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Building on the Momentum of Last Year’s Accuracy
It’s that time of year again. The one in which Wall Street rolls out its forecasts more focused on attracting new customers than genuinely helping you understand the economy and markets or plan your finances for the year ahead.
It’s also the season when skeptics dismiss forecasting altogether, claiming it’s impossible or a waste of time. But is that really true?
Last year, The Economy Tracker challenged this notion by delivering insights that overwhelming proved accurate. Was it just luck, or could it mark the start of a fresh, more effective way to understand the economy, markets, and the broader world? This year, will offer more clues as you know the rules of observations we use here:
Once is an instance.
Twice in a row could be a coincidence.
But three times in a row? Now you have a new trend.
One things for sure: You don’t want to miss out on the outcome on this one.
Especially since there’s nothing to lose. If it continues to work, you’ll have a powerful tool to improve your life, and you’ll be able to say you were part of it from the very beginning.
If it doesn’t? You’ll still gain a deeper understanding of the economy and markets along the way. Any setbacks will become opportunities to refine The Economy Tracker and improve future forecasts, ultimately enhancing your knowledge of the financial system we all navigate daily.
As Michael Scott says, that’s a Win-Win-Win.
The Economy Tracker’s current reading.
As we enter 2025 we find ourselves in a significantly different economic and stock market landscape than we did a year ago. And as you know from reading Here’s the Deal, the red flags are continuing to build and pick up steam. Standard behavior for the Economic Slowdown phase of the Credit Cycle.
As of the most recent readings from The Economy Tracker, the US Economy is inching ever closer to the final phase of the credit cycle, Recession.
2025 Seasonality - Presidential Cycle
The year following a presidential election, known as the post-election year, is historically the third strongest in the four-year election cycle. The only year that typically lags behind is the mid-term election year.
Why does this happen? It often comes down to government spending. After the big spending bills from the prior presidential cycle have been implemented, their effects start to wane. For example, in this cycle, the CHIPs Act and the ironically named “Inflation Reduction Act” played significant roles in boosting the economy. These policies, combined with a surge in technological advancements like the rapid growth of AI beginning in November 2022 with the release of OpenAI, fueled strong market performance over the past two years and kept asset prices high.
But here’s the key: once that spending tapers off and the benefits are largely absorbed, markets and the economy begin to lose momentum. This slowdown typically starts in the latter part of the post-election year and continues into the mid-term year. As the "powder runs dry," the pace of growth softens, setting the stage for a more cautious time as the latter part of the presidential cycle merges with a credit cycle in it’s final phases.
Which is where we currently find ourselves at the moment.
Expect Higher Volatility in 2025
Credit cycles end in a sea of volatility, so it is best to expect the recent increase in volatility which began in July ‘24 to continue.
Weekly chart of the VIX. (Volatility Index)
While each surge in the VIX gets erased relatively quickly, as that is how the index operates, the thing in which to pay attention to here is the trend. As in higher highs and higher lows, as has been the case since July.
Economic Slowdowns tend to see volatility spike after putting in a new low, as was the case in July and August. It then tends to trend up into the Recession phase, as has been the case the last six months.
Keep an eye on this one in 2025.
Inflation Rates to stay elevated (above 2-2.5% on average) throughout most of the year.
Inflation is expected to remain elevated for much of the year, with a potential peak in the 4%-5% range, well below the highs of 7% to 9% seen in 2022. While this level of inflation isn’t catastrophic, it will likely strain consumers as they prioritize essentials like food, housing, and transportation. Since 2020, prices have already risen by 21.9%, amplifying the burden on household budgets. A return to inflation near the Federal Reserve’s 2% target would significantly improve economic prospects in the short to mid-term.
So what would send inflation rates back up to 7% - 9%? Mass deportations + 10%-25% tariffs + huge spending increases in an inflationary environment. These outcomes reflect basic economic principles rather than political arguments.
When it comes to the economy and financial markets, the timing of policy decisions is just as important as the policy changes themselves. What could have worked out for the positive 5 - 10 years ago, could be severely debilitating in 2025.
