Week of March 10, 2025

Key Points for the Week

• The stock market is down from its recent highs.
• Tariffs remain a worry, but Friday’s jobs numbers were strong.

Current Trends & News is a weekly financial recap curated by SPC Financial®’s team of wealth management and tax-integrated advisors.* We monitor and explore the intricacies of the financial world and share insights into market developments.

Economic Update

The stock market does not provide level returns. In some years returns are positive, and in other years returns are negative. After two years, of stellar returns from U.S. stocks, the market has been experiencing a pull back. Therefore, the stock market was primed and ready to correct. The economy is strong by most economic measures and these measures are still in place. The equity (stock) markets are now pricing in the expectation that the impact from the actions of this Administration will be severe and prolonged, thus impacting future corporate earnings.

This fear of what might happen to the economy in the United States and globally has led to increased market volatility and, at times, panic selling of equities. This selling is running ahead of the current economy as the market is pricing in various scenarios of potential future impact from this Administration.

Prior to this drop, markets were at or near all-time highs. The overall economic outlook remains strong but the apparent erratic movements, of the current Administration, have created uncertainty. Financial Markets do not like uncertainty.

Last week, U.S. financial markets were volatile.

“A roller-coaster week for markets ended on that same note, with stocks whipsawing as traders tried to make sense of a myriad of headlines around the economy, tariffs, and geopolitical developments. Just minutes after a slide that drove the S&P 500 down over 1 [percent], the gauge staged an ‘oversold bounce’ as Federal Reserve Chair Jerome Powell said the economy is fine. The Nasdaq 100 briefly breached the threshold of a correction. Bonds fell.”

Rita Nazareth, Bloomberg

In contrast, some European stock markets moved higher last week. “President Donald Trump’s drive to shake up the world order is creating some surprising winners. As the U.S. stock market reels from tariff fears, German stocks are surging because the government has committed to almost $1 trillion in new spending on infrastructure and defense…The sea change in policy is creating a giddy optimism in German markets not seen in decades.”

Brian Swint, Barron’s

The divergence in performance brings home the value of a diversified portfolio.

When markets are volatile, remain confident and resist the impulse to react to short-term performance. The assets in your portfolio were carefully chosen to help you reach your financial goals. Unless your goals and risk tolerance have changed, your asset allocation should not. The weight of evidence accumulated over previous decades supports the idea that staying the course – holding a well-allocated and diversified portfolio and rebalancing periodically – is a sound way to pursue long-term financial goals.

This Week in the Markets

The S&P 500 had a late week bounce on Friday last week, but still fell more than 3% for the week for the worst week for the index since early September 2024. The worries are growing, from a potentially slowing economy, to a growing and more aggressive trade war, to worries over Washington policy. The bottom line is headlines are driving much of the volatility and investors are worried.

Early year weakness in a post-election year is not abnormal, early year weakness after a strong prior year is not abnormal, and early year weakness the past 20 years has not been abnormal either.

It is important to remember what happened two years ago this month, as the 16th largest bank in the United States went under virtually overnight and many expected the Regional Bank Crisis to spark a new bear market, but it did not. The S&P 500 finished that month higher. Then five years ago we shut down our economy during a once-a-century pandemic. Stocks eventually fell 34% in five weeks, but then bottomed on March 23, 2020 and finished with a solid 16% gain in 2020. Then there was the Great Financial Crisis, which bottomed on March 9, 2009 after a down 56% generational bear market. There is volatility in the stock market now, but there have been many other times this has happened and many of them have taken place in this very month, but all were major lows as well.

This is officially the first 5% mild correction of 2025, something that even the best years tend to see, and no reason to become pessimistic. In fact, we had two 5% mild corrections last year plus a 10% correction, and one mild correction in 2023, but both years that gained more than 20% by the end of the year.

The Economy

The February employment report was a bit mixed, and it did not tell us much that is new about the US economy.

