Stocks Tank as Recession Threat Grows, but Real Estate HASN’T Cracked

Dave:
What a week it was for the economy. The stock market had sharp declines. The tariff roller coaster just keeps speeding along. Consumers are getting spooked, but meanwhile, inflation is coming down. So today we’re going to dive into the busy, crazy confusing last week we just had in the economy. We’ll talk about the stock market, the housing market, and I’ll catch you up on what is actually important and what you should be paying attention. I’ll share with you how your investments and your businesses could be impacted by recent economic changes. And I’m also going to share with you a pretty bold move I personally made with my own portfolio.
Hey everyone, it’s Dave head of Real Estate investing at BiggerPockets back with another economic news and data update for you. Things are happening fast right now and we’re making sure that here on the market we’re getting you timely, accurate, and rational analysis on all the news that matters. Let’s jump into today’s recap of the crazy week. That was last week, and we’re going to do our best to make sense of it all. So let’s just start with the big news. The stock market was angry last week actually for the last couple of weeks, and we’re going to start here because it sort of frames a lot of the other things that are going on in the economy and helps make sense of what you should be thinking about and your own decision making. So first things first, the market has now reached correction territory and for a lot of last week we’re hovering around there for the s and p 500.
So we are in that sort of correction territory and I think notably the market is now also down over the last six months and it’s not like six months is some special number that has any significance. The only reason I’m saying that is because it goes back to before the election because if you were paying attention to the stock market, you probably noticed there was a very big post-election bounce to the equities markets. And now as we fast forward to the middle of March here, all of the gains that we saw after Trump’s election have now been given back. We’re actually a little bit below where we were pre-election, but for all intents and purposes we’re pretty much flat. This is coming out Monday morning. We’re recording this Friday afternoon, so things may have changed a little bit, but that’s where we’re, as of the end of the week that I’m actually recording this.
And notably, all of the major indexes are down the s and p 500, the Dow Jones, the nasdaq, they’re all down. The NASDAQ has definitely been hit the furthest because it has heavy weighting in stocks that are tech-focused and tech-focused equities have been hit pretty hard. You may have heard this term, the Magnificent seven. It’s basically seven exceptional growth stocks that have really outperformed the market over the last couple of years. And honestly, in a lot of ways they’ve been carrying a lot of the indexes. When you see the s and p or the NASDAQ go up, a lot of it is because of just these seven companies. If you don’t know who they are, it’s Meta or Facebook, apple, alphabet, Google’s parent company, Amazon, Microsoft, Tesla, and Nvidia. And all of those companies are down this year with the exception of meta, which is modestly up.
And so although the whole stock market is down, a lot of it is because these big high cap companies are starting to deflate. So that’s what actually happened. But let’s take a minute and ask ourselves why did this happen and what does it mean? Should you be selling? Is this going to impact real estate? Let’s turn to the implications of what’s happening in the stock market. We’ll start with the why. We’ve covered this a bit in other recent episodes, but it’s in my mind at least a combination of things going on. First and foremost is tariffs. We got to talk about them, we’ve covered them a bit, but we will talk about what’s happened recently, particularly the unpredictable nature that they’ve been rolled out. The second thing is consumer confidence. And this is a sneaky thing that I think a lot of people underestimate. Its importance, but it really matters for both the stock market and the real estate market.
So we’re going to talk about that. And then personally, I actually also think that there’s something else going on here that’s maybe a little bit less exciting. It’s not as sensational, but I do think it’s playing a big role here. So we’re going to talk about all three. We’re going to start with tariffs because the whiplash that’s going on back and forth I think is causing a lot of the most recent turmoil just at least in the last week because honestly, even for someone like me who reads the news, multiple economic news sources every single day, it’s pretty hard to keep up. Actually, the Wall Street Journal, if you have a subscription to the Wall Street Journal, they have a tracker of what’s happened in the last couple of days and they put out these timelines that are really nice visualizations. If you’re curious about what’s going on at any given point, recommend you check that out.
