Executive Summary:
Even though Q1 earnings were fabulous, most economists, industry analysts, and corporate managements have low hopes that Trump’s Tariff Turmoil won’t dunk the US economy into a recession this year. Not us: We’re counting on the economy’s resilience. Today, Dr Ed discusses why the widely expected recession, like others in recent years, will be a no-show. Hard-to-ignore reasons include record-high forward earnings, strong economic indicators, and a forward P/E that hasn’t plunged as happens when a recession is imminent. Stock investors seem to be in our camp. Moreover, Trump’s tariff overreach is bound to be tempered by the courts and mid-term election realities if nothing else. … Check out the accompanying chart collection.
Strategy I: Recession Forecasts Still in Fashion.
Once again, economists are debating the odds of a near-term recession. They’ve done so over much of the past three years. Most of them reckoned that the tightening of monetary policy, the fall in the Index of Leading Economic Indicators, and the inverting yield curve all meant that a recession was all but inevitable. They were wrong. All along, we counted on the underlying resilience of the US economy to keep GDP growing apace. That worked out well for us.
Here we go again. This year, the naysayers are convinced that Trump’s Tariff Turmoil (TTT) will cause a recession during the second half of this year. We are still betting on the resilience of the economy. We’ve also been betting that Trump will blink and unilaterally deescalate his one-man Tariff Man trade war. So far, so good. Mounting concerns among Republicans that they could lose their majorities in both houses of Congress if TTT causes a recession undoubtedly have softened Trump’s stance.
In addition, we anticipated that several court cases would challenge Trump’s constitutional authority to impose tariffs. Our good friend Jim Lucier of Capital Alpha Partners observes: “The first showdown in court over President Donald Trump’s IEEPA tariffs is coming Tuesday, May 13, at 11 AM ET. The Court of International Trade (CIT) in New York City will hold a hearing on all pending motions in one of four pending challenges to IEEPA in that court. The case brought by the Liberty Justice Center on behalf of small business plaintiffs is V.O.S. Selections, Inc. et al. v Trump et al. None other than Trump’s former U.S. Trade Representative Robert Lighthizer said at the Council on Foreign Relations in New York on April 28 that ‘there is a reasonable chance the CIT will enjoin’ Trump’s IEEPA tariffs (See video here, minute 49:00).”
Here is what we wrote on April 7: “Trump’s Liberation Day last Wednesday triggered Annihilation Days on Thursday and Friday, with the Stock Market Vigilantes giving a costly thumbs-down to Trump’s Reign of Tariffs. Trump officials say they aim to make Main Street wealthy again even if that’s bad for Wall Street. The problem is that Main Street owns lots of equities traded on Wall Street, so the two streets prosper and suffer together. Congress can’t do much to stop Trump given his veto power, but he might get the message that hurting Main Street’s stock portfolios can cause a recession and jeopardize the GOP majority in Congress. If so, he might postpone the reciprocal tariffs, giving trade negotiations time to work. Also, the courts might block Trump’s tariffs. An early end to Trump’s tariff nightmare would result in a V-shaped stock-market bottom. We’re counting on that; the alternative is just plain ugly.”
The S&P 500’s 18.9% correction since February 19 troughed on April 8; the next day, Trump postponed his April 2 Liberation Day reciprocal tariffs. The S&P 500 closed up 9.5% that day, April 9.
▌View Related Live Charts: US - S&P 500
It is now up 13.6% since the trough and only 7.9% below its record high!
The April 17 WSJ reviewed the latest quarter survey of economists’ forecasts. It was conducted from April 4 to April 8, just before Trump postponed his Liberation Day tariffs. Economists raised the probability of a recession in the next 12 months to 45% from 20%. They expect the unemployment rate to reach 4.7% by December and remain around there into 2026.
The May 3 WSJ featured a story titled “What Recession? Stock Investors Expect the Good Times to Continue.” It noted: “Wall Street’s best forecasters have been warning that tariffs could spark a recession. Goldman Sachs puts the chances at 45% in the next 12 months. Apollo Global Management’s top economist recently pegged it at 90%.” BCA also remains solidly in the recession camp.
We lowered our odds of a recession from 45% to 35% on May 4. We did so because Trump continued to moderate his stance on tariffs. In addition, the labor market has remained impressively resilient. We are also less concerned about a negative wealth effect on consumer spending now that the stock market has rebounded significantly. Additionally, we expect that capital spending related to datacenters for cloud computing and the onshoring of manufacturing will remain robust.
Consider the following:
(1) Last week’s batch of economic indicators lowered the odds of a recession, according to Polymarkets.com, to 51% on Friday from a peak of 66% on May 1.
▌View Related Live Charts: US - Probability of Recession in A Year (10Y-3M Model)
Meanwhile, the Citigroup Economic Surprise Index for the US has been only slightly negative since April 29.
▌View Related Live Charts: US - Citi Economic Surprise Index & Earnings Revision Index
(2) This week, a bunch of soft and hard economic indicators will be released, mostly for April. The soft indicators include data on small business owners’ concerns and expectations from the National Federation of Independent Business’ (NFIB) survey of its members. The main hard ones will be ...
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