The economy created 151,000 jobs in February, consistent with expectations. Monthly data can be noisy and that is why a 3-month average is useful. That is running at a strong 200,000 pace right now, thanks to a massive 323,000 gain in December, which will roll off next month. Job growth is likely running between 140,000 – 180,000. That is not bad, and slightly ahead of what is needed to keep up with population growth.

Job growth in the construction industry, which typically foreshadows broad weakness in the labor market, is at cycle highs and up 2.1% from a year ago. That is a slower growth pace than a year ago, but nothing close to what would be concerning. This is especially notable, given the drag on residential investment from high interest rates.

The US economy grew at an annualized pace of almost 3% (2.9% to be exact) over the last two years, after adjusting for inflation—faster than the 2010-2019 pace of 2.4%. Even as recently as six weeks ago, it seemed like the market narrative, and sentiment, was expecting a rerun of this pace: stocks had risen to record highs and more tellingly, interest rates were really elevated as investors expected the Federal Reserve (Fed) to hold rates “higher for longer” amid a strong economy. In fact, there was a notion that the Fed even “got it wrong” by cutting rates as much as they did (they cut policy rates 1%-point from September through December). I will note that we were decidedly not in this camp. We are optimistic about growth, and markets in 2025, but not overly so. As we wrote in our 2025 Outlook, we thought (and still think) interest rates are still too restrictive and a drag on cyclical areas of the economy (like housing and investment) and that tariffs are a threat that could create volatility (which is being manifested now).

Cue to last week, and there has been a big swing in sentiment. It is not just the uncertainty from tariffs. Economic data has been coming in on the softer side (but not recessionary), and the February payroll data confirm the slowdown.

The unemployment rate rose to 4.1%, though that’s lower than historical averages. Even the prime-age (25-54) employment-population ratio, which corrects for an aging population and definitional issues around who is unemployed, pulled back from 80.7% to 80.5%, but that is still higher than anything we saw over the last two expansion cycles (2003 – 2007 and 2009 – 2019). Other data show that layoffs remain low, but it is getting a little harder to find a job.

Also, the composition of job growth tells us that we are not getting the cyclical acceleration needed to take GDP growth above 2.5%. About 49% of jobs created in February were in health care and social assistance (+63,000) and government (+11,000). The DOGE is likely making its presence felt at the federal level, where jobs fell by 10,000, but this was more than offset by net job creation of 21,000 at the state and local level. (State/local government employment is almost 8-9 times larger than at the federal level.)

The support from non-cyclical areas of the economy in February continues a theme we have seen over the past six months to a year. Over the past six months, payrolls have grown by 1.14 million, of which health care and social assistance accounted for 39% (+444,000) and government accounted for another 16% (+185,000). The cyclical economy was not completely dead, with another 26% of jobs created within the leisure and hospitality, transportation/warehousing, and construction sectors. But these were partly offset by a loss of 35,000 jobs in manufacturing and 18,000 lost jobs in professional and business services.

Ultimately, what matters for the economy is aggregate income growth across all workers in the economy, since that is what drives consumption. That is a combination of employment growth (running ok), wage growth (strong), and hours worked (weak). Aggregate income growth has slowed to a 2.8% annualized pace over the past three months. That is an alarming slowdown on the face of it, but it is partly driven by a drop in hours worked due to weather-related issues over the past two months, which will likely reverse soon.

Of course, the question on everyone’s mind is tariffs, and it is difficult to gauge the precise impact of these tariffs. For one thing, we do not even know what the tariffs will be. But therein lies the uncertainty.

The largest, and perhaps adverse, impact of the tariff overhang is that it keeps the Fed waiting on the sidelines for longer before continuing with rate cuts. Elevated rates are clearly hurting parts of the economy, but the Fed does not look ready to provide relief anytime soon—they are going to want to wait to see what happens with tariffs. The Fed would likely act sooner rather than later if they thought the labor market was deteriorating, but the February data tells us that is not the case. That takes away any urgency for further rate cuts. There is also a risk that the big drivers of recent employment gains (health care and state/local governments) start to see headwinds amid federal government cuts that result in less money being sent to the states (including for Medicaid, particularly in rural areas).