Commercial Real Estate - Not as bad as is being sold to the public.
Every credit cycle has a "victim." A sector that bears the brunt of over-leveraging and systemic strain at the wrong time. Think back to housing in 2008, the dot-com bubble in 2000, or the savings and loan crisis of the late 1980s and early 1990s.
This time around, the commercial real estate (CRE) sector is shaping up to be a significant focal point for the U.S. economy in 2025. Specifically, high rise office buildings in downtown locations and new larger multi-family (apartments) properties.
In 2025 alone, approximately $598 billion of debt in the CRE space is due to be restructured. While $599.2B is due for 2026.
The good news is that only about 15% of which face refinancing risks.
While this amount of maturing debt presents a considerable challenge, especially in an environment of higher interest rates and changing property valuations, it is not nearly enough to crash the financial system on its own.
While it is certainly something to continue watching throughout the year, the hype over the fallout is severely overblown at this point.
While regional banks are most at risk due to financing the majority of commercial real estate, there are ample funds in larger banks like JP Morgan/Chase to absorb huge amounts of CRE debt in acquiring any failed regional banks.
Bond Yields
Expect bond yields to remain elevated, especially as the inflationary affects of tariffs begin to take shape.
Expect to see the US10Y get to 5.1%. Worst case scenario, it runs as high as 5.415% to 6.0%.
On the contrary, expect shorter term bond yields (US02Y) to continue to come down back into the 3’s and maybe even as low as 2.5%.
Unfortunately, this type of simultaneous action is the type of thing you see heading into a recession.
The Dollar is breaking out and continues to strengthen.
It may seem weird, but a strengthening dollar is typically bad for the economy and markets, and something you see heading into recessions.
Weekly chart of the dollar (DXY).
Interest Rates
While at the moment the Fed expects only two quarter point rate cuts equaling 0.5% in 2025, they would be forced to move more aggressively should the economy begin to show more obvious signs that commerce is grinding to a halt.
Don’t be surprised if at some point this year the Fed “unexpectedly” cuts rates and does so aggressively. Should that happen, it’s a strong signal that the US is either in or very quickly approaching a recession.
The key thing to watch here is the US 2Y Bond Yield. As you can see below, the Fed follows it in determining the Fed Funds Rate.
Should the 2Y Yield begin to trend higher again, it’s a sign of increasing rates of inflation. The result of which would force the Fed to once again begin raising rates. This would be a worst case scenario for the economy and markets as it would show the system is out of balance.
Mortgage Rates
Look for mortgage rates to maintain their current range of 7.1% to 6.0% throughout most of the year.
Should the economy begin to quickly deteriorate, you will more than likely see mortgage rates in the 5’s, possibly getting as low as 5.3%. However, at this stage it is more than likely that does not happen until late 2025 or 2026.
Should mortgage rates ever drop back into the 4’s, it will more than likely be short lived as the next decade or so will likely see average rates in the 5’s and 6’s.
In other words, don’t expect to see the 3’s again anytime in the foreseeable future.
If you are looking to buy or refi when rates come down, best to begin interviewing and developing relationships with local mortgage brokers now so that you are ready when the time is right.
Housing Prices
Expect home prices to grow modestly this year, around 2% to 2.5% nationally. Since housing trends are highly localized, anyone planning to move should connect with top real estate agents in both their current and target neighborhoods. Cultivating these relationships will provide valuable insights when the time is right.
Looking ahead, 2026 could bring slight national price declines of less -0.5% - -1.5% if current economic trends hold, but a housing price crisis is not on the horizon. Such events are rare, occurring roughly once every 80 years.
An active spring housing market, particularly in existing home sales, could extend the credit cycle and delay an expected recession until 2026. Should very low activity relative to the last couple of years occur, the recession could arrive sooner, possibly in early-to-mid 2025. Keep a close watch on existing home sales this spring for early signals about the broader economy.
Should US 10yr Bond Yields continue to remain elevated into the Spring, then an active Spring in existing home sales is unlikely.
