That Didn't Take Long: Post-Fed Stock Rally Dies, Crash Resumes Right on Course

Some market pundits said today that the market’s “correction” was nearly over, and the old bull will rise from the street and get back to bellowing again. Given that the market remains more overpriced than at most of its high points in history and that the major troubles ahead of it, such as tariffs, rising inflation, layoffs and the US debt, have barely begun to unfold, I think that is an insane position to hold; and I’m joined today by a couple of significant voices who believe, as I do, that the big trouble has not even begun to hit stocks. All that has hit so far is the premonitions of the trouble that is yet to come this year.

Powell put gone kaput already

I didn’t predict a market correction for this year. I predicted a crash, and I am nowhere near backing off from that. There is certainly more market failure to come than all that we have already seen. I’ll let these other two voices speak of some of the reasons why; but, first, let’s look at how quickly the rally that was attempted after Powell spoke following the Fed’s policy-setting meeting this week splatted onto the sidewalk. The lack of any strength or courage behind the attempt at a rally once the market got an obviously intentional breath of fresh air from Powell, as I explained yesterday, speaks volumes about the market’s effete condition. (See: “Burn-it-All-Down Powell Claims Inflation Will be Transitory and Promises to Increase it with More Easing!”)

Equities erased earlier gains. Not only does sentiment remain fragile just a week after the S&P 500 slipped into a correction, the market is set for a big test on Friday. That’s when an estimated $4.5 trillion of options contracts expire in an event ominously known as triple witching that often stokes volatility. In late hours, FedEx Corp. — an economic barometer — sank after cutting its profit outlook. Micron Technology Inc. gave an upbeat sales forecast. Nike Inc.’s results surpassed analysts’ expectations.

“While the bottom of the recent correction is likely in, we probably haven’t seen the end of volatility,” said Daniel Skelly, head of Morgan Stanley’s Wealth Management Market Research & Strategy Team. “Policy uncertainty hasn’t disappeared, and the market remains sensitive to sentiment shifts.”

Au contraire on that bottom, Sport. You’re not even close to feeling the pavement. While Skelly acknowledges that the sentiment that would drive rallies is sketchy, investors haven’t seen anything yet. Hardly any of Trump’s proposed tariffs have actually gone into effect. Remember, most of Trump’s tariffs that so abruptly shook the market were withdrawn within 24 hours of when they were imposed, so the market sighed in relief. However, the nations threatened with tariffs raised their own and kept them in place, clearly showing they are going to stand resolute in fighting Trump’s tariffs with their own. That means the Trump Tariffs are going to come back on in April. Inflation has only begun to rise, yet there hasn’t been enough time for the price impact of tariffs to have even begun!

Meanwhile, many of those government job cuts have been, in a number of cases, reversed by the courts; but not permanently. Trump will press on to the Supreme Court, which seems to lean his way, or may simply take a different tack on the same cuts. For example, where courts have said Elon Musk doesn’t have the power to fire; that must be done by the actual heads of departments, Trump can simply turn around and order his department heads to make those same firings … or do other firings that are not so mindlessly enacted that will accomplish the same amount of government reduction but without the maniacal Musk misfires and rehires.

“We will go up and down as policy uncertainty continues,” Michael Rosen, chief investment officer at Angeles Investments, said in an interview at Bloomberg headquarters in New York. “Investor sentiment is going to be very volatile, and that will be reflected in the market.”

And, yet, yesterday’s rally fell flat on its face today, even though the Fed threw some sugar-rich apples to the market by practically eliminating the QT of US Treasuries and by showing the Fed’s FOMC voting members anticipate more rate cuts and with Powell pulling his old badly beaten up rabbit back out of his moth-eaten hat by telling investors that inflation is “transitory” again. With all of that, yesterday’s rally didn’t even last a day. So, expect a lot more down than up because most of the news isn’t going to be pretty.

On top of all that, the financial news today was actually benign. Home sales came in surprisingly solid. Jobless claims only rose a little because the DOGE cuts are still barely registering. (Up only 2,000 from the prior week.) Layoffs remained low. Yet, the post-Powell meeting fell flat anyway.

