CHART: The confusing state of the economy 📊
Plus a charted review of the macro crosscurrents 🔀
📈 The stock market rallied last week, with the S&P 500 climbing 4.6% to close at 5,525.21. It’s now down 10.1% from its February 19 closing high of 6,144.15 and up 54.5% from its October 12, 2022 closing low of 3,577.03. For more on how the market moves, read: The stock market's awesome days occur near awful days 📊 and One of the most misunderstood moments in stock market cycles ⏱️
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We’ve been getting ambiguous signals in the economic data.
On one hand, the soft, sentiment-oriented data has been disappointing. The University of Michigan and the Conference Board’s surveys of consumer confidence have turned sharply lower in recent months. The NFIB’s Small Business Optimism index has tanked. Sentiment among CEOs and CFOs has turned south. Purchasing managers at manufacturing and services firms have also become increasingly cautious. And it’s all because of the Trump administration’s volatile position on tariffs — which most people agree are net negative for the economy.
On the other hand, the hard data, which reflects actual activity, has been strong. Retail sales hit a record high in March, and weekly card spending data — which you can see below in TKer’s weekly review of macro crosscurrents — suggest that strength has continued into April. Durable goods orders and shipments continue at elevated levels. Meanwhile, key labor market metrics including job creation, unemployment, and claims for unemployment insurance continue to trend at levels associated with economic expansion.
This narrative of contradictions is illustrated nicely in this chart from Goldman Sachs, which shows how soft data has been surprising to the downside while hard data has been surprising to the upside. In other words, sentiment has been weaker than expected while realized activity has been stronger than expected.
Renaissance Macro’s Neil Dutta wrote about these “data discontinuities” in his April 21 note.
“It’s probable that much of the recent upside surprises in hard data reflect pulling forward activity in the anticipation of tariffs,” Dutta wrote. “Consumers pulled forward auto sales and consumption on other household durables, as an example. Firms likely pulled forward some orders too. That likely gives the veneer of strength in the recent high-frequency dataflow.”
During much of the economic expansion that began in 2020, it’s paid off to focus on what consumers and businesses did (i.e., the hard data) over what they said (i.e., the soft data). The Federal Reserve just published research explaining this phenomenon.
But in a world where many are aware of the inflationary risks of new tariffs, this pull-forward of sales comes with two issues: 1) it masks what may be a much weaker underlying economy, and 2) we could get depressed sales in the future when these pulled-forward sales would’ve normally occurred.
“[R]ecent hard data in the U.S., mostly for March, are overstating activity and it’s worth noting that conditions were not especially strong to begin with,” Dutta added. “The collapse across a range of survey-based measures of activity suggest that actual activity will continue to slowdown, in a potentially abrupt manner. Recession may already be here.“
The big picture 🖼️
We’ll only know with the benefit of hindsight whether or not we’re in a recession or going into a recession.
However, we know that the economy had been cooling and that the threat of tariffs increased the risk of recession.
Importantly, as long term investors, we should understand that recessions and market downturns will happen as you build wealth with stocks.
The economy has been in expansion about 80% of the time. Similarly, stocks have been in a bull market about 80% of the time. Maybe we’re currently going through an unpleasant period that has historically occurred about 20% of the time.
If you like charts, check out: 19 charts to consider as markets swing wildly 📈📊📉
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Review of the macro crosscurrents 🔀
There were several notable data points and macroeconomic developments since our last review:
🏭 Business investment activity rises. Orders for nondefense capital goods excluding aircraft — a.k.a. core capex or business investment — rose 0.1% to a record $75.1 billion in March.
Core capex orders are a leading indicator, meaning they foretell economic activity down the road. The growth rate had leveled off a bit, but they’ve perked up in recent months.
For more on core capex, read: A bullish business investment story is brewing 🏭 and 'Check yourself' as the data zig zags ↯
💳 Card spending data is holding up. From JPMorgan: “As of 18 Apr 2025, our Chase Consumer Card spending data (unadjusted) was 3.3% above the same day last year. Based on the Chase Consumer Card data through 18 Apr 2025, our estimate of the US Census April control measure of retail sales m/m is 0.51%.”
