Wall St. Becomes a Perilous Trek as Tariffs, Debt & Economic Woes Pile Up
The S&P 500 enters official correction territory, and the selloff was long overdue, but at least lower entry points are emerging.
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The markets resumed their selloff on Thursday. The Nasdaq led the way, losing nearly 2% on the day. The Dow was off 1.3%, while the S&P 500 declined 1.4% and is now in an "official" correction. Changing tariff policies are getting the lion’s share of the blame for this sharp and sudden pull back, as well as dominating the financial headlines. However, as I have stated here consistently over the past year, a reckoning in the markets and for the economy was long overdue for several key reasons.
The average consumer has been tapped for some time. The higher-end income segment has held up well, thanks partly to large gains in equity and real estate holdings. The scourge of inflation, however, has taken its toll on most consumers, who have lost buying power over the past few years. They have record credit card debt, low savings levels and rising auto loan delinquencies. Housing affordability remains near historical lows. Given the consumer makes up nearly 70% of U.S. economic activity, this is becoming an increasing headwind for the economy.
Second, the overall market was significantly overbought after two years of 20% plus annual rallies, powered largely by the AI revolution. Equities had become beyond stretched from a valuation perspective. By many measures, such as price to sales and market cap to gross domestic product ratios, stocks were trading significantly more dearly than at the end of the Internet Boom. The market was simply overdue for a significant pullback. Even with the recent decline, equities are still trading near the top of their range using many valuation metrics.
Finally, the massive and fast-growing federal debt was a problem that investors could ignore for just so long. While the financial press continues to obsess around tariffs and their impacts, the February federal deficit was posted last week with little fanfare. It showed that the federal deficit for the first five months of the government’s fiscal year was $1.15 trillion. That is up substantially from the pace of fiscal 2024 when the federal government ran a fiscal deficit of $1.83 trillion. This was nearly 7% of GDP, and during an economic expansion.
February showed the government had just over $600 billion worth of outlays during the short month. Just over twice what the government took in as revenues. Obviously, this is huge issue and has been for some time. With the country’s debt to GDP ratio near the highest level in the nation’s history, this is obviously unsustainable. The spending cuts or federal revenue increases or both needed to get the deficit back down to a manageable level will slow economic growth in the short term. The transition is also likely to be a considerable headwind for the markets.
In summary, changing tariffs are going to have significant impact if fully implemented and they will continue to generate headlines and market volatility. But investors should keep in mind they are not the only key challenges equities, and the economy currently are facing.
Ending the trading week on a more optimistic note. The recent sharp decline in equities does now finally offer lower entry points to put new cash to work incrementally. In Monday’s column, I will highlight a couple of new positions in my portfolio in companies that should see little impact from tariff changes and that are reasonably valued now.
At the time of publication, Jensen had no position in publication mentioned.
