Here's the Deal - May 19, 2025

Economy: In early Recessionary Phase (Not necessarily a recession, yet.)

Market Cycle: Bull Market

_{Week 20 of 52 for 2025: 38.46% of the way through 2025}

Weekly Note:

One of the reasons I love studying markets and the economy is because once you truly understand how the system works, it becomes much easier to spot who actually gets it and who’s just confidently spreading nonsense. This past week offered another perfect example.

The April inflation data came in, CPI on Tuesday and PPI on Thursday, and it showed inflation rates continued to decline through April.

Last week in Here’s the Deal, I mentioned that I anticipated a lower inflation print:

The truth is, that was intentional because I expected the usual wave of misinformed political commentary to follow any good inflation data. Right on cue, it arrived.

Now, I don’t watch cable news anymore, regardless of the network, because frankly, it does more to rot people’s brains and pushes divisiveness than inform them. But I don’t need to watch it to know what’s being pushed. I can tell by the conversations I have and the social media posts I see from people parroting talking points that don’t line up with reality.

Take this example from a post I saw stated in a few different ways:

“They said tariffs would cause inflation.
Then we implemented tariffs.
Then inflation hit a 5-year low.”

While the words are technically factual for this moment in time, lending credence to the flawed logic, it is another example of a classic spurious correlation. It sounds right on the surface, which is why some people could gravitate towards that explanation. Especially if it’s the answer you want to be true to fit your bias.

But that’s not how the economy works.

Why? Because the U.S. economy is a $29 trillion machine. It doesn’t respond instantly. It takes months, sometimes quarters, for policies like tariffs to work their way through the system.

We’ve seen this same misunderstanding recently. Back when the Fed paused hiking interest rates while inflation was still hot, people were screaming that the Fed needed to keep raising to get inflation under control. What they didn’t understand is that rate hikes don’t work like flipping a switch, as they take time to ripple through the economy. The same principle applies here with tariffs.

Yet, many of the same voices who misunderstood that back then are making the same mistake now by arguing that because inflation came down in April, tariffs must not be inflationary. It’s as if they think economic policies hit the economy like electricity, instant and immediate once the switch is flipped.

As I continue to point out; the past few years have given us a front-row seat to separate those who really understand how markets and the economy function from those who just pretend they do but speak with absolute confidence. Even as they repeatedly continue to be proven wrong.

The cold hard truth is that if you care about building a better financial future for yourself and those of your loved ones, then you’ve got a choice:

You can stay loyal to a political ideology and let it shape your understanding of the economy...

Or, you can use that same time and energy to study how the system actually works and use that knowledge to your advantage.

One path leads to clarity, fulfillment, and happiness.

The other leads to division, anger, and hate.

The choice is yours.

But let’s be perfectly honest, both sides are just as guilty and continue to morph into the worst parts of the other side which they hate the most.

It’s like Tony Robbins has stated for decades, “Where your focus goes, energy flows.”

Are you focusing on hate and divisiveness masquerading as righteousness? Or, are you focusing on creating a better future for those you care about instead of the wealth accumulation of politicians who have repeatedly shown through their actions that they believe you are expendable?

Inflation Came in Softer. But the Fed Still Can’t Cut.

As stated earlier, inflation came in softer than expected for April. As great as that is, don’t expect the Federal Reserve to continue cutting rates just yet. They’re holding off to assess the full impact of the new tariffs, which take time to work their way through the economy.

WalMart Raising Prices Due to Tariffs

Walmart, the biggest retailer in the world and arguably the most influential price-setter, is raising prices. The company said tariffs are driving up costs, and it plans to hike prices across a wide range of goods starting this month and continuing into the summer.

When Walmart raises prices, it gives every other retailer permission to do the same.

How did President Trump respond? As expected by now.

He first blamed the company for responding rationally to the consequences of his own policy and for being a profitable and successful company. Which is odd, because he always talks about how great it is to make a lot of money. But then again, this is a typical response from someone in damage-control mode who does not understand that a retail store like WalMart, as big as it is, has a net margin of only 2.75%. Meaning there’s not a lot of room to incur additional costs without raising prices.

Unfortunately, it didn’t end there…

As he went on to say “I’ll be watching, and so will your customers!!”

And we will be watching you and any attempted authoritarian overreach.

After all, this is the United States of America. We don’t do kings or despots in this country.

Beyond the headlines and erratic reaction from the president, this signals something deeper. We're more than likely entering a period of shrinking profit margins for corporate America. That’s one of the warning signs we’ve been watching closely for signs of an impending recession.