But the big picture here is that we still have a 25% import tariff on goods from Mexico and Canada. That took effect on March 4th, but there was an exception for energy products and those are just 10% tariffs. But after that, in the last week or so, the Trump administration did suspend the tariffs for automobiles. So that is not going to go into effect till at least April 2nd. And then there’s also been an exception or a carve out for other duty-free trade for any products or goods that fall under the US Mexico Canada agreement. There was also a short-term spat with the province of Ontario over electricity, but that was pulled back. So as of right now, the Mexico and Canada situation has been stable for a day or two. The situation with China has actually been stable over the last couple of weeks. We still have a 20% tariff on imports from China, but there were two other big things that happened this week.
One was that the Trump administration imposed a 25% tariff on all steel and aluminum imports. That is any company in the United States that is trying to import aluminum or steel is going to be charged that 25% tariff regardless of the country of origin. And then the last thing is that the European Union announced 50% imports on American whiskey motorcycles, motorboats, that’s going to start on April 1st and additional tariff beginning in mid April on other things like American chewing gum, poultry, soybeans, other sort of agricultural style products. And Trump in turn has said that he will retaliate against the European Union citing a potential 200% tariff on European alcohol like champagne and wine. So we’ve definitely seen that Trump is using tariffs as a negotiating tactic, but we’re also seeing the potential for a bigger trade war. This sort of tit for tat escalating tariffs, I do think is causing a lot of the fear that is coursing through the entire economy right now because people don’t really know what to expect.
And this is all still playing out, of course in very public fashion. But in regards to the economy and the stock market, and this is true whether you’re a fan of tariffs and think they’re going to help the economy long run or if you’re opposed to tariffs, the undeniable thing is that it’s creating a difficult and unpredictable business environment. Imagine if you’re an automaker or a construction worker or a retailer who sells imported goods from China. It is super hard to make decisions right now. You don’t know what your input costs are going to be from one day to the next. How could you possibly pay in your business? And business leaders don’t like this and neither do investors because if you think about people who are buying and selling stocks, they want to understand what import costs are going to be for any potential stock or company that they’re going to invest in. And because it’s so uncertain for the businesses, it becomes uncertain for the investors. And I do believe that’s probably the primary driver of the volatility that we’re seeing in the stock market right now. So that’s the first reason we’re seeing this economic fear and upheaval. I have two other things that I want to share with you, but first we’re going to take a quick break.
Welcome back to On the Market. We’re here recapping the crazy week in the economy. Last week we just talked about how tariffs are impacting the stock market and the broader economy. I have two other things to share with you before I get to one, what I’m doing with my own portfolio, and two, what you should be thinking about with your own investing. But let’s just talk quickly about a second cause that I think is a little bit overlooked, which is the state of the US consumer. And we talked a little bit about this last week about how consumer confidence has dropped significantly in recent months across a bunch of different measures. The shift from January to February was a pretty big drop. I think it was the biggest month over month drop that we’ve had in four years. Again, it’s just one month of data.
It’s not a trend just yet, but that does spook markets. And we also have some recent data that has sort of expanded on the increasing challenges that consumer face. And I want to remind everyone, the reason consumer spending and consumer confidence is so important is that it actually makes up about 70% of our GDP of our gross domestic product. That is what you and I are neighbors, are friends, consumers, what we spend makes up 70% of the entire economy of the United States. And I know a lot is made of how businesses spend money and how the government spend money that matters. But what matters way more is what consumers are thinking about and doing. And the data that has come out in the last few days has probably spooked markets a little bit more because it shows some weaknesses with American consumers. The big thing a lot of people react to, I don’t follow this that closely, but it does matter, is retail spending.
It’s basically people going to the stores, retail stores and spending money that has been down. Don’t get me wrong, it is not down that much, but it was the biggest drop we’ve had since March of 2023. So in about two years it’s not falling off a cliff. But as we’ve sort of discussed over the last couple of weeks, my personal belief is that investors and consumers everywhere right now are just super sensitive because there’s a lot of uncertainty going on and uncertainty causes sometimes outsized reactions to data. And I think that’s a little bit of what we’re seeing right here because this was just one month of data. But if the trend continues, I’ll certainly start to take it more seriously. But as a rule, one month, one piece of data doesn’t make a trend. And it’s better I think to be patient and just see what happens.
