The Market Outlook for the Week Ahead, or Full Speed Ahead Towards the Cliff

Remember the cult classic 1955 coming-of-age drama, Rebel Without a Cause?

In it, two teenagers are racing stolen cars towards a cliff on the California coast, playing chicken to see who jumps out first. James Dean makes it out safely, but gang leader Corey Allen gets a belt on his leather jacket stuck on a door handle and plunges to his death.

I feel like we are playing a similar game of chicken these days, but it is with the stock market. Will we get out in time? Or will we suffer financial destruction?

It now seems like the stock market exchanged a trade war for artificial intelligence, abruptly on April 9, and it has been straight up ever since. Markets have endured two once-in-50-year events two months in a row, down 20% and then up 20%.

The moves have blown up every trading model out there, including my own, which depends heavily on historical data. To make matters worse, almost the entire rally took place in a mere 60 trading minutes, mostly at market openings. The last time the market recovered more than 15% in less than six weeks was in 1982 when the inflation rate was backing off 20% and the Unemployment Rate was 10.8%.

How High Can Stocks Go into a Recession?

One of my concierge clients asked an excellent question last week during one of our regular conversations. When is this damn recession going to show?

Store shelves are about to go empty. Economic data points for the next six months will be awful. The budget deficit is about to double, pushing interest rates up. How many shares do you want to buy after the sharpest move up in history?

The answer is very simple. The recession is already here, but investors won’t be able to see it until June at the earliest.

Once Trump won the election in November, companies rushed to build up inventories, in some cases as much as a year’s worth, to beat the tariffs. It was no secret that higher tariffs were coming, but no one imagined by how much. That created an order surge from November to February. Those orders then went to zero from March onward, just before the new tariffs hit. That collapse in business starts showing up in the numbers in June, only 12 days away.

As for prices, they will remain stable as long as companies can sell out of existing pre-tariff inventories. That is why the April Consumer Price Index remained at a modest 2.3%. When those inventories run out, starting from June onward, depending on the product, the next new price will be 30% higher as the new Chinese tariffs are passed on.

This is why businesses and consumers everywhere are bracing for an inflation surge. And once inflation starts, only a recession can reign it in with dried up demand.

You can be excused for being confused, befuddled, and disoriented. The administration has pursued two diametrically opposed economic policies at the same time. On the one hand, an aggressive trade war and budget cutting were hugely market negative, delivering an instant 20% selloff in stock market indexes, and 50% haircuts in single stocks.

On the other hand, a trade war retreat and tax cuts are very market-positive, as the 20% rally amply demonstrated. The net for all of this has no real movement in shares in 2025, but ballistic stress levels, increased heart attacks, and diminished retirement funds.

If we aren’t in a recession right now, then the bond market will certainly give us one by year’s end. The implications of the House budget proposals are nothing less than cataclysmic, which promises to add more than $4 trillion to the national debt in four years through massive tax cuts.

That includes chopping Medicaid for the 75 million poorest Americans. Add that to the $2 trillion a year budget deficit we are currently running, and the National Debt will soar from $36 trillion to $52 trillion by 2028.

This explains Moddy’s downgrade of the US debt from triple A to double Aa1. It was our last triple-A rating to go after Standard & Poor’s and Fitch’s posted similar downgrades in earlier years. But then, I guess Trump is used to downgrades.

If you haven’t noticed the dire consequences of such a move, the bond market has. In the last week, yields for ten-year US Treasury bonds have soared from 3.9% to 4.58%. A 5.00% yield is generally expected to cause blood to flow in the stock market and accelerate any recessions already in progress.

Inflationary tariffs will tie the Fed’s hands on interest rate cuts for another year, or at least until a new Fed governor is appointed. It turns out you can’t have your cake and eat it too, said Marie Antoinette, whom I once dated.

If you’re not already confused enough, look at the actions of individual investors. They are giving some of the worst Consumer Confidence readings in the 73-year history of the data series, with 7.3% one-year inflation expectations, almost double the current level. And then they are running out and buying the most volatile high-growth technology stocks with both hands?

Could these possibly be the same people?

Of course, not all stocks are going up, and elections have consequences. RFK’s appointment as Secretary of Health and Human Services has made biotech and health care a no-go area, possibly for four years. Look no further than UnitedHealth (UNH), which is down 65% since the election and is now under criminal investigation for Medicare fraud.