Foreclosures Tick Up in Q1 2025. But No, It’s Not 2008

Foreclosures rose in the first quarter of 2025. And while that may sound alarming at first, let’s keep some perspective: foreclosure rates are still near historic lows.

So no, this isn’t the start of another housing market collapse.

Yes, we’ve all heard the crowd warning of a housing crash every year since 2013. But today’s housing market is far more stable than it was in the lead-up to the 2008 crisis, thanks to major regulatory changes that followed the Great Financial Crisis (GFC). Lending standards are tighter, mortgage quality is higher, and speculative excess is much more limited.

That said, this uptick in foreclosures is meaningful. It’s another sign that the U.S. economy is in an Economic Slowdown and is moving steadily toward a Recession.

Worried about crashing home prices? Don’t be.

Back in the 2000s, by this point in the credit cycle, home prices had already been falling for nearly two years, and foreclosures were spiking fast. That’s not what we’re seeing today.

This current rise is more of a yellow flag than a red one. It's not panic time, but it is confirmation that the broader economy is continuing to slow beneath the surface.

UnitedHealth Group Under Fire Again: CEO Shuffle and Medicare Fraud Investigation

UnitedHealth Group $UNH ( ▲ 2.15% ) is back in the spotlight, and again it is not for good reasons.

The company has ousted its current CEO and brought back a former executive to steady the ship amid growing turmoil. The move comes as new investigations into potential Medicare fraud is now underway.

This isn’t a minor issue. The scope and scale of the investigation could carry even more legal and financial consequences for the rightfully battered company.

Since the shocking murder of Brian Thompson in Manhattan on December 4, 2024 (covered here at some length as the story unfolded), shares of $UNH have plunged more than 50%. That incident and the questions surrounding it cast a long shadow over the company, and now, with a renewed fraud probe and executive shakeup, confidence may continue to erode further.

For investors and industry watchers alike, this is shaping up to be one of the most important healthcare stories of the coming year or so.

Moody’s Downgrades US Credit Rating

On Friday, Moody’s downgraded the U.S. credit rating from Aaa to Aa1.

With this move, Moody’s joins Fitch, which downgraded the U.S. in August 2023, and S&P Global, which made a similar move all the way back in August 2011.

Moody’s cited several long-standing, and worsening, fiscal and political issues as the reason for the downgrade:

Rising Federal Debt and Deficits
U.S. government debt has ballooned over the past decade, now exceeding $36 trillion. Deficits currently sit at 6.4% of GDP and are projected to climb to nearly 9% by 2035. These levels are far above those of other top-rated countries.

Surging Interest Payments
Interest costs on that debt are rising faster than the economy is growing, eating up more and more of the federal budget. This makes the debt harder to manage and increases the risk of fiscal instability.

Political Gridlock
Moody’s sharply criticized both political parties for failing to enact lasting fiscal reforms. Ongoing dysfunction and polarization in Washington have made it nearly impossible to address the structural causes of rising deficits.

Policy Risks That Add to the Problem
Extending the 2017 tax cuts, increasing federal spending, and other proposed policies could add trillions more to the national debt over the next decade, further weakening the fiscal picture.

Lagging Behind Peers
Compared to other highly rated countries, the U.S. now has much higher debt-to-gdp and interest burdens, which erodes its relative credit strength.

Moody’s did acknowledge the U.S. still has important credit advantages due to the massive and resilient economy, as well as the US Dollar’s role as the world’s currency.

This week in tariffs.

A lot of news came out on the trade war front this week, including a win for the Trump Administration. So much so, that it necessitates it’s own post due to size constraints.

That post will go out later today or tomorrow, and may need to become a norm due to increasing activity.

Markets:

News of the 90day cool down period between the US and China sent stocks surging into the new week, in a classic gap and go. The good news was exactly what markets needed to rip higher and further confirm the end of the correction.

Look for markets to use the Moody’s downgrade as an opportunity to take a breather in the coming week or two, before resuming the uptrend.

$SPY ( ▲ 0.5% ) S&P 500:

Look for support between $575 - $565. Then we could easily get back to the highs and possibly move even higher, with $585 acting as possible resistance along the way. Should price fail to get above and/or hold $585 after resuming back up, keep your eyes out for a new twist (more than likely from the trade war front) which could send markets back down further.

But that is not what I expect to happen at this point in time. Should something change, you will read about it here.

$DIA ( ▲ 0.94% ) Dow Jones Industrial Average:

$QQQ ( ▲ 0.34% ) Nasdaq:

$IWM ( ▲ 0.03% ) Russell 2000 (Small Caps):

Looking to $200ish for support.

Significant Economic Data from the previous week:

Economic Data to watch this week:

Quote of the Week:

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