Weekly Newsletter: June 2, 2025
Aphorisms and acronyms are dominating the news cycle as investors are still trying to make sense of the economy, tariffs, and the tax legislation making its way through Congress. It seems that April showers did indeed bring May flowers, as the market put in its best month in over two years. Of course, it followed one of the shortest/steepest drops after the tariff announcements. Investors have figured out the meaning of Taco Tuesday. Trump Always Chickens Out. While it may not happen on Tuesday, there have been plenty of times when a tariff is announced and the markets react negatively. This is followed by a walking back of the tough tariff talk and the markets rise. Trying to time the various pronouncements is a sure way to wind up on the funny farm. Now that the markets are slightly higher for the year, it may be best to sell in May and go away. However, that recommendation has not worked well over the last few years as the summer months have put up some good returns. Investors have been hoping that market conditions will improve enough for IPOs and LBOs to once again take center stage. Initial Public Offerings and Leveraged Buy Outs are usual signs of investors willing to take on risk. Those signs are beginning to show up a bit. If the markets indeed climb a wall of worry, there is plenty of room for stocks to rise from here. Valuations remain in rarified air, so it may take very positive economic data this week to push the markets to and past their all-time highs.
Among many worries by investors has been the wide divide between the “soft” and “hard” economic data. Various surveys of investors, consumers, and company officers have been rather dour over the past year. That “soft” data is in stark contrast to the actual data from consumer spending to employment and inflation reports. This past week saw a bit less spending by consumers in the release of income/spending data. Incomes rose significantly while spending cooled after a robust March as consumers (like businesses) tried to get ahead of any price increases due to tariffs. Employment data is due on Friday and is likely to show continued gains in job creation and the unemployment rate is steady at 4.2%. One bit of data that usually gets passed over that may get some time in the spotlight is the trade deficit. After growing dramatically in March (getting ahead of tariffs), it is expected to still be negative, but a bit less so. There could be some political commentary around the deficit, but investors may ignore all the sound and fury.
For all the worries about higher inflation due to the impact of tariffs, the bond market remains relatively quiet. Yes, yields have increased for the longer-dated bonds, but short-term yields have dropped nearly a full percentage point since last summer. Since Thanksgiving, commodity prices have been stable, leading many to believe that inflation may not be as big an issue as has been touted recently. The 10-year yield, which is the focus of bond investors, is roughly the same as it was a year ago. The bond market has “normalized” a bit, with short-term rates about half of a percent below 10-year yields. Again, very different than a year ago, when short rates were over one percentage point higher than 10-year yields. Taken as a whole, the bond market does not seem to worry about inflationary pressures.
The rally back during May has once again pushed the market into “expensive” territory when looking at the multiple of earnings investors are willing to pay. It can be argued that the market has been expensive for much of the past 10 years, as the multiple has regularly traveled between 20- and 30 times earnings. Not surprisingly, it also marks a period when the Fed (and the government) have been very active in creating an easy money policy. Before 2016, the market multiple would travel between 10 and 20 times, with an average of 16. Since 2016, that average is just above 23 or 40% more. The Federal Reserve had a balance sheet of under one trillion leading up to the financial crisis. Today it is seven times greater, even after the Covid peak in 2022. That money has found its way into the financial markets and to a lesser extent, the global economy. If there ever is fiscal and monetary restraint by either the government or the Fed, the markets should trade much lower. Without that restraint and continued financial largess, the markets are likely to remain well above historical norms.
The unemployment report on Friday is the highlight of the economic week. Based on the weekly jobless claims figures, no change to the unemployment rate and good employment growth is a good bet.
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.