly, the changes that stuck have never prevented the economy and the markets from setting new records.
If you've been following the news at all over the past two months, you've probably heard at least a few folks talking about how the Trump administration's approach to trade policy is damaging the U.S. 's standing in the world while also threatening to send the global economy into recession.
As the stock market tumbled, phrases like "sell America" and "end of American exceptionalism" began to trend. Popular measures of investor sentiment tanked.
Barron's Big Money poll revealed historic levels of bearishness. (Source: Barron's)
To be clear, I think the past two months created some damage, and we have yet to learn the extent of that damage. It's certainly possible that we're in a recession or headed for one. And it's certainly possible the stock market could take another leg lower.
But I'm nowhere near convinced that we're destined for an extended, multi-year period of turmoil and pain.
Our system is amazing at self-correcting. Whether it's through votes or something else, we always seem to find a way to get things back on track toward increasing prosperity and improving our standard of living.
And to repeat what I said last week: There's basically three scenarios investors always have to consider: 1) Things improve from here, and the market goes up; 2) Things get worse before they get better, which means markets could fall before resuming a more firm rally; or 3) Things get worse and never get better.
If we're facing scenario 3, then we may have bigger problems than stocks not recovering. But scenario 3 has never played out.
Scenarios 1 and 2 favor long-term investors. Maybe things get worse before they get better. (Note: Timing market bottoms is nearly impossible.) But staying long the stock market covers you in case the low of this cycle is behind us.
I'll leave you with Warren Buffett said earlier this month at Berkshire Hathaway's annual meeting:
"We're always in the process of change. We'll always find all kinds of things to criticize in the country. … If you don't think the United States has changed since I was born in 1930… We've gone through all kinds of things. We've gone through great recessions. We've gone through world wars. We've gone through the development of the atomic bomb that we never dreamt of when I was born. So I would not get discouraged about the fact that it doesn't look like we've solved every problem that's come along."
The 94-year-old investor has lived through everything, and he's made a fortune investing in the stock market along the way.
There were several notable data points and macroeconomic developments since our last review:
🇺🇸 Moody's downgraded its rating on the U.S. from Aaa to Aa1. Like most analysts out there, I'm not too surprised or concerned by the action. You can read my thoughts on credit rating downgrades in the this 2023 TKer: 🤔
🛍️ Shopping ticks higher. Retail sales increased 0.1% in April to a record $724.1 billion.
(Source: Census via FRED)
For more on consumer spending, read: 😵‍💫 and 🛍️
💳 Card spending data is holding up. From JPMorgan: "As of 08 May 2025, our Chase Consumer Card spending data (unadjusted) was 2.3% above the same day last year. Based on the Chase Consumer Card data through 08 May 2025, our estimate of the US Census May control measure of retail sales m/m is 0.54%."
(Source: JPMorgan)
From BofA: "Total card spending per HH was up 1.3% y/y in the week ending May 10, according to BAC aggregated credit & debit card data. Relative to last week, the biggest gains were in department stores & grocery while entertainment & lodging saw the biggest decline. Spending has recovered from the Easter slowdown. Overall, there has been some moderation but spending momentum remains."
May spending is likely being boosted by consumers pulling forward purchases in an attempt to front-run tariffs.
For more on consumer spending, read: 😵‍💫 and 🛍️
👎 Consumer sentiment is tumbling. From the University of Michigan's May Surveys of Consumers: "Sentiment is now down almost 30% since January 2025. Slight increases in sentiment this month for independents were offset by a 7% decline among Republicans. While most index components were little changed, current assessments of personal finances sank nearly 10% on the basis of weakening incomes. Tariffs were spontaneously mentioned by nearly three-quarters of consumers, up from almost 60% in April; uncertainty over trade policy continues to dominate consumers' thinking about the economy."
(Source: University of Michigan)
Politics clearly plays a role in peoples' perception of the economy.
(Source: Michael McDonough)
Notably, expectations for inflation appear to be a partisan matter.