Tariffs Effects on the Economy
Whether you like Trump or not, the fact remains that tariffs are are a net negative for economic health and jobs in the US. It’s not a matter of “if” tariffs are a negative for the economy, but rather how bad as there’s literally hundreds of years of data to go through to reach this fact.
As to how the proposed tariffs will affect the economy in the coming years, estimates range from about -0.2% to upwards of -3.6% of GDP, and cause a loss of ~140,000 - 350,000 jobs.
However, these things take time to work their way through the gigantic financial system in which we all operate. Therefor, the size and timing of the tariffs will matter significantly.
Since tariffs were a cornerstone of Trump’s agenda, it’s likely we’ll see some imposed early in his administration. If that happens, the negative economic effects could begin to surface by the middle or latter half of the year.
Unfortunately, this timing coincides with an the economy that may already be entering the recessionary phase or even the early stages of a full-blown recession.
Mass Deportations = Massive Inflation
Among campaign promises unlikely to be fully realized, mass deportations stand out. While deportations of individuals in the country illegally with violent criminal histories is absolutely warranted, broader mass deportations would be ill-timed and economically detrimental. The U.S. has faced a labor shortage since around 2016, and such a policy would exacerbate inflation and likely help trigger a recession, deepening its severity and extending its duration. Historically, economic downturns tend to naturally reduce immigration, as many leave voluntarily when opportunities dwindle.
It’s important to remember that the United States was built on mass immigration, making anti-immigration stances fundamentally un-American. Immigrants who come to work contribute significantly to the nation’s growth, as has been the case since before the USA was a nation. Protecting immigration is vital for maintaining the economic dynamism that has and continues to define the country.
Is a complete overhaul of the immigration system needed? Yes! Absolutely. However, that is another story and meaningless to the economy until or if it happens and begins to take shape.
The likely roadmap to a recession.
Corporate profit margins shrink, causing companies to respond by laying off large numbers of workers. These layoffs push unemployment rates sharply higher, creating a ripple effect throughout the economy. As more people lose their jobs, they are forced to drastically reduce their spending, putting additional strain on businesses and the broader financial system.
This stress spills over into credit markets. With more households unable to keep up with their debt payments, defaults (which are already rising) accelerate rapidly, creating a feedback loop of financial instability. This sequence is a classic hallmark of economic downturns.
As this begins to happen, expect to see bond prices begin to outperform stocks as money seeks safety, which in turn will lead to falling bond yields and stock market prices.
Events which could change this forecast.
Corporate Profit Margins remain at currents levels all year or move higher.
Corporate profits resume their climb higher as inventory levels fall.
Defaults and delinquencies rollover, begin to fall, and trend down.
Credit growth begins to grow and trend back up again.
Volatility falls back to last years range and stays there for multiple weeks in a row. (VIX 11.50 - 13.50 or lower)
The Trump Administration decides not to go through with tariffs and instead expands free trade.
AI continues to make businesses and people more productive much faster than anticipated.
Inflation gets back to 2% early in the year and maintains that level for several weeks, allowing the Fed to begin cutting rates again.
Event Risk to watch for at this stage in the cycle.
The key risk to watch at this stage is the collapse of a financial institution. An even bigger risk would be if it is large enough to take others down with it, which would erase billions of dollars from the financial system and escalate economic instability. Barring such an event, the recession, if it arrives, is likely to be milder and shorter than usual. There's even a slim chance the economy could transition directly into the next credit cycle without a recession, though that’s less likely. Alternatively, the current credit cycle might extend for a few more years. Should that be the case, we’ll likely know sometime mid-year.
For now, the outlook remains cautiously optimistic, and there’s no immediate cause for major concern of a financial collapse or severe recession. Unless of course the incoming administration levies huge tariffs, severely slashes budgets quickly, and mass deports undocumented workers.
While uncertainties remain, the absence of a major financial shock could pave the way for a more manageable recession. Time will ultimately reveal how these dynamics unfold, and you’ll be seeing it play out here well before most realize what is happening.
S&P 500 to 6450 in 2025
Look for the S&P 500 to hit 6450 this year. More than likely happening in the beginning to mid-part of the year, before markets begin the rollover to trigger the beginning of the end for the current credit cycle.
