With the US government heading for a shutdown this weekend and a key inflation report due today, stock futures – led by a 1% drop in Nasdaq 100 futures – are in the red Wall Street Journal.

Is this decline a harbinger of falling stock prices in the next few years? Since I don’t have a crystal ball, my answer is yes. That’s because the scenario that seems most likely to me will send stock prices lower for four reasons:

• An increase in inflation due to tariffs;
• Fewer interest rate cuts;
• Slower economic growth; And
• Bitcoin Volatility Risk.

If you’re not willing to wait for a long period of stock market decline and gradual recovery, taking stock profits could be a wise decision.

The impending government shutdown is hitting the markets

After two failed attempts to fund the government until March 2025; Without an agreement today, the government could close at 12:01 a.m. on December 21st.

The economic consequences of such a closure would be significant. For example, “millions of federal employees and military personnel” could be furloughed and Americans who rely on federal aid could face disruptions in service, it said I’m looking for alpha. Over and beyond, A prolonged government shutdown could cause flight delays as some TSA employees and air traffic controllers may call in sick, according to reports Axios.

Leading the decline are technology stocks and Bitcoin as investors await an inflation report that could send stocks falling further. As semiconductor industry stocks – such as ASML, TSMC, AMD, Broadcom and Nvidia – fell, Bitcoin price fell 12% from its peak to $95,000 magazine reported.

Meanwhile, a report on the Federal Reserve Bank’s preferred inflation indicator – the personal consumption expenditures index – could move stocks. If PCE rises by more than the expected 0.2%, stocks could take a hit as investors bet it will lead to less accommodative Fed policy.

Increase in inflation due to tariffs

Some economists predict that tariffs imposed by President-elect Trump could spur inflation.

Trump has announced a series of tariff proposals, some of which are tied to the behavior of the countries whose goods would be affected. During the election campaign, he promised to impose 20% tariffs on all US imports, the reported magazine.

After the election in November he…

• Threatens to impose a 25% tariff on imports from Canada and Mexico if those countries do not reduce the flow of migrants and drugs into the United States;
• He proposed imposing a 10% higher levy on goods from China because the country has not done enough to prevent fentanyl from entering the United States, and
• He warned of a 100 percent tariff on Brazil, Russia, India, China and South Africa “if they seek to replace the U.S. dollar as the main global currency,” the noted magazine.

Executives of companies that import goods – which would likely face higher costs in paying the tariffs – have so far failed in their efforts to eliminate the Trump tariffs, it noted magazine.

Economists believe tariffs could boost inflation. If tariffs drive up consumer prices, companies and individuals could respond by hoarding products or paying more, they argue. Tariffs could rise “against the backdrop of an economy where the embers of inflation are still smoldering,” said Diane Swonk, chief economist at KPMG New York Times. “It can revive again.”

Fewer interest rate cuts

On December 18, the Dow plunged 1,100 points after the Fed announced fewer rate cuts for 2025 than investors expected. If inflation rises again, the Fed could stop cutting interest rates – or even raise them.

“Today was a closer call, but we decided it was the right call,” Fed Chairman Jerome Powell said at a news conference after the Fed meeting. He later added: “It is a new phase from here and we will be cautious about further cuts,” he said Wall Street Journal,

Investors did not take into account how the Fed’s forecast could change given the election results. An economist concluded that the Fed’s slower rate cuts were due to uncertainties surrounding tariffs and immigration policy.

“This broad change in their views is clearly related to the uncertainty and risks surrounding yet-to-be-enacted customs and immigration policies and has far less to do with changes in the economic landscape,” said Omair Sharif, founder of Inflation Insights magazine.

Slower economic growth

Economists are uncertain about the pace of economic growth. “The outlook is very uncertain, and most of that uncertainty is due to potential policy changes,” said Michael Gapen, chief U.S. economist at Morgan Stanley Just.

Still, Morgan Stanley and other Wall Street economists forecast gross domestic product growth will slow from 2.5% in 2024 to 2% in 2025. While rising stock prices and higher home prices could boost consumer spending – which accounts for 70% of economic growth, tariffs are rising and stricter immigration policies could raise prices.

Such stagflation – slower growth and higher prices – is an economist’s worst-case scenario. “Trade and immigration policies could be extremely disruptive to the economy,” said Michael Strain, an economist at the American Enterprise Institute Just.

He imagines a stagflation scenario in which prices – of imported goods, groceries, restaurant meals and houses – rise while economic growth slows. The reason? “High new tariffs are discouraging investment, mass deportations are limiting employers’ ability to find workers, and rising deficits are driving up borrowing costs,” the reported Just.

Bitcoin volatility risk

Finally, just as subprime mortgage-backed securities found their way into the financial mainstream and contributed to the 2008 financial crisis, there is a risk that Bitcoin and other risky tokens will do something similar in the future.

Bitcoin has more than doubled in 2024 and is up 40% since November 5, “on hopes that a second Trump administration will usher in a golden age for digital currencies,” the reported Wall Street Journal.

Individual investors invest cash in exchange-traded funds linked to cryptocurrencies. Such ETFs – notably from Fidelity and BlackRock – have attracted $36 billion in new money since their launch – with total assets of around $116 billion magazine noted.

ETFs are paid to accumulate assets in the classes investors want. “The job of asset managers is to create products where there is demand from their clients so they can charge for them,” said Mike Akins, founder of ETF Action magazine. “We must remember that they also had no problem packaging and delivering subprime mortgages to their customers.”

Could the inherent volatility of Bitcoin and other risky tokens clip the wings of these investors and trigger another financial crisis? The involvement of Fidelity and BlackRock gives me little comfort about the safety of Bitcoin as an investment.

Finally, Akins’ comment reminds me that Lehman Brothers – which built a highly leveraged portfolio of subprime mortgage-backed securities – was a highly respected investment bank until it filed for $639 billion in bankruptcy on September 15, 2008.

The average Wall Street forecast is for the S&P 500 to rise 9% in 2025 Market observation.

While I hope I’m wrong, tariffs, inflation, higher-than-expected interest rates, slower economic growth, and Bitcoin volatility risk could make this forecast seem overly optimistic.