Stock market downdraft

Daily Thoughts 7 Mar 2025

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Yesterday, I discussed with a younger friend of mine on the state of the stock markets. At the end of our discussion, he asked me what’s reason behind the current slide of U.S. stock markets. “Is it the geopolitics, tariffs, inflation, Doge, what?” I kindly replied to him, “My friend, this is something you cannot remember. This is a recession-warning” (he’s about half my age).

Stock markets have rallied for so long at the back of central bank and fiscal stimulus, with the (notable) exception of the Corona-crash, that very few actually remember or understand how stock markets normally behave. Outside outright speculative manias, they have a forecasting ability. Millions of investors process economic information on a daily basis, and their conclusion is reflected in their activities (what stocks to buy and what to sell). For example, before the Great Crash of 1929 stock markets started to head down close to two months prior, in an anticipation of a recession. Most analysts follow just the yield curve forgetting that stock markets also tend to forecast the economy (see, e.g., this).

In early February, based on our liquidity forecasts, we noted:

This implies that we would be close to the upper 95% confidence interval of the forecast this month, indicating that we would see a notable liquidity injection. We can thus assume markets to keep on rising also this month, but with increased volatility (due to, e.g., the tariff-related uncertainty). March could see a proper market rally.

Markets rose till 20 February, but then the uncertainty hit.

Daily closing values of the S&P 500 stock marker index. Source: GnS Economics, Investing.com

Speculation in the stock markets has been rampant in recent months, like I show below, but what lies ahead?