396930 01: Traders and clerks work on the Eurodollar Futures floor of the Chicago Mercantile … [+]
With the U.S. government careening toward a shutdown this weekend and a key inflation report due today, stock futures — led by a 1% drop in Nasdaq-100 futures — were down, according to the Wall Street Journal.
Does this drop foreshadow declining stock prices in the next few years? Lacking a crystal ball, my prediction is yes. That’s because the scenario that strikes me as most likely will send stock prices down for four reasons:
- A rise in inflation due to tariffs;
- Fewer interest rate cuts;
- Slower economic growth; and
- Bitcoin volatility risk.
If you are not prepared to wait out a long period of stock market decline and a gradual recovery, taking equity profits could be a wise move.
Looming Government Shutdown Hits Markets
After two failed efforts to fund the government through March 2025; absent a deal today, the government could shut down at 12:01 a.m. on December 21.
The economic consequences of such a shutdown would be significant. For example, “millions of federal employees and military service members” could be furloughed and Americans relying on federal assistance could face service disruptions, noted Seeking Alpha. Moreover, an extended government shutdown could cause flight delays since some TSA employees and air traffic controllers might call in sick, reported Axios.
Leading the fall are technology stocks and bitcoin as investors await an inflation report that could send stocks down further. As semiconductor industry stocks — such as ASML, TSMC, AMD, Broadcom, and Nvidia — fell, bitcoin’s price dropped 12% from its peak to $95,000, the Journal reported.
Fortunately for bulls, a report on the Federal Reserve’s preferred inflation gauge — the Personal Consumption Expenditures index — was better than expected. The PCE rose 0.1% in November — less than the expected 0.2%, according to CNBC.
A Rise In Inflation Due To Tariffs
Some economists forecast tariffs imposed by President-Elect Donals Trump could revive inflation.
Trump has announced a variety of tariff proposals — some linked to conduct of the countries whose goods would affected. During the election campaign, he pledged to impose 20% tariffs on all U.S. imports, reported the Journal.
Following the November election, Trump also
- Threatened to impose a 25% tariff on imports from Canada and Mexico if these countries did not reduce the flow of migrants and drugs into the U.S.;
- Suggested he might impose a 10% higher levy on goods from China because the country has not done enough to prevent fentanyl from coming to the U.S.; and
- Warned of a 100% tariff on Brazil, Russia, India, China and South Africa, “if they try to replace the U.S. dollar as the main global currency,” noted the Journal.
Executives of companies that import goods — which would likely be faced with higher costs when they pay the tariffs — have so far failed in their efforts to quash the Trump tariffs, noted the Journal.
Economists envision tariffs could boost inflation. If tariffs push up consumer prices, businesses and individuals might be primed to react by hoarding products or paying more, they argue. Tariffs could go up “in the context of an economy where the embers of inflation are still smoldering,” KPMG chief economist Diane Swonk told the New York Times. “It can rekindle.”
Fewer Interest Rate Cuts
On December 18, the Dow plunged 1,100 points after the Fed signaled fewer 2025 rate cuts than investors expected. If inflation rekindles, the Fed could stop cutting rates — or even raise them.
“Today was a closer call, but we decided it was the right call,” Fed Chair Jerome Powell said at a news conference after the Federal Open Market Committee’s meeting. He later added, “From here, it’s a new phase, and we’re going to be cautious about further cuts,” according to the Wall Street Journal,
Investors did not take into account how the Fed’s forecast might change in light of the election results. One economist concluded the Fed’s slower rate of interest rate cuts was a result of uncertainties related to tariffs and immigration policies.
“This wholesale change in their views are clearly tied to uncertainty and risks around as-yet-enacted tariff and immigration policies and have far less to do with changes to the economic landscape,” Inflation Insights Founder Omair Sharif told the Journal.
Slower Economic Growth
Economists are uncertain about the rate of economic growth. “It is a very uncertain outlook, and most of that uncertainty comes from potential changes in policy,” Morgan Stanley’s chief U.S. economist Michael Gapen told the Times.
Nevertheless, Morgan Stanley and other Wall Street economists forecast gross domestic product growth will slow from 2.5% in 2024 to 2% in 2025. While rising stock prices and higher home prices could boost consumer spending — which accounts for 70% of economic growth, tariffs and stricter immigration policies could increase prices.
Such stagflation — slower growth and higher prices — is the worst case scenario of one economist. “Trade and immigration policy could be extremely disruptive to the economy,” American Enterprise Institute economist Michael Strain told the Times.
Strain envisions a stagflation scenario in which prices — of imported goods, groceries, restaurant meals, and homes — rise as economic growth slows. The reason? “Steep new tariffs discourage investment, mass deportations limit employers’ ability to find workers and mounting deficits drive up borrowing costs,” reported the Times.
Bitcoin Volatility Risk
Finally, just as subprime mortgage-backed securities found their way into the financial mainstream — contributing to the 2008 financial crisis — there is a risk of bitcoin and other risky tokens doing something similar in the future.
Bitcoin more than doubled in 2024 and popped 40% since November 5 on “hopes that a second Trump administration will usher in a golden age for digital currencies,” reported the Wall Street Journal.
Individual investors are pouring cash into exchange traded funds linked to cryptocurrencies. Such ETFs — notably from Fidelity and BlackRock — have attracted $36 billion of new money since their launch — with their assets totaling about $116 billion, the Journal noted.
ETFs get paid to accumulate assets in classes investors desire. “Asset managers’ jobs are to build products where there is demand from their clients so they can charge fees on it,” ETF Action Founder Mike Akins, told the Journal. “Let us not forget they also had no problem packaging up subprime mortgages and delivering them to their clients.”
Could the inherent volatility of bitcoin and other risky tokens clip those investors’ wings and cause another financial crisis? The involvement of Fidelity and BlackRock gives me little comfort about the safety of bitcoin as an investment.
After all, Akins’ comment reminds me how Lehman Brothers — which accumulated a highly leverage portfolio of subprime mortgage-backed securities — was a respected investment bank until Sept. 15, 2008 when it filed a $639 billion bankruptcy.
The median Wall Street forecast sees a 9% rise in the S&P 500 in 2025, according to MarketWatch.
While I hope I am wrong, tariffs, inflation, higher-than-expected interest rates, slower economic growth, and bitcoin volatility risk could make that forecast look overly optimistic.