I am expecting a 15% - 20% correction in markets at some point this year, either Q1 or Q3, as that is also consistent with Economic Slowdowns.
Should this happen and we roll into a recession in 2025 or early 2026, then I expect to see Financials, Materials, and Energy stocks leading in the first part of the year, with Utilities, Consumer Staples, and Healthcare taking the reigns around mid-year. All the while, expect technology stocks of profitable companies and “The Generals (NVDA, AAPL, JPM, TSLA, AMZN, etc) to continue to lead as well until the last possible moment.
Then, look for bond prices to begin to outperform stocks. That will more than likely tell us the end is here for this current credit cycle.
Final thoughts.
Welp. Not the forecast I want or enjoy sending out, but it is the one which the data says is most likely.
Could some new or improved innovation come out of nowhere or the incoming administration pull a rabbit out of their hat and save the current credit cycle? Sure. But I certainly wouldn’t put money on that one now as it is always best to stick with the odds and know when the environment changes.
Like him or not, there are times when Trump has shown that he has the Midas touch. However, it is concerning that he seems to be using a playbook for the wrong environment. It’s easy to do when you think growth cures all. Most times it does, but about 20% of the time it overheats the system and throws it completely out of sync.
The administration has four years to implement the policies which he ran on, so hopefully they will choose to do so when the economy and markets are on firmer footing.
Should the recession occur, Trump has a great opportunity to apply policies that both cure it quickly and exacerbate the harms. It’s shaping up to be a great opportunity for him to either be a hero or end up being known for completely botching the economy.
Whether it’s fair or not that he is likely to deal with this early in his second term is irrelevant. Great Leaders don’t complain about the hand they are dealt, they simply get to work finding solutions which benefit the most amount of people.
As always, I could be wrong. If I am, that’s ok. As being right with these forecasts isn’t really the point. Instead it’s serves as a roadmap for what “should” happen based on data trends, cycles, and history.
Ultimately, I find it helpful to have a yearly and quarterly plan for what is “supposed” to happen. That way if action diverts, I know that I am wrong or missing something early rather than hope and wait.
No different than a gameplan in sports where sometimes they work out exactly as they were drawn up, and sometimes they have to be adjusted throughout the game.
While last year’s performance and forecast were great, they mean absolutely nothing this year.
It’s good to take a few days to enjoy the victory, but that crap goes out the window when it’s time to perform again. Having confidence in your abilities is one thing, hubris is quite another.
So back to the grind and extreme anxiety of chasing top performance.
I sincerely hope you get something out of this which helps your business, career, and financial well-being. While I may seem to be letting my ego from my performance the last few years get to my better judgement, the truth is that I am constantly looking for holes in my work, models, theories, and forecasts. That is one of the meanings behind “Do the work required.” The way I see it, being a cocky mf’er for a moment and taking a victory lap in the 2024 review helps in two ways:
It lets you know that I know what I am doing and that I am very good at it.
It puts more pressure on myself to deliver again this year. For some reason, that just helps me prepare so that I perform at my best.
While there appears to be some challenging times ahead of us, it could be a lot worse. Plus, you’ve been here before and have come through the other side better and more savvy. This time will be no different.
Have a plan and implement it to the best of your abilities. That’s all anyone can do.
Whatever happens, I will be in the middle of it every step of the way. So, feel free to ask any questions.
If you own and/or operate a business and want to work more closely together, I have been low-key consulting for over a year based on my work with The Economy Tracker. Honestly, that’s been a lot of fun as it allows me to merge my old career and working experience with my economic and market analysis.
Most importantly, remember that there is ALWAYS a light at the end of the tunnel. Once we get through this, there’s likely to be some more great prosperity in front of us.
Go have yourself a monumental 2025. You don’t need the economy’s permission to do so.
Click the Leave a comment button if you have any questions or comments, or need something clarified. Don’t be shy. The main point here is to improve constantly. Questions and comments help us both and tells me what you are interested in learning/hearing more about.
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