Nevertheless, a measure of bearish sentiment came in today for the fourth straight week with market bears above 55%, which it has never done. Some would say that, by itself, is a contrarian reason to jump back into stocks, but I’d say “not when the actual bad news hasn’t even happened yet, and there is so much of it to come.” (I’ll explain why below.) Besides, while a measure of 58% is high and four weeks in a row above 55% is unheard of, that 58% still leaves a good number of investors who need to become truly terrified before this deep boy is going to be over. Go long when nearly everyone feels like a bear, not when a little over half do.

The kind of shaky sentiment talked about in those quotes takes bad news on the chin and goes down to the floor. It’s the way stock-market waterfalls are made, and we haven’t had any of those yet, though we’ve gone down some fun chutes for those who like to get their shorts wet on some profitable and thrilling plunges.

Therefore, what is all this “volatile sentiment” going to do when it actually comes up against some adversity that is more than just Trump talk?

What do you suppose happens to stocks when Trump’s tariffs get real on April 2nd, and nations immediately impose another round of promised retaliatory tariffs as they have said they will?

Just ask Moses

Now let’s go to a couple of market big names who see the darkness ahead much like I do … and see through there murkiness of the present.

Danny Moses joins me (though he doesn’t know he’s joining me) in the video below in saying the market is still priced quite richly:

Being short the overall market at 21.5 times forward earnings with everything going on doesn’t seem like a big risk in my opinion…. I think the market is expensive, and I think there is a change in the world in economic order in how people view the US market….

The market may look like it can rally based on where it has come from; but, on an absolute basis, I think the market is still expensive….

Taking a contrarian investment position from those 58% of investors who are bears doesn’t make sense when the market is still so expensive. It’s after the crash has taken the market down to where many bargains are found and everyone is scared to death that you jump back into the water. Right now, being bearish is exactly the mojo that does take markets down.

I think we are underestimating the effects to the economy of the cuts we are making to government and what that might mean to the knock-on effects to the economy.

For sure, Many of those cuts have been reversed; all the rest have only just begun, and there has been nowhere near enough time for the knock-on effects to begin, as I described in my Deeper Dive on this subject. We are in the early, early stages of these cuts and the dominoes that fall after. I don’t think the market is being at all realistic about any of that. Not even close. Investor’s heads are still swimming in hopium; and Moses sees this the same way.

Those government cuts, he says, will put a dent in government revenue, and

… when your debt-to-GDP is over 120%, you really can’t make a mistake, so I think we are being overly optimistic in how this is going to play out. I think you’re going to hear, when first-quarter earnings are reported, that there is a market slowdown potentially and a hit to consumer confidence, which you’ve already seen, which I don’t think is priced into the markets.

Moses feels AI is already fully priced into the market, so there won’t be anymore lift from AI in the near future (unless another big breakthrough is announced that pulls up one particular stock, but in general it’s priced in). On the other hand, the market has not fully priced in the impact of government cuts and doesn’t seem to realize how significant all of that will be to the economy.

One of the nation’s biggest bond guys sees recession

Bond guru Jeffrey Gundlach, CEO of DoubleLine Capital, sees another painful period of volatility on the horizon with a heightened risk of a recession. Gundlach has lowered his positions in leveraged funds to the lowest they have ever been in the company’s history.

“I do think the chance of recession is higher than most people believe. I actually think it’s higher than 50% coming in the next few quarters,” Gundlach said.

For me, the market crash and a deep recession will go hand in hand, each helping to add to the downward vortex we’re going to feel. While Gundlach places the signs of recession as pointing to an event that will start months from now, I say it has already begun and that makes it 100% certain in my mind; but I don’t like to wait around for others to realize things just to feel safe before I lay out what is coming.

“It’s probably time to pull the trigger for real on dollar-based investors diversifying away from simply United States investing. And I think that’s going to be a long-term trend.”

We got a microcosm view of how this plays out today

We got our first example of how the government cuts are going to impact the stock market today. Another one of the things I laid out in my predictions was that all the stoppage of payments on government contracts was going to impact the general economy through the labor market as companies that don’t get paid start firing people, and it is going to impact stocks.

Here is a snippet of what I wrote in those predictions for paying subscribers that I haven’t shared with free subscribers until now. I share it now so you can see how this is already going exactly as predicted, yet only in the very earliest stage of it all:

We’re not just talking the loss of tens of thousands or maybe hundreds of thousands of government workers, all going on unemployment, but also the loss of hundreds of thousands of employees who work for government contractors. Then you have mass deportations, which will open up jobs for some of those displaced workers, but probably not in regions where they live or not at anywhere near the pay they have built their household budgets around.