The trade war has claimed another victim with Foot Locker (FL), which imported almost all of its products from China. As the father of five children, my preschool visits there became an annual family ritual. It seemed my kids never stopped growing. They just got taken over by Dicks Sporting Goods (DKS), after a post-election 56% share price collapse.

By threatening default on US Treasury bonds, restraints on capital outflows from the US, and withholding taxes on interest payments to foreign investors, Trump has upended a global capital system that raised American standards of living for 80 years. Foreign investors now view the American glass as half empty rather than half full, they currently own $20 billion worth of all American equities, or about 20% of the total.

Supply chains are now being put through a meat grinder and will lead to lower global economic growth and stability, including in the US. A globalized trading system lifted one billion people out of poverty and turned them into consumers of American goods. Everything from Levi’s to iPhones is now at risk. The end result could be single-digit stock market returns for a decade, or maybe none at all.

I hate to sound like a Debbie Downer with such a negative outlook. But I was bullish from 2009 until 2025. Conservatives call me a liberal, and liberals accuse me of being a conservative, so I get flak from all sides. At the end of the day, I am just a humble numbers guy, and numbers don’t lie. When they give me a firm direction, I go full speed ahead. This is why I am 80% RISK OFF and 20% cash going into the next market top.

By the way, James Dean was killed in a head-on collision on a narrow highway near Paso Robles, California, while driving his Porsche 550 Spyder at 80 miles per hour after Rebel Without a Cause was released.

As for me, I won’t be wearing any leather jackets this summer.

My May performance dropped by -2.26%. That takes us to a year-to-date profit of +26.12% so far in 2025. My trailing one-year return stands at a high +83.96%. That takes my average annualized return to +50.47% and my performance since inception to +778.01%.

It has been another wild week in the market. I stopped out of short positions in (NVDA) and (TSLA). What was I thinking when the stocks were being wildly over-promoted in Saudi Arabia? But the profits were offset by longs in these names that I had earlier taken profits in. I took profits in longs on (JPM) and (GLD). I establish a new short in (MSTR), doubling my exposure there. That leaves me 80% RISK OFF

in (GLD), (SPY), (MSTR), (AAPL), (QQQ), and (TLT), and 20% cash.

Some 63 of my 70 round trips in 2023, or 90%, were profitable. Some 74 of 94 trades
were profitable in 2024, and several of those losses were really break-even. That is a success rate of +78.72%.

Try beating that anywhere.

James Dean

 

James Dean’s Porsche 550 Spyder – Don’t Let This Happen to You!

 

My Ten-Year View – A Reassessment

We have to substantially downsize our expectations of equity returns in view of the election outcome. My new American Golden Age, or the next Roaring Twenties, is now looking at multiple gale-force headwinds. The economy will completely stop decarbonizing. Technology innovation will slow. Trade wars will exact a high price. Inflation will return. The Dow Average will rise by 600% to 240,000 or more in the coming decade. The new America will be far more efficient and profitable than the old. My Dow 240,000 target has been pushed back to 2035.

On Monday, May 19, at 9:00 AM EST, the Conference Board Leading Economic Indicators are announced.

On Tuesday, May 20, at 7:55 AM, the Redbook Index of retail sales is released.

On Wednesday, May 21, at 9:30 AM, the final read for Q1 GDP is disclosed.

On Thursday, May 22, at 8:30 AM, the Weekly Jobless Claims are disclosed. We also get Existing Home Sales.

On Friday, May 23, at 7:30 AM, we get New Home Sales. At 1:00 PM, the Baker Hughes Rig Count is published.

Trump Caves on Most Chinese Demands, squeezing the shorts. You can only talk markets up for so long. Stock markets were already in the process of peaking out and are looking for the slightest excuse to dive. Chinese exports fell by 20% in April, setting off a supply chain disaster. How do you go from a 145% Chinese tariff to 80%, to 60%, to 30% in a week? The tax increase is still there, it’s just $100 billion instead of $1 trillion. The recession is still on. Getting China to agree is one thing, getting them to honor agreements is entirely another kettle of fish.

Consumer Sentiment Crashes, with the second-lowest reading in 73 years at 50.8. One-year inflation expectations are at 7.3%. The majority of the survey was completed before the U.S. and China announced a 90-day pause on most tariffs between the two countries.