Gross Domestic Product

The Atlanta Federal Reserve’s Real GDP “Nowcast” for Q1 dropped from 2.3% to -1.5%. The GDP Nowcast is a running estimate of the GDP growth in the current quarter and is continually updated as data are released. However, as this latest batch of data just showed, the nowcast has a big flaw, which gets to why the GDP growth tracker collapsed.

A Surge in Imports Drives the Nowcast Lower

The nowcast plunge was triggered by the advanced estimate of goods trade data in January. But it is worth recapping the components of GDP first.

• Household consumption: 68% of GDP
• Nonresidential (business) investment: 14%
• Residential investment (housing): 4%
• Net exports (exports minus imports): -3%
• Federal government spending: 6%
• State/local government spending: 11%

Net exports are negative because the US imports more than it exports (a lot more). On the face of it, it looks like imports are a “drag” on GDP, but that is not accurate (or how you should think about it). If a consumer or business buys something that is manufactured abroad (like a TV), it does not add to US gross “domestic” product. So, imports are just subtracting all the goods and services households and businesses buy from abroad, since it does not add to domestic economic activity. In fact, if imports surge, that means there is a lot of domestic demand, which will show up in higher consumption/investment and/or an inventory buildup (as businesses stock up in anticipation of higher demand in the future, or for another reason, like higher tariffs).

That brings us to the January trade data. Imports surged in January by 12% (you can see this in the chart below), whereas exports rose just 2%. It would be one thing if imports and exports were mostly equal, but imports run 1.5 – 2 times larger than exports, and so the trade deficit (net exports) widened by 26% in January. Over the last four months, imports surged 15% while exports fell 1%, leading to a whopping 40% increase in the trade deficit.

There are a few things happening.

One, the dollar has appreciated by over 8% between October and January (partly in anticipation of tariffs), making exports more expensive and imports cheaper. We saw a similar dynamic in 2017 – 2019 when the dollar was also elevated. An elevated dollar is a drag on US exports, and the manufacturing industry. And lower exports are a drag on US economic growth.

Two, there has been a surge in gold imports. But this should ultimately not impact GDP, as gold is typically not widely consumed or used for production.

Three, there is a good bit of tariff frontrunning. This is not unexpected given the tariff rhetoric (and we also saw a 10% increase in tariffs on Chinese goods). The threat of 25% tariffs on Canadian and Mexican goods also have not gone away, let alone tariffs on several other trading partners.

Imports do not count toward GDP, since it is offset by a corresponding increase in household or business consumption/investment or inventories. The problem is that we got data showing an import surge, but other data have not shown a corresponding surge in household consumption (in fact, we got the opposite), or business investment. That leaves an inventory buildup, but we’ve yet to get that data.

The Atlanta Fed is now estimating a whopping -3.7% contribution from net exports to Q1 GDP growth. Here is the complete breakdown of how they get to -1.5% GDP growth for Q1:

• Household consumption: +0.87%-points (pp)
• Business investment: +0.56 pp
• Housing: +0.06 pp
• Government spending (federal + state/local): +0.34 pp
• Net exports (exports minus imports): -3.70 pp
• Change in private inventories: +0.40 pp

Now, this is just one month of data (January) and there are two more to go. We are also likely to see a big jump in inventories when that data comes out. That should send the nowcast into positive territory.

Keep in mind that the tariff frontrunning is likely not over and we could see the impact continue into February—especially as companies look to import more steel, aluminum, and even cars and car parts, before new tariffs on these items are imposed.

There are also valid reasons for concern once you look beyond the import data. GDP growth is likely to slow down considerably from the 3% annualized pace we have seen over the past 2 years. Real GDP growth is likely to clock in anywhere between 1.5-2.3% in Q1. I already mentioned the headwind to manufacturing exports from a strong dollar. But we saw a pullback in consumption too.

Is It Time to Worry About Consumption?