But it is a data point that I think the markets are reacting to. One thing I’ve been personally paying attention to is just savings rates because it really tells a lot about how much money people have to spend and how much is going to be injected back into the economy. And the Wall Street Journal actually came out with this really good graphic of this and it shows the American savings rate relative to pre pandemic level. So looking back to what was happening in 2019, you could see that during the pandemic things were sort of unnaturally high. So the first round of stimulus checks came out, the savings rate jumped to about 35% above where it was in 2019. That was pretty crazy. Second stimulus, it went to 20% above 2019 when the third stimulus check came out went to about 25%. Now we’re back down to about 3.4%.
To me, this is just sort of inevitable, right? Because without those stimulus checks, the savings rate never would’ve went that high. So seeing it come back to where it was around pre pandemic levels in my opinion, is just what will naturally happen. But when you take this information in conjunction with inflation and decline in consumer sentiment and increases on credit card defaults and car loan defaults, the whole picture is starting to feel like the American consumer is showing some weakness, right? Because a while we saw that Americans were able to bear the burden of inflation and higher interest rates because they had extra savings. They might not have been making enough money to cover this, but they could come out of savings to cover some of those unfortunate increases in costs. But now that savings rate, the amount that people have leftover to cover these ever increasing costs is depleted.
And to me that could spell some more trouble for American consumers in the coming months. And investors in the stock market are seeing this as well. They’re sort of downgrading a lot of retail players. We’re seeing a lot of retail and consumer focused companies downgrade stock forecast. So I think the market is reacting in a large part to some softness with the American consumer. And just one thing that I’ve personally been thinking about, this is just kind of a rant here, but I saw some data recently that said that 50% of consumer spending in the United States right now comes from just the top 10% of US consumers, which is pretty crazy if you think about it. I just said that consumer spending is 70% of US GDP. So if you multiply those two little facts together, you’ve realized that 35% of our entire economy is the spending of the top 10% wealthiest Americans in the United States, which is pretty nuts.
And the reason I’ve been thinking about that a lot recently is wealthy people tend to be heavily invested in the stock market. And so if the stock market stays down, and I don’t know if it will, but if it does stay down and these wealthy folks spend less, that could have recession implications. I don’t know if that’s happening. I’m just sharing this thought that I’ve been having over the last couple of days with you. It’s something to keep an eye out for if the stock market stays down, if that has sort of a spillover effect onto consumer behavior. So that was the second thing. We talked about tariffs, then we talked about the state of the American consumer. The third thing that I want to share is less about current news. It’s less about economic policy. And this is of course just my opinion here, but to me, the markets just seem overvalued.
If you’ve been listening to me on the BiggerPockets podcast, I’ve been talking about this since the beginning of the year, but there are all different ways to value the US stock market, and almost all of them say that the market is overvalued, right? So one that I really like to look at is what people call the buffet indicator named after Warren Buffett, where he has sort of famously compared the total value of the US stock market to GDP, to the total economic output of our country. And at the beginning of the year, that ratio was above 200%, which is just well above the long-term average and is an indication that stocks are just too expensive right now. You could also look at things like PE ratios, price to earnings ratios, which is basically how expensive a stock is based on the earnings of that particular company.
And what you saw at the end of the year is that it was actually two standard deviations above the historical trend. This is very, very high. The total value of the stock market wasn’t about 28. It’s come back down over the last couple of days. And these are just two ways to look at it. There are plenty of ways to do it, but most every way you look at it, stocks are super expensive right now. And to me that makes prices very unstable because remember, although most of us here watching on the market are primarily real estate investors, this isn’t the housing market. In the housing market. When things are more expensive or unaffordable, people can just live in their homes and as long as they’re making their mortgage payments, they could do nothing as we’ve seen very well over the last couple of years.