Inflation comes in Cool at 2.3%, indicating that recession risks are rising. US inflation rose less than forecast in April, with the consumer price index increasing 0.2% from March, driven by tame prices for clothing and new cars. The report suggests that companies are absorbing some of the extra costs of higher tariffs, and consumers are cutting back on leisure and discretionary spending.

Coinbase Joins S&P 500 Index, taking the stock up 21%. It will replace credit card issuer Discover Financial, which is being acquired by Capital One. The move will be effective before trading begins on May 19. The move reflects S&P’s preference for adding news technology companies while dumping old economy ones.

Meta Delays Flagship Behemoth AI Product, taking the shares down 6%, as concerns about its capabilities rise. Company engineers are struggling to significantly improve the capabilities of their Behemoth large-language model, resulting in staff questions about whether improvements over earlier versions are significant enough to justify public release. Incremental improvements are shrinking, despite a planned $72 billion capital investment this year.

Retail Sales Crater, gaining 0.1% in April from March, the Census Bureau reported Thursday. Economists surveyed by FactSet had forecast that overall retail sales gained 0.2% month over month in April, a slowdown from a revised 1.7% surge in March. This is what the beginning of a recession looks like.

US Producer Prices unexpectedly declined in April by 0.5%, the weakest in five years, largely due to a slump in margins. The decline suggests companies are absorbing some of the hit from higher tariffs, rather than passing them on to consumers, who have seen only a modest impact so far. Yet another pre-recession indicator.

Weekly Jobless Claims Unchanged at 229,000. Claims have moved in a 205,000-243,000 range this year, consistent with a historically low level of layoffs. Companies have been hanging on to their workers, following difficulties finding labor during and after the COVID-19 pandemic. Trump’s on-and-off-again tariffs have created an uncertain economic environment, resulting in major companies from airlines to motor vehicle manufacturers pulling their 2025 financial forecasts.

Say Goodbye to the EV Tax Credit, long a major incentive for car buyers. Some details of the house tax bill are out. Now, automotive investors have two matters to consider: the possibility that electric-vehicle tax credits could vanish, and the potential for a new tax break on cars assembled in the U.S.. That’s a huge plus for Tesla, which prompted a major rally in the shares.

As for me, I have been known to occasionally overreach myself, and a trip to the bottom of the Grand Canyon a few years ago was a classic example.

I have done this trip many times before. Hike down the Kaibab Trail, follow the Colorado River for two miles, and then climb 5,000 feet back up the Bright Angel Trail for a total day trip of 27 miles.

I started early, carrying 36 pounds of water for myself and a companion in a big backpack. Near the bottom, there was a National Park Service sign stating that “Being Tired is Not a Reason to Call 911.” But I wasn’t worried.

The scenery was magnificent, the colors were brilliant, and each 1,000-foot descent revealed a new geologic age. As it was spring, the magnificent royal blue Colorado River was roaring with fresh snowmelt.

I took a cautious bath in the river and then began the long slog back to the south rim.

As the sun set, it was clear that we weren’t going to make it to the top. I was passed by a couple who RAN the entire route, who told me, “Better hurry up.” I realized that I had erred in calculating the sunset, it taking place an hour earlier in Arizona than in California in the same time zone.

By 8:00 PM, it was pitch dark, the trail had completely iced up, and it was 500 feet straight down over the side. I only had another 500 feet to go, but the batteries on my flashlight died. I resigned myself to spending the night on the cliff face in freezing temperatures.

Then I saw three flashlights in the distance. Some 30 minutes later, I was approached by three Austrian Boy Scouts in full dress uniform. I mentioned I was an American Scoutmaster and Eagle Scout (Adler Scout in German), and they offered to help us up.

I grabbed the belt of the last kid, who was a hefty six feet tall, my companion grabbed my belt, and they hauled us up in the darkness. We made it to the top, and I said, “Thank you”, giving them the international scout secret handshake.

It turned out that I wasn’t in as great shape as I thought. In fact, I hadn’t done the hike since I was a scout myself 30 years earlier. I spent three days recovering in the famed 1905 El Tovar Hotel, barely able to move.

As a treat, I took the steam-powered Grand Canyon Railway back to Flagstaff, where I picked up my plane. I then flew through the amazingly deep Grand Canyon on the way back to San Francisco.

Good Luck and Good Trading,

John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader