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Why This Recession Signal Is Ringing Alarm Bells

By Larry Benedict, editor, Trading With Larry Benedict

The new trade war is clouding the economic outlook.

Just over a month ago, President Trump announced – and then delayed – a round of tariffs against Mexico and Canada.

But this week, time ran out. On March 4, Trump stated that 25% tariffs would go into effect on imports from Canada and Mexico. China is seeing another 10% tariff too. That brings the total tariff on imports from China to 20%.

The average tariff rate is now the highest since the early 1940s when the U.S. was still struggling under the Great Depression.

And the affected countries have already announced their own retaliatory measures. That means the trade war is in full swing.

Of course, the Trump administration has already made noises about coming to a deal soon. But barring a complete reversal of the new tariffs, we’ll likely see more upsets ahead.

Even more concerning, there’s growing evidence that a recession may have already arrived.

So today, let’s look at what that means for us in the coming months…

Falling Growth

Even before tariffs went into effect, everyone was discussing the toll they would take on the economy.

We’ve seen the results in consumer sentiment surveys. In February, the Conference Board’s Consumer Confidence Index saw the largest monthly decline since 2021. There was a sharp increase in survey respondents mentioning tariffs.

Souring consumer moods are showing up in economic data too. Consumer spending dropped by 0.2% in January. It was the first decline in nearly two years and the biggest decline in four years.

Likewise, businesses were rushing to pre-buy imported goods before tariffs went live. That pushes net exports lower, which counts against GDP (because of a larger trade deficit).

The end result is that the economy may already be entering a recession.

Remember, a recession is a significant decline in economic activity lasting more than a few months.

The Federal Reserve’s Atlanta district maintains a closely followed measure of estimated GDP growth. It uses incoming economic data to create a real-time estimate of the economy’s growth rate. That estimate is plunging.

Take a look at the chart below:

(Click here to expand image)

The estimate for first-quarter GDP growth has plummeted to an annualized decline of 2.8%.

If that’s correct, it would be the first contraction in GDP since the second quarter of 2022.

That sets the stage for increasing volatility in the stock market ahead…

Look Out Below

Stocks are priced for perfection. The S&P 500 currently trades at a price-to-earnings (P/E) ratio of 21.9 based on expected earnings. That’s 30% higher than the long-term average.

The P/E ratio is a popular way to measure valuations. It can show whether a stock or index is over- or undervalued.

So the earnings outlook is critical to justifying the S&P’s current valuation.

But here’s the problem for investors…

During recessions, the S&P 500 has seen a 17% decline in earnings on average.

Contrast that with the 8.8% average decline across all earnings drawdowns going back to 1950.

In other words, a recession can have an outsized impact on corporate earnings. Plus, the S&P is susceptible to a large decline, considering current valuations.

It’s too soon to confirm a recession, of course. We need more time to know if this will be a sustained downturn.

That’s why we should pay close attention to where things go from here… and what future economic readings show.

And as traders, we should be ready to act.

Uncertainties like the ones we’re facing can tempt you to sit still and wait out the choppiness… yet if we’re set up to profit, we can see some impressive gains.

In fact, my readers have been doing just that over the past couple of weeks. In One Ticker Trader, we’ve enjoyed 40.6%, 40%, and 53% gains recently.

In The Opportunistic Trader, we’ve seen wins like 94.5%, 39.5%, 23%, 134.8%, and more…

So rest assured, even in the midst of a churning market, I’m here to help you maneuver. If you’d like to learn how we do it, you can go right here.

Happy Trading,

Larry Benedict
Editor, Trading With Larry Benedict