Will Macroeconomic Shocks Trigger a Business Cycle Recession?

Fiscal Spending Cuts: Rapid cuts in government spending, aimed at increasing efficiency, could contract economic activity. Even if small in dollar terms, the speed and scale of cuts could have an outsized effect on confidence and spending.

Immigration Slowdown = Labor Shock: Immigration, especially undocumented immigration, has quietly contributed up to 1% of GDP growth in recent years. A slowdown in inflows—and even reverse migration—is reducing both labor supply and consumer demand. Fewer workers means less output; fewer consumers means less spending.

Reversal of the Wealth Effect: A declining stock market makes consumers feel poorer. This psychological impact leads to reduced spending and increased saving—especially on big-ticket items like homes, cars, and vacations—dragging consumption down further.

Tightening Financial Conditions: Rising interest rates and reduced access to credit are making borrowing more expensive. Higher mortgage rates and cautious lending standards slow down investment, home buying, and small business expansion—often precursors to recession.

The Q1 GDP decline is not a sign of immediate weakness, Kostohryz explains. It was mainly caused by a spike in imports, which are subtracted from GDP. Ironically, this indicates strong consumer and business demand, not a contraction.

The real strength came from a 20% surge in equipment investment, but much of this was likely "pulled forward" to beat upcoming tariffs. This could lead to a slowdown in later quarters as that demand has already been met.

Consumer spending is starting to soften, in line with gloomy consumer sentiment. While not recessionary yet, it’s an early warning sign.

A potential war involving Iran and Israel, possibly with U.S. involvement, is a looming risk. Such a conflict could disrupt the Strait of Hormuz, which handles about 20% of the world’s oil supply.

If oil prices spike dramatically (to $200–$300/barrel as Kostohryz speculates), it could trigger a global stagflation scenario—where inflation surges while growth collapses.

This kind of geopolitical shock, layered on top of the economic ones already in play, could deepen any market downturn significantly, even pushing drawdowns toward 50% or more, similar to the 2000–2002 bear market.

Raise Cash: Don’t rush into risky positions. High-yield savings and money market funds (earning ~4–5%) are excellent places to sit tight while markets correct.

Reduce Equity Exposure: Particularly in sectors sensitive to consumer demand and international supply chains. The goal is to avoid being caught in a steep drawdown.

Be Patient: Much of the damage from tariffs and immigration tightening won’t show in official data until summer. Be ready to act, but don’t front-run the pain too early.

Use Tactical Tools Cautiously:

• Inverse ETFs: Kostohryz uses SDS (a 2x inverse ETF for the S&P 500) as a starter bearish position.
• Volatility Trades: His team also shorted the VIX using volatility-linked ETFs when it spiked above 50, capturing the normalization trend.
• Options (for advanced investors): Tactical bearish exposure through options could offer high reward—but high risk.

The risk of recession is rising as macro shocks build. Now is the time to protect your portfolio: raise cash, reduce exposure to high-beta stocks, and monitor early warning signs like jobless claims.

History shows markets reprice fast—being prepared, not reactive, is key. Even without a full recession, valuations remain elevated. Stay cautious, stay flexible, and get ready to seize long-term opportunities.