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April 30, 2025

Markets Sell Off on Negative GDP Report

After six consecutive trading days in positive territory which cumulatively led to an approximately 8% total return, the S&P 500 Index retreated today, down over 1% in mid-day trading.

Investors were spooked after the Bureau of Economic Analysis reported negative GDP growth in the first quarter of this year, the worst reading since early 2022.

Despite the recent recovery, markets remain on edge. No investor wants to see a shrinking economy. It is not surprising that stocks would react badly to a negative headline GDP number.

But is the economic outlook really that bleak?

We wrote earlier today about gold, which, despite extremely strong recent performance, we continue to favor as a portfolio hedge on stock market volatility. (Read the full report here: Understanding the Gold Price.)

Caution is always warranted, and investors should look to protect themselves with hedge assets like gold. But when it comes to the broader economic outlook, stock market investors need to process information carefully.

The financial media is always keen to amplify bad news, if only for ratings. This is probably truer now than ever, given partisan and ideological opposition to the administration.

Today’s GDP report, which showed -0.3% growth in the first quarter, was primarily influenced by the statistical impact of an uptick in imports as businesses and consumers prepared for tariffs.

(Source: Bureau of Economic Analysis)

Declining government expenditures also contributed modestly to the marginally negative GDP result.

In the footnotes to the report, the BEA actually pointed to lower defense department expenditures (which could be related to lower spending associated with Ukraine).

Economists subtract imports from GDP calculations to prevent double counting, but this can lead to noise in the data that may have to be addressed in subsequent revisions.

The subtraction of imports in the first quarter accounted for more than the entirety of the negative GDP result, given that consumer spending and investment were decidedly positive.

We would argue that investors are better off focusing on spending and investment, the core drivers of economic activity, versus areas that are more difficult to measure.  

There’s a lot of weird numbers in this data. The bottom line is that underlying measures of future growth are pretty good. - Stephen Miran, Chair of the Council of Economic Advisors (4/30/2025)

Real-time indicators

As investors have learned from all the severe revisions to the employment reports that took place in 2024, backward-looking calculations by government economists are not always reliable, to say the least.

When we form opinions about the condition of the broader economy, we tend to prioritize direct feedback from private sector participants. Many of them have informational advantage.

Visa (V), for example, is the largest credit card network in the world (outside of China). When it comes to consumer spending patterns, V essentially sees everything.

On a conference call last night after the close, in connection with a strong earnings report, V offered very interesting, and perhaps surprising, comments about consumer spending.

Halfway through our fiscal year, consumer spending has been resilient and strong, but there is much uncertainty. Focusing on the U.S. in Q2 and through April 21, we have not seen any signs of overall consumer spending weakening. While spending growth differs among consumer spend bands, with the most affluent growing the fastest, all spend bands remain resilient and consistent with past quarters. Within spend categories, there are some select areas, such as in travel with airlines and lodging where growth has decelerated but overall discretionary and non-discretionary spend remains strong. Outside the US, we see similar stable trends. - Ryan McInerney, Visa CEO (4/29/2025)

Tariffs and inflation

Inflation is another area where investors are well-served focusing on what companies are saying, rather than economists (or potentially politically motivated pundits on television).

We note with interest that Rolex, the luxury watchmaker, is increasing U.S. retail prices by 3% in response to 10% tariffs on Switzerland.

Financial media has emphasized recent consumer sentiment reports (coming out of the University of Michigan, for example) which point to inflation expectations as high as 7% in the coming year as a result of Trump’s tariff policies.

What we find interesting about the Rolex announcement is, first, it offers evidence that tariffs have a muted impact on final retail prices.

The cost of importing wholesale goods is only one variable that determines the ultimate price to consumers, who are also paying for marketing, distribution and corporate overhead, among other things.

In the case of Rolex, we see how a 10% tariff translates into a much smaller 3% surcharge on this imported product.

It is also worth mentioning that Rolex has historically implemented 4% to 7% price hikes on its watches, even in the absence of tariffs. This was never covered as an economic catastrophe.

While Trump’s tariff policies are unquestionably disruptive, the U.S. economy and the U.S. consumer is also highly resilient. We encourage investors with a long time horizon to stay focused on what businesses are saying and not get too distracted by eye-catching headlines.

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