The Stock Market’s Looming Dangers and How to Prepare

The economy is flashing warning signs that could spell trouble for the stock market and your financial future. From surging Treasury yields to skyrocketing credit card debt, a ballooning national debt, and the specter of tariffs, multiple threats are converging. Today, I’ll break down these risks and offer practical tips to help you navigate the stormy waters ahead. My goal is to inform you of the dangers and empower you to protect your wealth.

Treasury Yields Surge Past 5%
The 30-year Treasury yield briefly topped 5% recently, and the 10-year yield hit 4.485% after Moody’s downgraded the U.S. credit rating from Aaa to Aa1 on May 16, 2025. This downgrade, driven by concerns over the government’s ability to finance its growing deficit, signals investor unease. Higher yields mean higher borrowing costs across the board—mortgages, car loans, and credit cards are all getting pricier. For the stock market, rising yields make bonds more attractive than equities, potentially triggering outflows from stocks. This shift could depress stock prices, especially for growth companies reliant on cheap borrowing. The downgrade also raises questions about whether U.S. Treasuries remain the world’s safe-haven asset, a status they’ve held for decades. If confidence wanes further, expect more market volatility.

Credit Card Debt Hits Record Highs
American households are drowning in debt, with credit card balances surpassing $1 trillion in 2023 and continuing to climb. The average credit card interest rate is now over 20%, and with Treasury yields pushing borrowing costs higher, consumers are feeling the squeeze. Delinquency rates are rising—3.2% of credit card loans were 60+ days past due in mid-2024, the highest in over a decade. This debt burden crimps consumer spending, which drives 70% of the U.S. economy. Retailers, restaurants, and consumer goods companies could see earnings take a hit, dragging down their stock prices. A weaker consumer also raises the risk of a broader economic slowdown, which could spark a bear market.

National Debt Soars to $36 Trillion
The U.S. national debt has ballooned to $36 trillion, or roughly 120% of GDP, and Moody’s downgrade highlights the challenge of financing this debt in a high-interest-rate environment. Interest payments on the debt are projected to hit $1 trillion annually by 2028, crowding out other government spending. This fiscal strain could lead to higher taxes, spending cuts, or more borrowing—all of which could unsettle markets. Investors are already selling Treasuries, pushing yields higher and signaling skepticism about the government’s fiscal path. If foreign investors, like China or Japan (which hold $760 billion and over $1 trillion in Treasuries, respectively), reduce their holdings, the dollar could weaken, and interest rates could spike further, hammering stocks.

Tariffs Threaten Inflation and Growth
President Trump’s “reciprocal” tariffs, which hit 145% on Chinese goods and 10% on other imports, have roiled markets. While a 90-day pause on most tariffs was announced on May 12, 2025, uncertainty persists. Treasury Secretary Scott Bessent warned that tariffs could snap back if trade deals falter. Economists estimate these tariffs could add 1-2% to inflation while slowing GDP growth by 0.5-1% annually. Higher prices would hit consumers, reducing spending, while businesses face higher input costs, squeezing margins. The stock market, which rallied after the tariff pause, could reverse if tariffs return or if inflation forces the Federal Reserve to keep interest rates high. The Fed’s benchmark rate, currently 4.25-4.50%, is unlikely to drop soon, adding pressure on stocks.

Other Economic Threats
Beyond these headliners, other risks loom. The U.S. dollar has weakened amid tariff uncertainty and rising debt concerns, potentially increasing import costs and inflation. Corporate debt is another worry—U.S. companies hold $13.5 trillion in debt, and higher interest rates make refinancing costlier. A wave of corporate defaults could shake investor confidence. Geopolitical tensions, like trade disputes with China or instability in the Middle East, could disrupt supply chains or spike oil prices, further fueling inflation. Finally, consumer sentiment is souring—recent surveys show confidence at a two-year low, which could curb spending and drag the economy toward recession.

Why This Matters for the Stock Market
These threats create a perfect storm for stocks. Higher yields and borrowing costs reduce corporate profits and consumer spending, hitting earnings. Inflation from tariffs could force the Fed to delay rate cuts, keeping pressure on valuations. A weaker dollar and rising debt could erode investor confidence, leading to capital flight from U.S. markets. The S&P 500, up 0.09% on May 19 despite the downgrade, is at 5,963.59, near record highs. But this resilience masks fragility—valuations are stretched (P/E ratios around 24), and any shock could trigger a correction. A 10-20% drop isn’t out of the question if these risks materialize.

How to Survive the Economic Storm
You can’t control the economy, but you can protect your finances. Here are actionable tips to weather the turbulence:

Diversify Your Portfolio: Spread investments across asset classes—stocks, bonds, gold, and cash. Gold, up 1.86% to $3,246.40 recently, is a hedge against inflation and dollar weakness. Consider emerging market bonds, which have gained traction as Treasury confidence wanes.

Focus on Quality Stocks: Invest in companies with strong balance sheets, low debt, and consistent cash flow. Defensive sectors like utilities, healthcare, and consumer staples tend to hold up better in downturns.

Reduce Debt: Pay down high-interest credit card debt to free up cash and reduce financial stress. If you can’t pay in full, consolidate or negotiate lower rates.

Build a Cash Reserve: Aim for 6-12 months of living expenses in a high-yield savings account. This cushions you against job loss or unexpected expenses in a slowing economy.

Stay Informed on Tariffs: Monitor trade policy developments. If tariffs escalate, consider reducing exposure to import-heavy sectors like retail or tech, which could face higher costs.

Consider Fixed-Income Alternatives: Short-term Treasuries or high-grade corporate bonds offer decent yields with less risk than stocks. Avoid long-term bonds, which are sensitive to yield spikes.

Plan for Inflation: Invest in assets that benefit from rising prices, like real estate investment trusts (REITs) or commodities. TIPS (Treasury Inflation-Protected Securities) are another option.

Avoid Panic Selling: Market dips are normal. Stick to a long-term strategy and avoid emotional decisions. If you’re nervous, consult a financial advisor to reassess your risk tolerance.

The stock market faces serious risks from surging Treasury yields, crushing credit card debt, a soaring national debt, and unpredictable tariffs. These factors could spark inflation, slow growth, and erode investor confidence, potentially pushing stocks into bear territory. But with careful planning—diversifying, reducing debt, and staying informed—you can safeguard your finances. The economy may be on shaky ground, but your portfolio doesn’t have to be. Stay vigilant, and let’s navigate this together.

DISCLAIMER: None of this is financial advice. This newsletter is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. Please be careful and do your own research.