Weekly Newsletter: July 7, 2025
There were the usual celebrations of the penultimate 4th of July before the 250th party next year. The fireworks in the sky were matched by some fireworks in both Washington and Wall Street. While many have decried the tax/spending bill for both what it does and does not do in keeping with the promise, it was signed on July 4th with much fanfare. It will take another year or two to figure out how it plays in the real economy rather than in an econometric model. There are always intended and unintended consequences from every piece of legislation that is passed. The ramifications of this bill will be felt well beyond Trump’s term. On Wall Street, the handwringing about the strength of the labor market got an added dose of excitement when the ADP employment report (Wednesday) showed a contraction. At 8:30a EST, those worries were put to bed as the “official” employment report showed a higher level of employment and an unemployment rate that declined. State employees and education were the big gainers, which has many scratching their heads, given that school is out and state government hiring tends to be light during the summer. Revisions to prior months were positive, confirming that, for now, the employment situation remains good. Wall Street took the numbers and ran higher, capping a short week with another 1.5%+ gain. The economic temperature gets turned down a bit this week as the Fed minutes from their last meeting are released, along with the usual chatter from the Fed governors.
Normally, a jobs report with 150k in new jobs, a lower unemployment rate, and a cooling of wage growth would be met with a few “ooohh’s” and “aaahh’s”. In general, economists were the only ones complaining; investors liked the report enough to push stocks higher. Investors believe the report is strong enough to keep corporate earnings on a path higher, supporting higher stock prices. Economists are concerned that the report does not square with other economic reports. As mentioned above, the hiring of educators and state workers was odd. It moved in the opposite direction of the ADP report, which showed small businesses were laying off employees. High-profile companies like Microsoft also announced layoffs in the past month. The weekly jobless claims data, which has been very consistent in “calling” good job growth, remains within the range of past periods of economic expansion. The report should take talk of a Fed cut in rates at the end of July off the table. So, expect more fireworks from the White House when that announcement is made. The Fed minutes, released this week, should provide some color about topics discussed and how close they may be to cutting rates. Much of the concern of the Fed is potential inflation from tariffs, which so far have not shown up in the data. More tariff chatter is likely to be in focus now that the legislative session has ended for the summer.
Interest rates took note of the surprisingly strong employment report and rose on the week. Expectations are getting reduced for future rate cuts, now down to just two from over four coming into 2025. Interest rates have bounced around all year and are essentially where they were coming into the year. Commodity indices have increased, indicating some inflationary pressures, and if the tariff worries do materialize, inflation could be a second half of 2025 concern. One note is that some Japanese auto companies are “eating” the tariff increase, so they can keep prices steady for US consumers. It is merely one anecdote of how companies/countries are handling tariffs.
More reasons to celebrate July 4th, it marks the beginning of one of the better parts of the year for stocks. Historically, the mantra was to sell in May and go away (to the beach). However, over the last 10 years, July has become the second-best month for stocks, behind December. Further, there has not been a decline in July over those 10 years. July, for stocks, marks the high point of the summer, as August and September have tended to perform poorly over the last 10 years. Like the 4th of July, the month starts out with a bang until earnings season gets started and performance wanes a bit before finishing up strong. The one caveat is that the market is heading into the summer at very high valuations, and there remains plenty of volatility around tariffs and their economic impact. The start of July has been particularly good for value and small stocks. There have been plenty of false starts for those two asset classes over the years, so patience remains the watchword for those groups.
The tariff deadline is this week. How much gets pushed into the fall, and how much tariffs rise to provide a negotiating tool, are concerns for investors. Volatility around these geopolitical events remains high.
The opinions expressed in the Investment Newsletter are those of the author and are based upon information that is believed to be accurate and reliable but are opinions and do not constitute a guarantee of present or future financial market conditions.