But when stocks are overpriced, there is a lot of risk because it’s a more liquid asset and people can sell those stocks. No, it needs to own those stocks and put them in safer assets. So to me, when the stock market is as expensive, relatively expensive as it is right now, there is a lot of risk. And there’s actually been some studies that show that when PE ratios reach this level, returns for the stock market underperformed for up to a decade. We’ve actually seen major banks and financial institutions like Goldman Sachs and JPMorgan Chase have predicted about a 3% real return for the next 10 years that’s probably going to underperform bonds. So I think that the fact that the stock market is expensive right now is contributing to declines because investors might just be looking for reasons to sell off and to take profit and to take some risk off the table.
And so when these data points come out that don’t tell a holistic or conclusive picture just yet, people are getting a little bit spooked because it’s at relatively high levels. If we saw the same data point and the market had already corrected 20 or 30%, right, it would probably be a little bit different. But since we’re at such highs, it does feel a little bit unstable, at least to me. And I think that’s sort of the general vibe in a lot of the stock market right now. Now, none of this makes these declines any less real or any less important, but to me some of it is just part of a normal business cycle of a normal equity cycle. We had excellent years in the stock market in 2023 and 20 24, 2 really good back to back years. And so having the stock market come down a bit here in 2025 to me is just sort of inevitable. So there are definitely other things going on in the stock market, but to me, those are the big three things that I’ve been watching. And I recommend you do too because as we’re going to talk about after the break, this does have big implications for the real estate market. When we come back, we’ll talk about the big kind of bold move I made with my own portfolio and what you should be thinking about as we head into the second quarter of 2025.
Hey everyone, welcome back to On the Market. We are recapping the economic news of the last week. We’ve talked about tariffs, we’ve talked about consumer confidence. We’ve talked about the relative expensiveness of the stock market. And now I’m going to tell you about what I have actually done about this. I mentioned this on Instagram. I got a lot of good feedback about this, but I actually wound up about two weeks ago selling close to 25% of my stock portfolio. I’m going to explain why, but I want to preface what I am about to say that this is not advice for you. Not everyone should do what I did. In fact, most people should do the opposite of what I did. It’s just about what your individual goals are. But for me, I’ve been saying this for months and I took a long time to think about this, but I’ve been staring at an equities market that to me seems overheated.
There’s a lot of volatility and I believe that there is upside for real estate in the coming years. I think there could be a good environment to buy in single family homes, small multifamily. I think particularly in commercial multifamily, there’s going to be some good opportunities. So I wanted to take some money out of the equities market and put it into real estate. And yeah, I’m going to pay some capital gains tax and that is a risk that I’m willing to take. But since I dollar cost average in which basically just means I put small amounts of money into the stock market regularly, some of that I’ve put in recently and has either taken a loss or hasn’t grown that much. And so if I sell those stocks with a higher tax basis, I won’t have that big of a capital gain tax. I will pay something in capital gains for sure though.
But I just kind of think right now the way I’m looking at this is that this cycles the market cycles in real estate and in equities, the stock market, they’re just different. And based on my personal goals, I want to shift some of my asset allocation towards real estate and towards just being defensive in general, actually reducing my own living expenses. And I still have a large equities portfolio that I could retire off of in 15 to 20 years despite the majority of my net worth being in real estate. It’s not like I am panic selling, I just want to shift a little bit more towards real estate right now. I’m not going to buy the first real estate deal. I see I’m going to take some of this money, pay down my mortgage so I have more cash coming in that I can sit on because frankly, I am comfortable sitting on cash right now for a few months or even a year to find deals in real estate that I believe are going to come.
Now, of course, you could be different if you have different goals. Do not do this. If you’re going to sell your stock portfolio and do nothing with that money, you’re probably better keeping it in the stock market. I have a specific plan for what I’m going to do with this money and believe it will outperform even with the taxes, the stock market. But that is just my opinion, and I could be wrong and I’m willing to take that bet. I just feel, because I talk about investing publicly, I want to tell you what I’m actually doing with my own money that I put my money where my mouth is, even though it doesn’t apply to everyone watching. So anyway, that’s what I’m doing, but let’s just talk a little bit about what happens now and what you should be thinking about and watching as we go forward.
