From Moody's credit downgrade to a disappointing Treasury auction to trillion-dollar spending bills, this week highlighted the growing tension between fiscal policy and market realities. As bond investors demand higher rates, the question becomes: are we witnessing the early stages of a fiscal reckoning?
For the first time in over a century, the United States lacks a top-tier credit rating from any major agency. All three—S&P, Fitch, and Moody's—have now downgraded America's debt. While these headlines may sound alarming, historical data shows that markets are forward-looking and recovery patterns have been consistent for patient, diversified investors.
Markets rose this week despite mixed economic data. The S&P 500 gained ground as investors responded positively to a significant reduction in U.S.-China tariffs, where duties on Chinese imports dropped from 145% to 30% while China reduced tariffs on U.S. goods from 125% to 10%. Inflation continued its moderating trend with April's CPI at 2.31%, though core categories remained stubborn. Producer prices posted their largest monthly decline since 2020, falling 0.47%, potentially signaling weakening demand. Consumer sentiment hit near-record lows, and homebuilder confidence declined sharply despite local markets showing resilience. For investors, this environment of softening inflation alongside policy uncertainty and fragile consumer confidence suggests maintaining diversification and vigilance as prudent strategies in the near term.
On April 9, 2025, the S&P 500 soared 9.52%—its biggest one-day gain since 2008. This post puts the rally in historical context, compares past spikes, and looks at what followed. While the move was dramatic, questions about trade, policy, and volatility still loom large.
In this post, we review key recession indicators, including yield curve inversions, the Sahm Rule, and the Leading Economic Index (LEI), all of which have recently signaled potential economic challenges ahead. While these indicators have reliably predicted recessions in the past, they do not guarantee one will occur. We also discuss how fiscal policy, like government deficit spending, can influence the economy and potentially delay or mitigate a downturn. As recession risks rise, understanding these indicators is crucial for navigating future economic conditions.
As election season heats up, many are pondering how the outcomes might impact the economy. Historically, Congress has wielded significant influence over economic conditions—perhaps even more than the President. An analysis of the 12 recessions since World War II reveals a compelling pattern: most were preceded by inflationary pressures that led the Federal Reserve to tighten monetary policy, often during periods of single-party control in Congress. The Typical Recession Cycle: 1. Inflationary Pressures Build Up: Triggered by strong economic growth, government deficit spending, or external shocks. 2. Federal Reserve Intervenes: The Fed raises interest rates to cool inflation. 3. Economic Activity Slows: Higher rates reduce spending and investment. 4. Recession Ensues: The economy contracts, leading to higher unemployment. The Role of Congressional Control: • Single-Party Control: When one party controls both houses, increased government spending can occur with less opposition, potentially leading to inflation. • Divided Government: Offers more checks and balances, making rapid policy shifts less likely and promoting economic stability. Notably, 83% of recessions began when a single party controlled Congress. This suggests that unified control may contribute to conditions that lead to economic downturns. The Exception—COVID-19 Recession: Unlike previous recessions caused by economic factors, the COVID-19 recession was due to a global health crisis. However, the government’s massive deficit spending in response to the pandemic mirrored the inflation-inducing policies seen in other recessions. Looking Ahead: As we face potential economic headwinds, understanding the historical interplay between election outcomes and economic cycles is crucial. If current trends of deficit spending continue amidst elevated interest rates, we may see a rise in inflation or even another recession. Voters should consider how congressional control can impact not just policy but the broader economy. Conclusion: While predicting the future is challenging, historical patterns offer valuable insights. A divided Congress may provide the checks and balances necessary for economic stability, whereas single-party control has often preceded inflation and subsequent recessions. As elections approach, the economic implications of congressional control are more relevant than ever.