Things are looking up lately. A series of positive signals from ongoing tariff talks, jobs reports, inflation data and corporate earnings have contributed to an historic S&P 500 rally since it plummeted into bear market territory post-Liberation Day. But there’s still one indicator that concerns me about the longevity of the rally and where the S&P 500 will actually land toward the end of this year and beyond.
Amid the good news and market momentum last week, we learned that the U.S. economy actually contracted in the first quarter of 2025. Gross Domestic Product (GDP) fell by 0.3%, which is a huge swing from the previous quarter where GDP grew by 2.4%. An increase in imports as businesses scrambled to preempt tariffs as well as a decrease in government spending—thanks to DOGE—have led to the economic contraction. The slight growth in consumer spending and investment were not significant enough to offset the overall decline.
What is GDP anyway?
Put simply, GDP basically measures everything made within a country's borders, which includes consumer spending, business investments, government spending, and net exports. Typically measured quarterly and annually, higher GDP in general means the economy is growing. But when GDP goes negative, it’s an indication that the economy is retracting.
So when I hear that the U.S. economy is shrinking, I can’t help but prepare for and expect a recession. If there are two consecutive quarters of negative GDP, then that’s often an indication that we’re in a recession. Though stocks are rebounding now, what’s going to happen if the GDP indicator shows negative again next quarter? The stock market will probably pull back significantly, especially if there’s still lingering uncertainty with tariffs, jobs, inflation, consumer sentiment and earnings. I can easily see tariffs, even if reduced from what has been initially proposed, weighing on our spending later in the year as increased costs get baked-in to prices passed down to consumers. One possible upside to this is that the Fed cuts rates to help stimulate spending. But again that will all likely depend on Powell’s view of the longer-term effects of tariffs on inflation and the Fed’s ability to keep it from getting out of hand.
Though there’s good reason to be more optimistic right now, there are still signs that we’re not yet out of the woods, which means uncertainty will remain in our futures. And uncertainty is the enemy of the markets. Despite all the waffling and fleeting good news and bad news, I continue to reference UVstocks data including the weekly excel report that comes with Premium Subscription.
In anticipation of continued recessionary trends and indicators, you can use UVstocks insights to consider allocating more of your portfolio to historically recession-resistant sectors like consumer staples consisting of companies that produce essential items people need regardless of economic conditions like food, hygiene products, basic household items. Healthcare companies that provide medical services and products should continue to see healthy demand during economic downturns. And also utilities which include companies that provide essential services like electricity, water, and gas usually maintain relatively stable demand when times are tough.
In general, you always want to seek out quality companies with strong fundamentals in good times and in bad. These companies have low debt-to-equity ratios, consistent free cash flow, strong balance sheets (more cash than debt to weather storms), a history of maintaining or increasing dividends during previous downturns and competitive advantages in their industry where they wield pricing power and switching costs are high for their customers.
"You must always be prepared for the unexpected, including sudden, sharp downward swings in markets and the economy. Whatever adverse scenario you can contemplate, reality can be far worse" — Seth Klarman
P.S. I'm sharing some investment information, but it's important to remember that what I'm providing is for informational purposes only and should not be construed as financial advice.
Happy Investing,
John
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