The GDP nowcast estimates a 0.87%-point contribution from consumption to real GDP growth in Q1. That is just about half the contribution we saw in 2023 and 2024. After adjusting for inflation, personal consumption fell 0.5% in January (equivalent to 5.5% on an annualized basis). This was driven by a 18.4% annualized decline in goods spending, as Americans bought fewer cars, furnishings, appliances, and recreational goods in January. There are several “one off” reasons for this, including the fires in California and unseasonably cold weather in the South—factors which suggest we could see a rebound in February and March.

At the same time, we saw real services spending rise at an annualized pace of just 1% in January, the slowest pace we have seen in a year. There has been a bit of loss of momentum recently as well. Services spending was up 2.5% annualized over the last 3 months, and 2.9% over the last 12 months. Goods spending can be volatile, but what holds steady is services spending (which makes up 46% of GDP). It’s too early to tell whether the January services spending data is a blip. We saw the same drop in January 2024, but services consumption picked up and eventually rose 2.9% in 2024, well above the 2018-2019 average of 2.1%.

The good news is that income growth, which is what has driven spending for the last two years, was strong in January. Disposable income surged 0.9%, which translates to an annualized pace of 11.1%. This was mostly because social security benefits rose by 2.8%, as the government adjusted them higher for inflation. Looking at the last three months, disposable income has risen at an annualized pace of 6.7%. If you exclude the impact of government transfers (including Social Security, Medicare, and Medicaid) and things like dividend and interest income, you are left with employee compensation, and that is also strong. Employee compensation rose at an annualized pace of 5.4% in January and was up 5.7% annualized over the past three months. These numbers are well ahead of the pace of inflation. Headline inflation as measured by the Fed’s favored metric, the Personal Consumption Expenditures (PCE) Index, rose 2.9% annualized over the last three months.

Gross Domestic Product

GDP, or gross domestic product, is the value of all goods and services produced in the United States.

“The percentage that GDP grew (or shrank) from one period to another is an important way for Americans to gauge how their economy is doing. The United States' GDP is also watched around the world as an economic barometer.”

Bureau of Economic Analysis.

At the end of January, the Atlanta Fed’s GDPNow model estimated the United States economy would expand by 2.9 percent in the first quarter of 2025. Since then, the estimate has moved sharply lower. Last week, GDPNow projected the U.S. economy will shrink in the first quarter, contracting by 2.4 percent.

It is a remarkable swing that captured a lot of media attention.

How should investors weight this bit of unofficial data? Probably not too heavily because GDPNow can be volatile.

“These estimates are published regularly as new economic data is released…There were 11 [releases] in February alone. Friday's [February 28’s] shock reading of -1.5% was led by a record-high $153 billion trade deficit in January, most likely as firms front-loaded imports ahead of tariffs, and Monday's decline was driven by soft manufacturing activity. There is every chance -2.8% turns into a positive reading in a few weeks.”

Jamie McGeever, Reuters

GDP growth estimate 1Q2025 annualized (after inflation)	Atlanta Fed GDPNow	New York Fed Staff Nowcast	Dallas Fed Weekly Economic Index
Week of January 26	2.9%	2.9%	2.4%
February 2	3.9	3.1	2.5
February 9	2.3	3.0	2.5
February 16	2.3	3.0	2.4
February 23	-1.5	2.9	2.2
March 2	-2.4	2.7	NA

Other Federal Reserve Banks also have economic growth forecasts. These models also have been moving lower, but they have not shot into negative territory like GDPNow. The New York Nowcast dropped from an estimated 2.94 to an estimated 2.67 percent for the first quarter, and the Dallas Fed’s Weekly Economic Index moved from 2.4 percent to 2.2 percent.

The average absolute error of final GDPNow forecasts is 0.77 percentage points. The final forecast is expected in April.

A Reminder About Scams

Scams usually start with a phone call, email, text, or another form of communication. The person typically claims to be from an agency or organization you know – or one that sounds like it might benefit you, such as the National Sweepstakes Bureau or a lottery.