On top of that, when you deport hundreds of thousands of cheap laborers, you have no idea what entire production lines (or crop harvests) might have to be shut down due to lack of sufficient labor because you cannot possibly find enough replacement employees or increase salaries and, hence, prices enough to get all the replacement employees you need in time to avoid shutdowns. Beyond that point, no one can have any idea how shutdowns in the first tier of production lines will impact other producers who are dependent on essential parts from the lines that just went down, causing those secondary producers to shut down. (Anyone remember supply-chain problems?) Even the producers have no idea what is coming. Since it’s all happening by surprise daily, they don’t know who will get hit with the deportations first….

Multiply that a thousand times over to encompass all the business contracts with all agencies that are being stopped or seriously rolled back, and it can suddenly swell up to be an enormous number of layoffs….

I have no idea how many contractors will fall with [those government agencies] and how many subcontractors will fall alongside the contractors and how many service companies that provide lunches, uniforms, whatever to those hundreds of thousands of employees might also shut down along with the companies that serve them. There is simply no way of knowing where the last domino falls in this kind of broad destruction.

I laid out a lot more about how those contractors will get hit and how that will play through the economy and said it would take a month or two to even begin to see that. Well, here we are. We have had barely that much time for it to begin to show, yet today we read in the news that one of those big government contractors saw its stock get clobbered today because of the cuts:

Accenture is DOGE’s first corporate casualty as shares dive on warning that contracts will be cut

…the consulting firm said efforts to tighten federal spending have begun to weigh on its revenues.

Shares tumbled 7.3% after Accenture’s chief executive officer said in a fiscal second-quarter earnings call that the company’s Federal Services business has lost contracts with the U.S. government after recent reviews.

Now multiply that impact on one company’s stock by the thousands of government contractors and suppliers that will begin reporting the same thing in the months ahead just from the loss of government contracts, which doesn’t include any of the government employees that get fired and their impact on the general economy. What happens to the stock market as this same scenario plays out again, and again, and again, relentlessly, to each company’s stock as they give such reports? That IS coming. It is the inevitable direct effect of so many contracts and orders being cut as agencies that do the hiring and buying are gutted.

“Federal represented approximately 8% of our global revenue and 16% of our Americas revenue in FY 2024. As you know, the new administration has a clear goal to run the federal government more efficiently. During this process, many new procurement actions have slowed, which is negatively impacting our sales and revenue,” chief executive Julie Spellman Sweet said in the Thursday call to several Wall Street analysts.

Accenture is among the first of the U.S. corporate giants to get hit by the Trump administration’s so-called Department of Government Efficiency.

So, their stock went down nearly 8% to reprice for their global revenue dropping 8%. Hundreds to thousands will have to reprice the same way. To make that impact to stocks even worse, Accenture doesn’t even know yet how many more of its government contracts will be shut down. This was just round one.

“While we continue to believe our work for federal clients is mission-critical, we anticipate ongoing uncertainty as the government’s priorities evolve and these assessments unfold,” Sweet said.

There are many, MANY more individual company stories like this that will hit market reports over the year in an endless dribble that reprices stocks down one company at a time; but the dribble becomes a roar as more and more companies start showing up with that news for their own business at the same time. Each one takes down a stock on the exchange. You get the momentum of all that going, and then the momentum, itself, adds to all those individual 7% moves all over the market, and that becomes the great flush of fear about the whole economy going down throughout all of this that sends the market over a spectacular waterfall.

We’ve never seen anything like this wholesale shutdown of agencies and loss of contractors with their contractors. Covid was for one month. These cuts are for years to come, and all of that will hit stocks before all the unemployment plays through to the general economy when all of those consumers spend less. That effect will take down the stock market more generally as a natural response to the major slowdown in economic growth that will be stripped away by the all those unemployed government workers and fired employees of government contractors, cutting way back on their spending at companies that don’t even have government contracts.

This gives you the general sense of what is coming, but I laid out the full sweeping panorama of these dominoes in that Deeper Dive from early February, which is immediately accessible if you become a paying subscriber. When you see the sweep of how all the dominoes have to crash into each other, you will understand why I am predicting with certainty a history-making market crash and a very deep recession.

I would bet this website and my future economic writing on it if I could find anyone to take up the other side of that bet with something of equal value.

You ain’t seen nothing yet.