From BofA: “So far, Bank of America card data through April 19 suggests that consumers are continuing to spend at a healthy rate, with spending up YoY throughout most of the month. In the week ending April 19, total card spending per household was up 3.1% YoY, with the YoY partly being boosted by the later timing of Easter this year. “
April spending is likely being boosted by consumers pulling forward purchases in an attempt to front-run tariffs.
For more on consumer spending, read: We're gonna get ambiguous signals in the economic data 😵💫 and Americans have money, and they're spending it 🛍️
💼 Unemployment claims tick higher. Initial claims for unemployment benefits rose to 222,000 during the week ending April 19, up from 216,000 the week prior. This metric continues to be at levels historically associated with economic growth.
For more context, read: A note about federal layoffs 🏛️ and The labor market is cooling 💼
💳 Bank accounts remain in pretty good shape. From BofA: “While household median deposit levels have declined since 2021, they increased across the income spectrum last month and remain at least 40% higher than 2019 levels on a nominal basis and 15% above inflation adjusted levels, according to Bank of America checking and savings account data. … Additionally, the rate of decline in deposits is significantly slower compared to two years ago, reflecting easing inflation over the same period. This is especially true for lower-income households. While median deposits fell around 3% YoY in March, that’s a noteworthy improvement from the 15% YoY decline that occurred three years ago.”
For more on household finances, read: Americans have money, and they're spending it 🛍️
👎 Pay expectations are deteriorating. From the New York Fed: “The average reservation wage — the lowest wage respondents would be willing to accept for a new job — sharply retreated to $74,236 from a series high of $82,135 in November. This decrease was most pronounced for men and respondents over age 45.“
For more on why policymakers watch wage growth, read: Revisiting the key chart to watch amid the Fed's war on inflation 📈
👎 Consumer sentiment is tumbling. From the University of Michigan’s April Surveys of Consumers: “While this month’s deterioration was particularly strong for middle-income families, expectations worsened for vast swaths of the population across age, education, income, and political affiliation. Consumers perceived risks to multiple aspects of the economy, in large part due to ongoing uncertainty around trade policy and the potential for a resurgence of inflation looming ahead. Labor market expectations remained bleak. Even more concerning for the path of the economy, consumers anticipated weaker income growth for themselves in the year ahead.“
Politics clearly plays a role in peoples’ perception of the economy. Notably, expectations for inflation appear to be a partisan matter.
For more on the state of sentiment, read: We're gonna get ambiguous signals in the economic data 😵💫 and Beware how your politics distort how you perceive economic realities 😵💫
🏚 Home sales fall. Sales of previously owned homes fell by 5.9% in March to an annualized rate of 4.02 million units. From NAR chief economist Lawrence Yun: “Home buying and selling remained sluggish in March due to the affordability challenges associated with high mortgage rates. Residential housing mobility, currently at historical lows, signals the troublesome possibility of less economic mobility for society.”
💸 Home prices rise. Prices for previously owned homes increased from last month’s levels and year ago levels. From the NAR: “The median existing-home sales price for all housing types in March was $403,700, up 2.7% from one year ago ($392,900). All four U.S. regions registered price increases.”
🏘️ New home sales rise. Sales of newly built homes rose 7.4% in March to an annualized rate of 724,000 units.
🏠 Mortgage rates tick lower. According to Freddie Mac, the average 30-year fixed-rate mortgage declined to 6.81% from 6.83% last week. From Freddie Mac: “The average mortgage rate decreased slightly this week. Over the last couple of months, the 30-year fixed-rate mortgage has fluctuated less than 20 basis points, and this stability continues to bode well for buyers and sellers alike.”