(Source: Michael McDonough)
For more on the state of sentiment, read: 😵‍💫 and 😵‍💫
📦 Inventory levels fall. Total business inventories increased just 0.1% to $2.58 trillion in March. However, this lagged sales growth during the period. As a result, the inventories/sales ratio declined to 1.34 in March, down from 1.35 in February.
(Source: Census)
For more on why we're watching inventories, read: 🤷🏻‍♂️
👍 Inflation cools. The Consumer Price Index (CPI) in April was up 2.3% from a year ago, down from the 2.4% rate in March. Adjusted for food and energy prices, core CPI was up 2.8%, unchanged from the prior month's level.
(Source: Nick Timiraos)
On a month-over-month basis, CPI and core CPI increased just 0.2%. If you annualize the three-month trend in the monthly figures — a reflection of the short-term trend in prices — core CPI climbed 2.1%.
(Source: Nick Timiraos)
For more on inflation, read: 🎈and ✂️
⛽️ Gas prices tick higher. From AAA: "Gas prices are creeping back up just in time for the busy summer driving season. The national average for a gallon of regular is up 4 cents from last week, as the price of crude oil rises and demand goes up. Typically, the seasonal increase in gas prices starts earlier in the spring, but lower crude oil prices so far this year have kept that from happening. Now, we're starting to settle in a more typical pattern. Despite the upward trend, drivers are paying about 40 cents less compared to last year, which is good news for the record 39.4 million Americans expected to take road trips over Memorial Day weekend."
(Source: AAA)
For more on energy prices, read: 🛢️
💰 Household finances are deteriorating but also normalizing. From the New York Fed's Q1 Household Debt & Credit report: "Transition into early delinquency held steady for nearly all debt types; the exception was for student loans, which saw a large uptick in the rate at which balances went from current to delinquent due to the resumption of reporting of delinquent student loans on credit reports after a nearly 5-year pause due to the pandemic."
(Source: NY Fed)
While the rate at which debt is going into delinquency has moved higher, the total amount of debt in delinquency remains low at just 4.3% of outstanding debt.
(Source: NY Fed)
And while credit card delinquency rates may be up, it's a mistake to say consumers are maxing out their credit cards. The $1.2 trillion in credit card balances as of Q1 represents just a tiny fraction of credit card limits.
(Source: NY Fed)
For more on household finances, read: 🛍️
💼 Unemployment claims tread. Initial claims for unemployment benefits fell to 229,000 during the week ending May 10, unchanged from the week prior. This metric continues to be at levels historically associated with economic growth.
(Source: DoL via FRED)
For more context, read: 🏛️ and 💼
👎 Small business optimism falls. From the NFIB's April Small Business Optimism Index report: "Very few small businesses export their goods and services, but millions acquire imported goods as inputs to their operations and those supply chains are currently at risk. Tariff policy is suddenly and dramatically changing relative prices (costs), and relative prices drive all decisions. Uncertainty remains elevated and thus caution clouds spending, hiring, and investing decisions."
(Source: NFIB)
For more on the state of sentiment, read: 🔃 and 😵‍💫
🏠 Homebuilder sentiment sinks. From the NAHB's Robert Dietz: "Policy uncertainty stemming in large part from the stop-and-start tariff issues has hurt builder confidence but the initial trade arrangements with the United Kingdom and China are a welcome development. Still, the overall actions on tariffs in recent weeks have had a negative impact on builders, as 78% reported difficulties pricing their homes recently due to uncertainty around material prices."
(Source: NAHB)
🔨 New home construction starts rise. Housing starts grew 1.6% in April to an annualized rate of 1.36 million units, according to the Census Bureau. Building permits ticked down 4.7% to an annualized rate of 1.41 million units.
(Source: Census)
🏠 Mortgage rates tick higher. According to Freddie Mac, the average 30-year fixed-rate mortgage rose to 6.81%, up from 6.76% last week. From Freddie Mac: "The 30-year fixed-rate mortgage remained below the 7% threshold for the 17th consecutive week. Stable mortgage rates coupled with moderately rising inventory are attracting homebuyers into the market, with purchase application activity up 18% from last year."