The person may know your name and address. They may give you their official title or an identification number. No matter how official they seem, you can be confident it is a scam if the person contacting you:

• Indicates there is a problem with your benefits.
• Asks you to pay to receive a prize.
• Suggests that paying will increase the chance of winning.
• Requests financial information, such as a bank account or credit card number.
• Pressures you to act immediately.
• Tells you to pay using a specific method, such as a gift card or cryptocurrency.

If this happens, remember that the Social Security Administration, the Internal Revenue Service, Medicare, and your bank do not call, email, or text to ask for money or personal information. They do not demand that you pay immediately, and they do not accept payment by gift card, prepaid debit card, cryptocurrency, or another untraceable form of money transfer.

When you suspect a scam:

• Hang up or close the message. Do not respond in any way.
• Remain calm.
• Think back over the call. Write down any personal information you may have inadvertently shared.
• Report the scam. Contact the Federal Trade Commission at ReportFraud.ftc.gov. You may also want to report the incident to your state’s attorney general or your local consumer protection agency.
• Share your knowledge. Talk with family, friends, and neighbors about your experience so they know what to look out for.

When you receive a digital message, no matter how official it seems, do not click on any links. Do not give or confirm any personal information, including your name, birth date, phone number, address, email address, place of birth, driver’s license, passport, or Social Security numbers, bank or other account numbers, and PIN numbers.

Being skeptical can keep you safe. Remove yourself from the situation. Do not share information. If you feel anxious and need to confirm that it was a scam, contact the organization using a method provided on their official website.

IRS Urges Taxpayers to Not Fall Prey to “Ghost Tax Preparers”

A common problem seen during tax season, “ghost preparers” pop up to encourage taxpayers to take advantage of tax credits and benefits for which they do not qualify. These preparers can charge a large percentage fee of the refund or even steal the entire tax refund. After the tax return is prepared, these “ghost preparers” can simply disappear, leaving well-meaning taxpayers to deal with the consequences.

While most tax professionals offer quality service, these ghost preparers and other unscrupulous preparers try to take advantage of people and should be avoided at all costs. The IRS encourages people to use a trusted tax professional, and IRS.gov has important information to help people choose a reputable, accredited practitioner.

Warning Signs to Look Out For

Most tax return preparers provide honest, high-quality service. But some may cause harm through fraud, identity theft and other scams. Paid preparers must sign and include a valid preparer tax identification number (PTIN) on every tax return. A ghost preparer is someone who does not sign tax returns they prepare. These unethical tax return preparers should be avoided, especially if they refuse to sign a complete paper tax return or digital form when filing electronically.

Taxpayers are also encouraged to check the tax preparer’s credentials and qualifications to make sure they are capable of assisting with the taxpayer’s needs. The IRS offers resources for taxpayers to educate themselves on types of preparers, representation rights, as well as a Directory of Federal Tax Return Preparers with Credentials and Select Qualifications to help choose which tax preparer is the best fit.

Some of the warning signs of a bad preparer include:

• Shady fees. Taxpayers should always ask about service fees. Shady tax preparers can ask for a cash-only payment without providing a receipt. They are also known to base their fees on a percentage of the taxpayer’s refund.
• False income. Untrustworthy tax preparers may also invent false income to try to get their clients more tax credits or claim fake deductions to boost the size of the refund.
• Wrong bank account. Taxpayers should also be wary of a tax preparer attempting to convince them to deposit the taxpayer’s refund in their bank account rather than the taxpayer’s account.

Good preparers ask to see all relevant documents like receipts, records, and tax forms. They also ask questions to determine the client’s total income, deductions, tax credits and other items. Taxpayers should never hire a preparer who e-files a tax return using a pay stub instead of a Form W-2. This is also against IRS e-file rules.

Report Fraudulent Activity and Scams

The IRS highly encourages people to report tax return preparers who deliberately prepare improper returns and any activity that promotes improper and abusive tax schemes.

