Over the past week, financial markets have been rocked by extreme volatility, wiping out trillions in market capitalization. From Wednesday to Friday, the S&P 500 suffered an unprecedented decline, losing $100 billion per trading hour, totaling a staggering $2 trillion loss. Then, in a shocking after-hours move, S&P 500 futures shed another $120 billion within minutes.
The Timeline Leading to the Crash
The S&P 500 hit a bottom on March 13th at 5505, coinciding with a lull in President Trump's tariff-related headlines. In the following weeks, with little mention of new tariffs, the market rebounded, climbing 5% by March 26th. However, this rally quickly unraveled as news of a 25% auto tariff emerged. The market had built a false sense of stability, assuming that tariff uncertainty had peaked—a crucial misjudgment that led to last week's violent decline.
This miscalculation resulted in a classic bull trap. Risk appetite surged, but the fragile foundation collapsed under the weight of renewed economic uncertainty. Sentiment became highly polarized, sending shockwaves throughout the economy.
Signs of Panic in Trade and Inflation
The US trade deficit data further underscores the chaos. The nation posted a two-month trade deficit of $301 billion—a level rarely seen, let alone doubled from historical norms. This reflects producers scrambling to front-run anticipated tariff hikes.
On Friday, inflation data added fuel to the fire. Core PCE inflation for February surged to an annual rate of 2.8%, up from the previously reported 2.6%. Even more concerning, January's Core PCE was revised upward to 2.7%. As a result, 1-month annualized Core PCE inflation now sits at an alarming 4.5%, with 1, 3, and 6-month annualized headline and core PCE inflation running above 3%.
Adding to inflation fears, the University of Michigan's long-term inflation expectations data revealed a surge to 4.1%, the highest level since 1993. This shift signals growing concerns among businesses and consumers about persistent price pressures.
GDP Contraction and the Fed’s Dilemma
Markets were further rattled by GDPNow data released on Friday. Following the inflation data, the Atlanta Fed slashed its Q1 2025 GDP growth estimate to -0.5%. When factoring in gold imports and exports, this estimate drops further to -2.8%. This marks the first expected GDP contraction since 2022, a clear warning sign of economic slowdown.
Why is this significant? A declining economy combined with rising inflation puts the Federal Reserve in an impossible position. The central bank has maintained a "higher for longer" stance on interest rates to combat inflation. However, with growth now turning negative, the Fed faces a lose-lose scenario:
Cutting rates could reignite inflationary pressures.
Keeping rates high could exacerbate economic contraction, potentially triggering a deeper recession.
The Emergence of Stagflation
The latest data confirms that the US economy is now entering a stagflationary period—characterized by slowing growth and rising inflation. This toxic combination is notoriously difficult to manage, leaving policymakers with few good options.
Markets will now be watching closely for the Fed’s next move. Will they prioritize combating inflation or attempt to prevent further economic contraction? Either choice carries significant risks, making the coming months crucial for investors, businesses, and policymakers alike.
As uncertainty looms, one thing is clear—the markets are on edge, and the road ahead looks anything but smooth.
Disclaimer: The information provided in this article is for informational purposes only and does not constitute financial, investment, or trading advice. Market conditions are subject to change, and readers should conduct their own research or consult with a financial professional before making any investment decisions. The author and Sensexnifty.com are not responsible for any financial losses incurred based on the information presented.