First one encouraging piece of news was that inflation came in lower than expected last week amidst all this other stuff that was going on. I think this was kind of missed, but that was good news. Even amidst tariff fears. It was great I think to see that inflation was coming down because it actually had gone up in December and January. Now, I do think we all have to pay close attention to inflation data over the next couple of months because tariffs have just recently gone into place, and it does take a little bit of time for that to work its way too consumers. And so we’ll see if inflation goes up in April, in May, in June, if the trend of flat or declining inflation continues, that would be great, but there is some risk that inflation might heat up with the introduction of tariffs.
Next thing to look for is I think a lot of sort of the future of the economy, the stock market, the housing market, all of it really comes down to the labor market because if the labor market cracks and we’re starting to see a little bit of cracks, but honestly, the labor market has been remarkably resilient. The American labor market is very strong relative to where we are in the market cycle. Despite a lot of challenges, yeah, we are seeing more layoffs, but the facts that the unemployment rate is still in the low fours is honestly pretty incredible to me. But if the labor market cracks, I think we go into a recession and with that, the stock market is probably going to decline further. Then we’ll see bond yields fall because people take their money out of the stock market, they put ’em into bonds, that drives down yields.
We’ll probably see the Fed reacts to a weakening labor market by lowering interest rates. And all of that will probably create conditions where mortgage rates come down. And we probably have a more interesting, more affordable housing market if labor continues. Its somewhat amazing resilience. I think we get that soft landing. The stock market probably will stabilize and start growing again, but we will see rates higher for longer, and that will probably mean a lot of challenges in the housing market for the foreseeable future. My guess, and I’m making this guess here on March 14th, 2025, is that there’s a 66% chance that we go into a recession this year, like two thirds, one third, and Trump himself has said that he thinks it’s possible that the US goes into a recession. He personally believes that is worth it to implement the economic policies that he is looking at, but I think the economy investors are reacting to that.
A lot of what Trump is doing in the short term does have the potential to tip the US into the recession. But I also believe, and I think this is probably a whole other episode I can get into, but I also think a lot of people overweight recent news when it comes to things like recessions because the American economy, although it can change based on new tariffs or something like that, a lot of these things are big long-term trends when you just look and zoom out at the economic and business cycle. We’ve been sort of at a high for a little bit for a while. We’ve had high interest rates and the economy has held up amazingly well to that. But I do think just eventually the economy does have to react and adjust to a new reality. And that is probably the primary driver of why I think it’s more probable that a recession comes in 2025 than not.
But also, like I said, there’s still probably about a one third chance that we avoid that recession. Now, if we go into a recession, how deep is it going to be? How bad is it going to be? I don’t know. It could be mild, it could be significant if the labor market gets really bad, I think it’s a little bit too early to tell. I don’t have a specific prediction or anything like that. But as an active investor, that means that I am sort of overall across all of my assets, all of my holdings. I’m trying to lower risk in general. I just told you I sold some stocks and I’m going to keep a lot of that money in money market accounts earning interest. I’m going to use some of it to pay down my mortgage and lower my living expenses while I wait for real estate deals to materialize.
Then maybe I’ll refinance my primary residence and use that to go buy some more real estate deals. And again, I’m not telling you to do the same thing. I actively manage my portfolio. I don’t buy my own stocks, but I reallocate between stocks, bonds, money market real estate somewhat regularly, and I am trying to set myself up for the best long-term cashflow. So whenever I see real estate conditions start to get better, especially relative to other asset classes, I put myself in a position to reallocate. I am pretty excited about the potential for commercial multifamily in the next couple of years, and that’s what I’m looking to buy. So I’m positioning myself to be able to do that sometime here in 2025, but that’s what I’m doing. Would love to know how you are all handling this volatility. So if you’re watching on YouTube, definitely let me know in the comments. Or if you’re listening on the podcast, hit me up either on BiggerPockets or on Instagram and let me know what you’re doing to manage this really confusing volatile economy that we’re in right now. Thank you all so much for checking out this episode of On The Market for BiggerPockets. I’m Dave Meyer. I’ll see you next time.