To report an abusive tax scheme or a tax return preparer, people should use the online Form 14242 – Report Suspected Abusive Tax Promotions or Preparers, or mail or fax a completed Form 14242 and any supporting material to the IRS Lead Development Center in the Office of Promoter Investigations.

Mail: Internal Revenue Service Lead Development Center MS7900 1973 N. Rulon White Blvd. Ogden, UT 84404 Fax: 877-477-9135

Alternatively, taxpayers and tax practitioners may send the information to the IRS Whistleblower Office for possible monetary award.

Maryland Budget Reconciliation Act (HB 352)

The Maryland Budget Reconciliation and Financing Act of 2025 (HB 352) will be heard this week, and it includes significant tax and financial changes that will impact businesses, individual taxpayers, and the broader economy. Below are several provisions from the bill.

• Individual Income Tax Increases: The proposed tax rate hikes, particularly with county increases, could result in combined rates nearing 9%, potentially driving residents and businesses to neighboring states.
• Marriage Penalty: Current filing thresholds create inequities for married taxpayers.
• Estate Tax Reduction: The proposal to reduce the estate tax exclusion from $5 million to $2 million would disproportionately impact small business owners, family farms, and middle-income households. This could force asset liquidation and drive wealthier individuals out of state.
• Itemized Deduction Removal: Eliminating itemized deductions without increasing the standard deduction to match federal levels would penalize taxpayers who rely on deductions for mortgage interest and charitable contributions.
• Combined Reporting for Corporations: The bill proposes new corporate tax compliance measures that would create significant administrative burdens for businesses and tax preparers.
• Retail Delivery Fee: This new tax on consumer deliveries acts as an additional sales tax burden.

How You Can Advocate

We encourage you to contact your state delegates and representatives to voice any concerns you may have about HB 352. Here is how:

1. Find Your Representatives: Use the Maryland General Assembly's Legislator Lookup to identify your elected officials.
2. Call or Email Them: Express your concerns, particularly about the estate tax reduction, income tax increases, and itemized deduction removal.
3. Talking Points:
4. "I am a Maryland tax professional, and I am concerned that HB 352, as currently written, will create significant financial burdens on Marylanders."
5. "The estate tax reduction will disproportionately impact small business owners and force many to relocate or sell assets."
6. "Eliminating itemized deductions without raising the standard deduction will harm taxpayers who rely on mortgage and charitable deductions."
7. "Businesses need more time to adjust to the combined reporting requirement to avoid administrative burdens."

If you have any questions about the bill and how it my impact you, please contact us.

Bitcoin

Bitcoin has taken a significant downturn recently, as the price has dropped 28% from its January highs and had a decline of almost 20% in a matter of days last week.

Did you Know? This Week in History

February 26, 1919: Grand Canyon is Designated a National Park

Located in northwestern Arizona, the Grand Canyon is the product of millions of years of excavation by the mighty Colorado River. The chasm runs exceptionally deep, dropping more than a mile into the earth, and is 15 miles across at its widest point. The canyon is home to more than 1,500 plant species and over 500 animal species, many of them endangered or unique to the area, and its steep, multi-colored walls tell the story of two billion years of Earth’s history.

In 1540, members of an expedition sent by the Spanish explorer Coronado became the first Europeans to discover the canyon—though because of its remoteness, the area was not further explored until 300 years later. American geologist John Wesley Powell, who popularized the term “Grand Canyon” in the 1870s, became the first person to lead a journey across the entire length of the gorge in 1869. The harrowing voyage was made in four rowboats.

In January 1908, U.S. President Theodore Roosevelt designated more than 800,000 acres of the Grand Canyon a national monument. It took more than a decade for it to gain full national park status.

Weekly Focus

“We must hang together, or, most assuredly, we shall hang separately.”

Benjamin Franklin, American Polymath and Inventor

”Contrary to popular opinion, it is institutions, norms, and laws, not elections, that constitute a functioning democracy.”

M. Gessen, Russian and American Journalist and Author

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