A Stock Market in Denial

Investors in the U.S. stock market are living in a state of denial. To be sure, the S&P 500 advanced nine days in row for the first time since 2004, and it has bounced 14% off the early April low, investors are wishing away the trade tsunami that is about to hit the economy. As I write this, the west coast ports are shutting down, bringing with it layoffs among dock workers and truckers. That malaise will soon spread eastward. 

Consumer confidence remains in the toilet. Thus, it is no surprise that year-over-year same store sales for McDonald’s, Chipotle, and Starbucks are down. Indeed, domestic airline travel is down, and foreign tourists are staying away from America in droves. On the business side, save for the Magnificent 7, capital spending plans are plummeting. Although the recent employment report for April was better than what I would have expected, my guess is that it will turn out to be the last good report we will see for quite some time. As a result, my March forecast calling for a recession starting in the current quarter still stands. (See: https://shulmaven.blogspot.com/2025/03/the-recession-of-2025.html ) 

Investors remain in denial that the postwar global architecture of the past 80 years is in ruins. (See: https://shulmaven.blogspot.com/2025/04/regime-change-end-of-economy-as-we-have.html ) To me this means that all of the old rules of thumb concerning the economy and the stock market are no longer valid. Simply put, we are entering a new world with unknown economic and geopolitical   consequences. In a nutshell, the world has become a much riskier place.

For those who believe that the U.S. will win the trade war with China, I have a few words of caution. According to the “Sinocism” newsletter, the domestic Chinese media are portraying the trade war as a “protracted war.” The members of the Chinese Communist Party know full well that the term “protracted war” harks back to Chairman Mao’s 1938 pamphlet calling for protracted guerilla warfare against the Japanese aggressors. That war lasted for seven years. Further, Thucydides taught us 2500 years ago that nations go to war for “honor, fear, and interest.” To China the trade war with the United States is a matter of honor.

The bottom line is that soon the denial phase of the current bear market will soon turn to anger as investors realize that the Trump tariff policy will bring with it higher prices and reduced output yielding a stagflationary recession. When that realization crystalizes, the S&P 500 will breach the April low before too long.