There are 147.4 million housing units in the U.S., of which 86.9 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: Why home prices and rents are creating all sorts of confusion about inflation 😖
⛽️ Gas prices tick higher. From AAA: “The national average for a gallon of regular is slightly higher than a week ago and 5 cents higher than a month ago. An increase in demand – as the weather gets nicer and more people get out and about – is pushing prices up slightly. But at $3.17, the national average remains well below what drivers were paying this time last year. That’s because the price of crude oil is on the lower side at $62 a barrel compared to $82 a barrel one year ago.”
For more on energy prices, read: Higher oil prices meant something different in the past 🛢️
🏢 Offices remain relatively empty. From Kastle Systems: “Peak day office occupancy was 63% on Tuesday last week, down six tenths of a point from the previous week. Washington, D.C. experienced the biggest single-day drop, falling more than eight points on Wednesday as local government offices were closed to observe Emancipation Day. New York’s high was 62.9% on Tuesday, down nearly six points from the previous week. The average low was on Friday at 35.2%, down 1.1 points from the previous week.”
For more on office occupancy, read: This stat about offices reminds us things are far from normal 🏢
👎 Activity surveys look bad. From S&P Global’s April U.S. PMI: “The early flash PMI data for April point to a marked slowing of business activity growth at the start of the second quarter, accompanied by a slump in optimism about the outlook. At the same time, price pressures intensified, creating a headache for a central bank which is coming under increasing pressure to shore up a weakening economy just as inflation looks set to rise.“
Keep in mind that during times of perceived stress, soft survey data tends to be more exaggerated than actual hard data.
For more on this, read: What businesses do > what businesses say 🙊
🇺🇸 Most U.S. states are still growing. From the Philly Fed’s March State Coincident Indexes report: "Over the past three months, the indexes increased in 43 states, decreased in four states, and remained stable in three, for a three-month diffusion index of 78. Additionally, in the past month, the indexes increased in 39 states, decreased in seven states, and remained stable in four, for a one-month diffusion index of 64.”
📉 Near-term GDP growth estimates are tracking negative. The Atlanta Fed’s GDPNow model sees real GDP growth declining at a 2.5% rate in Q1. Adjusted for the impact of gold imports and exports, they see GDP falling at a 0.4% rate.
For more on GDP and the economy, read: 9 once-hot economic charts that cooled 📉 and You call this a recession? 🤨
Putting it all together 🤔
🚨 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.
For more on how the macro story is evolving, check out the previous review of the macro crosscurrents »
Key insights about the stock market 📈
Here’s a roundup of some of TKer’s most talked-about paid and free newsletters about the stock market. All of the headlines are hyperlinked to the archived pieces.
10 truths about the stock market 📈
The stock market can be an intimidating place: It’s real money on the line, there’s an overwhelming amount of information, and people have lost fortunes in it very quickly. But it’s also a place where thoughtful investors have long accumulated a lot of wealth. The primary difference between those two outlooks is related to misconceptions about the stock market that can lead people to make poor investment decisions.
The makeup of the S&P 500 is constantly changing 🔀
Passive investing is a concept usually associated with buying and holding a fund that tracks an index. And no passive investment strategy has attracted as much attention as buying an S&P 500 index fund. However, the S&P 500 — an index of 500 of the largest U.S. companies — is anything but a static set of 500 stocks.
The key driver of stock prices: Earnings💰
For investors, anything you can ever learn about a company matters only if it also tells you something about earnings. That’s because long-term moves in a stock can ultimately be explained by the underlying company’s earnings, expectations for earnings, and uncertainty about those expectations for earnings. Over time, the relationship between stock prices and earnings have a very tight statistical relationship.
Stomach-churning stock market sell-offs are normal🎢
Investors should always be mentally prepared for some big sell-offs in the stock market. It’s part of the deal when you invest in an asset class that is sensitive to the constant flow of good and bad news. Since 1950, the S&P 500 has seen an average annual max drawdown (i.e., the biggest intra-year sell-off) of 14%.