(Source: Freddie Mac)
There are 147.8 million housing units in the U.S., of which 86.1 million are owner-occupied and about 34.1 million of which are mortgage-free. Of those carrying mortgage debt, almost all have fixed-rate mortgages, and most of those mortgages have rates that were locked in before rates surged from 2021 lows. All of this is to say: Most homeowners are not particularly sensitive to movements in home prices or mortgage rates.
For more on mortgages and home prices, read: 😖
😬 This is the stuff pros are worried about. From BofA's May Global Fund Manager Survey: "The US-China meeting in Geneva was announced in the middle of the May FMS survey period; even still, trade war triggering global recession continues to be seen as the biggest 'tail risk' per 62% of investors, albeit down from peak 80% in April (in 15-year history)."
(Source: BofA)
For more on risks, read: 🎢, 😟 and 🌈
🍾 The entrepreneurial spirit is alive. From the Census Bureau: "Total U.S. Business Applications were 449,508 in April 2025, down 0.9% from March 2025."
(Source: Census)
TKer is a small business that launched three years ago. For more, read: 📈🎂
🛠️ Industrial activity flattens. Industrial production activity in April didn't change much from prior month levels. Manufacturing output decreased 0.4%.
(Source: Federal Reserve)
For more on economic activity cooling, read: 📉
📈 Near-term GDP growth estimates are tracking positive. The Atlanta Fed's GDPNow model sees real GDP growth rising at a 2.4% rate in Q2.
(Source: Atlanta Fed)
For more on GDP and the economy, read: 📉 and 🤨
🏢 Offices remain relatively empty. From Kastle Systems: "Peak day office occupancy was 62.8% on Tuesday last week, down half a point from the previous week. New York and San Jose experienced the largest declines, falling 2.5 points to 66.8% and 2.9 points to 57.1%, respectively. The average low was on Friday at 34.8%, same as the previous week."
(Source: Kastle)
For more on office occupancy, read: 🏢
Upgrade to paid
🚨 The tariffs announced by President Trump as they stand threaten to upend global trade — with significant implications for the U.S. economy, corporate earnings, and the stock market. Until we get some more clarity, here's where things stand:
Earnings look bullish: The long-term outlook for the stock market remains favorable, bolstered by expectations for years of earnings growth. And earnings are the most important driver of stock prices.
Demand is positive: Demand for goods and services remains positive, supported by healthy consumer and business balance sheets. Job creation, while cooling, also remains positive, and the Federal Reserve — having resolved the inflation crisis — has shifted its focus toward supporting the labor market.
But growth is cooling: While the economy remains healthy, growth has normalized from much hotter levels earlier in the cycle. The economy is less "coiled" these days as major tailwinds like excess job openings have faded. It has become harder to argue that growth is destiny.
Actions speak louder than words: We are in an odd period given that the hard economic data has decoupled from the soft sentiment-oriented data. Consumer and business sentiment has been relatively poor, even as tangible consumer and business activity continue to grow and trend at record levels. From an investor's perspective, what matters is that the hard economic data continues to hold up.
Stocks are not the economy: Analysts expect the U.S. stock market could outperform the U.S. economy, thanks largely due to positive operating leverage. Since the pandemic, companies have adjusted their cost structures aggressively. This has come with strategic layoffs and investment in new equipment, including hardware powered by AI. These moves are resulting in positive operating leverage, which means a modest amount of sales growth — in the cooling economy — is translating to robust earnings growth.
Mind the ever-present risks: Of course, this does not mean we should get complacent. There will always be risks to worry about — such as U.S. political uncertainty, geopolitical turmoil, energy price volatility, cyber attacks, etc. There are also the dreaded unknowns. Any of these risks can flare up and spark short-term volatility in the markets.
Investing is never a smooth ride: There's also the harsh reality that economic recessions and bear markets are developments that all long-term investors should expect to experience as they build wealth in the markets. Always keep your stock market seat belts fastened.
Think long term: For now, there's no reason to believe there'll be a challenge that the economy and the markets won't be able to overcome over time. The long game remains undefeated, and it's a streak long-term investors can expect to continue.
A version of this post first appeared on TKer.co