Wednesday's release of the nation's first-quarter Gross Domestic Product stunned investors since it was the first quarterly decline in the economy since 2022. Looking beyond the headline number, however, the results told a different story.

 

At first blush, the minus-0.3 percent decline in GDP sent stocks lower, with the NASDAQ down 3 percent on the day at one point. The culprit behind the numbers was a 41.3 percent rise in imported goods and services. If we import more than we export, as we did substantially in the quarter, the economy's growth decreases.

 

The surge in imports began after the November 2024 elections and continues today. These higher imports result from President Trump's intention to levy tariffs on all our trading partners. U.S. corporations have been scrambling to get ahead of these tariffs by ordering products before the deadline. Trump's second 90-day reprieve has only heightened the trend toward importing even more goods from overseas.

 

The decline in GDP  was also the first substantive instance where the "hard" economic data matched so-called soft data. Over the last three months, the University of Michigan sentiment numbers, the AAII Institutional investor surveys, and consumer confidence polls have indicated that investors and consumers are growing steadily more negative about the economy and market.

 

The president was quick to cast the blame for the disappointment on the prior administration, although, to my knowledge, neither Biden nor candidate Harris had any intention of waging a tariff war. He also indicated that if the economy weakens in the second quarter, he will blame Biden again.

 

However, if the president had just looked under the GDP hood, he might not have been so quick to duck the blame. If you strip out the import data, the economy grew by 3 percent. Private business investment was up while government spending fell. Business equipment and machinery investment rose 22.5 percent. That is a powerful upswing.

 

The Trump administration could have taken credit for that result. Trump promised that when Congress passes his "One Big Beautiful Bill," he would give business and factory investment a 100 percent immediate depreciation write-off retroactive to Jan. 20, 2025. That means the cost of these purchases would be tax-deductible in year one instead of being stretched out and deducted over the life of the equipment. How much of those purchases were related to avoiding tariffs and how much was a genuine willingness to invest in America will likely show up in the data in the months ahead.

 

In addition, the Fed's favorite inflation indicator, the Personal Consumption Expenditures Price Index (PCE), came in weaker than expected, indicating that inflation has not increased, at least for now. I expect April's Consumer Price Index to be weaker still.

 

Jobs, on the other hand, is a different story. U.S. jobless claims rose to a nine-month high, but Friday's non-farm payroll employment report drew the market's attention. The number beat estimates, coming in at 177,000 jobs gained compared to 138,000 expected. That helped markets rise to top off a good week of gains.

 

Some on Wall Street are betting that a weaker economy, steady inflation, and the threat of rising unemployment might be a sufficiently worrisome combination for the Fed to alter its wait-and-see point of view. The bond market has upped its probability that the Fed will cut rates at least four times this year. It could provide cover for Fed Chair Jerome Powell to give in to the president's continued pressure to cut interest rates now instead of waiting. 

 

Last week, the market could continue to rally, providing quarterly earnings came in better than expected. Fortunately, that is what happened. We have made progress. I could see 5,700-5,750 before a pullback occurs on the S&P 500 Index. That is a mere 50-100 points away.

 

In the meantime, my warning to wait before chasing gold proved to be the correct call. I expected at least a 10 percent correction in the yellow metal, which would take the price down to $3,150.

 

For markets to continue their recovery, we need to see the following. A peace deal, the tariffs disappear, China and the U.S. come to a trade agreement, the Fed cut rates, and/or no recession. That's a long list, so let's say just two of the above need to happen for further gains.

 

A June Fed cut is a good bet, and China said on Friday that it is at least willing to talk to the U.S. on trade at this point. A Russia/Ukraine deal and/or a U.S. recession remain a 50/50 bet. I am afraid some tariffs are here to stay. If none of the above occur, we remain in a 500-point trading range (5,200-5,700) on the S&P 500. Until these issues are solved, we remain Trump-dependent. 

 

Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.