How the stock market performed around recessions 📉📈
Every recession in history was different. And the range of stock performance around them varied greatly. There are two things worth noting. First, recessions have always been accompanied by a significant drawdown in stock prices. Second, the stock market bottomed and inflected upward long before recessions ended.
In the stock market, time pays ⏳
Since 1928, the S&P 500 generated a positive total return more than 89% of the time over all five-year periods. Those are pretty good odds. When you extend the timeframe to 20 years, you’ll see that there’s never been a period where the S&P 500 didn’t generate a positive return.
What a strong dollar means for stocks 👑
While a strong dollar may be great news for Americans vacationing abroad and U.S. businesses importing goods from overseas, it’s a headwind for multinational U.S.-based corporations doing business in non-U.S. markets.
Economy ≠ Stock Market 🤷♂️
The stock market sorta reflects the economy. But also, not really. The S&P 500 is more about the manufacture and sale of goods. U.S. GDP is more about providing services.
Stanley Druckenmiller's No. 1 piece of advice for novice investors 🧐
…you don't want to buy them when earnings are great, because what are they doing when their earnings are great? They go out and expand capacity. Three or four years later, there's overcapacity and they're losing money. What about when they're losing money? Well, then they’ve stopped building capacity. So three or four years later, capacity will have shrunk and their profit margins will be way up. So, you always have to sort of imagine the world the way it's going to be in 18 to 24 months as opposed to now. If you buy it now, you're buying into every single fad every single moment. Whereas if you envision the future, you're trying to imagine how that might be reflected differently in security prices.
Peter Lynch made a remarkably prescient market observation in 1994 🎯
Some event will come out of left field, and the market will go down, or the market will go up. Volatility will occur. Markets will continue to have these ups and downs. … Basic corporate profits have grown about 8% a year historically. So, corporate profits double about every nine years. The stock market ought to double about every nine years… The next 500 points, the next 600 points — I don’t know which way they’ll go… They’ll double again in eight or nine years after that. Because profits go up 8% a year, and stocks will follow. That's all there is to it.
Warren Buffett's 'fourth law of motion' 📉
Long ago, Sir Isaac Newton gave us three laws of motion, which were the work of genius. But Sir Isaac’s talents didn’t extend to investing: He lost a bundle in the South Sea Bubble, explaining later, “I can calculate the movement of the stars, but not the madness of men.” If he had not been traumatized by this loss, Sir Isaac might well have gone on to discover the Fourth Law of Motion: For investors as a whole, returns decrease as motion increases.
Most pros can’t beat the market 🥊
According to S&P Dow Jones Indices (SPDJI), 65% of U.S. large-cap equity fund managers underperformed the S&P 500 in 2024. As you stretch the time horizon, the numbers get even more dismal. Over a three-year period, 85% underperformed. Over a 10-year period, 90% underperformed. And over a 20-year period, 92% underperformed. This 2023 performance follows 14 consecutive years in which the majority of fund managers in this category have lagged the index.
Proof that 'past performance is no guarantee of future results' 📊
S&P Dow Jones Indices found that funds beat their benchmark in a given year are rarely able to continue outperforming in subsequent years. For example, 334 large-cap equity funds were in the top half of performance in 2021. Of those funds, 58.7% came in the top half again in 2022. But just 6.9% were able to extend that streak through 2023. If you set the bar even higher and consider those in the top quartile of performance, just 20.1% of 164 large-cap funds remained in the top quartile in 2022. No large-cap funds were able to stay in the top quartile for the three consecutive years ending in 2023.
The odds are stacked against stock pickers 🎲
Picking stocks in an attempt to beat market averages is an incredibly challenging and sometimes money-losing effort. In fact, most professional stock pickers aren’t able to do this on a consistent basis. One of the reasons for this is that most stocks don’t deliver above-average returns. According to S&P Dow Jones Indices, only 24% of the stocks in the S&P 500 outperformed the average stock’s return from 2000 to 2022. Over this period, the average return on an S&P 500 stock was 390%, while the median stock rose by just 93%.
