Recent economic data has sparked concerns about slowing US growth, leading investors to bet on more interest rate cuts from the Federal Reserve (Fed) this year. Markets are now pricing in three Fed rate cuts of 0.25% each for 2025, with growing debate over whether the first cut could come as soon as May. A week ago, markets saw a 75% chance of no change in May; now, that has dropped to 50%. Treasury bond yields have fallen this year in response to growth concerns, with the 10-year yield down 0.36% and the 2-year yield down 0.29%.

Lower interest rates typically boost stocks by reducing borrowing costs for businesses and consumers. However, the market reaction has been negative. The S&P 500 recently hit its lowest level since before the election, and small-cap stocks, which usually benefit from rate cuts, have performed even worse. The Russell 2000 index (representing small US companies) is down almost 6% this year, compared to the S&P 500’s 2.0% decline.

The issue? Rate cuts driven by weak economic data are not seen as positive for equity investors. Recent reports showed consumer spending declined for the first time in nearly two years, retail sales dropped sharply, and housing activity remains sluggish. Manufacturing and construction data also missed expectations, pushing down forecasts for economic growth and indicating the economy is losing momentum to start the year.

Adding to concerns, some analysts suggest that Trump’s tariff policies could further slow the economy. Businesses and consumers may need to adjust to higher prices and product shortages as supply chains adjust. Many economists have lowered their growth expectations for the first quarter in response. This has fueled speculation that the Fed might cut rates to prevent a downturn, even though inflation remains above the Fed’s 2% target and downward progress has stalled.

The recent decline in stock prices and bond yields seems to be an adjustment to the prospect of slower economic growth, policy uncertainty, and potentially sticky inflation. As is usually the case, the financial markets quickly reflect investor expectations and outlook. The current environment reflects more caution by investors and less appetite for risk. Arguably, the fears facing the financial markets may already be priced into stocks and bonds. Changing a portfolio allocation at this point may not provide investors with protection from current concerns. The market and current policies are fluid and ever changing. Timing portfolio adjustments is very difficult and adds stress and uncertainty during an already trying time. Market forces will send clear signals to the White House and policymakers, and this may help soften or modify policies that are not well received by investors. We have already seen tariffs pushed out or adjusted in response to falling stock prices. Market pressure has generated responses from President Trump, who has historically considered the stock as a gauge of his performance.

Disclosure: This commentary represents the opinions of Aldrich Wealth based on current market conditions as of March 6, 2025, and is for informational purposes only and should not be considered investment advice. Past performance is not indicative of future results. Any forward-looking statements or discussions of market trends are subject to change.