Coming Crash In Stocks To Trigger The Next Recession? | Wolf Richter

In terms of level of risk, stretched valuations are a bigger concern than the economy right now

After embracing the "no landing narrative" last year and later unleashing animal spirits after the Presidential election that drove stocks to record levels of euphoria, the national mood has turned substantially more dour.

Suddenly, the headlines are filled with fears of recession.

The post-COVID higher cost of living and the uncertainty caused by the new Administration's policies has many fearing for their household budgets, their portfolios, and their jobs.

Are things really this bad?

After all, the economy is still growing, inflation has moderated (mostly), and unemployment remains low.

When there are so many crosscurrents as there are today, it's prudent to seek the counsel of those who take a cold and calculated look at the data, to see what "is" vs what our biases may want us to see.

Which is why we're fortunate to speak with macro analyst Wolf Richter of WolfStreet.com, who will share with us what the charts he regularly compiles are telling him about the true state of today's economy & markets.

Wolf doesn’t see the economy as the bigger risk right now. Instead, he worries that a major market correction — the timing of which is difficult to estimate — is what will cause the next recession.

For the details why, click here or on the video below:

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Adam’s Notes: Wolf Richter (recorded 3.20.25)

EXECUTIVE SUMMARY:

• The U.S. economy is navigating heightened uncertainty due to disruptive policy changes by the Trump administration, particularly around trade and fiscal direction. Wolf emphasizes that while the approach may be chaotic, addressing the long-standing twin deficits, the fiscal deficit and the trade deficit in manufactured goods, is long overdue. The trade deficit, which has historically benefited other countries, and the fiscal deficit, which floods the global economy with trillions of dollars in demand, are finally being confronted. Although these shifts are creating near-term volatility and geopolitical friction, Wolf believes these structural changes could ultimately realign U.S. economic fundamentals for the better.

• Despite increasing fears of recession, Wolf does not see a clear-cut economic contraction ahead in 2025 but acknowledges greater unpredictability than in past years. He anticipates that Q1 GDP could be slightly negative due to a surge in imports (which are subtracted from GDP) and seasonal adjustments distorting weak January–February consumer spending. However, barring a major shock, his base case aligns with the Federal Reserve’s forecast of 1.7% real GDP growth for the year, below the 15-year average of 2%, but still positive. He describes the economic outlook as one of “slower than average growth,” not contraction.

• The U.S. stock market remains dangerously overvalued and vulnerable to a significant correction due to inflated valuations and lingering liquidity from past monetary stimulus. Wolf points out that