Weekly Newsletter: April 21, 2025
“Pressure, pushing down on me, pressing down on you.” Trump has been under pressure to adjust his tariff “negotiations”. Powell is under pressure from Trump to cut interest rates. Investors have been under pressure to figure out what this all means for the economy and the financial markets. It is little wonder that everyone is screaming “let me out”. So what of the economy? Many will argue that the most recent data points preceded the tariff implementation, so they are ignored. Others will point to the beginning of earnings season and declare much of the same. However, companies will be outlining their guidance based on what they have seen over the past two weeks. United Airlines, to address the current uncertainties, provided two earnings forecasts, one if the current environment remains stable, or if the economy falls into a recession. Fed Chair Powell made an appearance in Chicago and reiterated the Fed’s view that things are OK, but they will be waiting to see the impact of tariffs before making any interest rate changes. Investors took that to mean the Fed did not have their back and sold off into Thursday’s close. Pressure!
Investors, consumers, and companies’ views are rather dour at this point. But looking at what they are doing, only investors are making changes. Based on the weekly jobless reports over the past month, including last week, companies are not laying off employees in advance of any anticipated economic slowing. Both weekly claims and continuing claims remain well within historical ranges during good economic times. The consumer sentiment figures have been in the basement for a few months, but retail sales remain robust. This past month was well above expectations, as spending on autos to get ahead of the tariffs was the main driver. Even taking out the auto component, spending is still running at a solid pace. Both highlight the wide chasm between what consumers/companies are saying and what they are doing. That may well change in the months ahead as the economy begins to feel the impact of tariffs, but for now, the data is good. Finally, investors are selling, backing up their bearish views on the markets for the months ahead. Front-running a recession by smartly cutting risk or making decisions based on emotions? Time will tell if the recent spate of selling is justified or hang-wringing about nothing much.
The bond market remains just as volatile as the stock market. Is a recession on the horizon? Then rates should drop. Is inflation from tariffs coming? Then rates should rise. Powell’s comments did little to provide direction on either factor. A wait-and-see approach, potentially the best path, is not one bond (or stock) investors want to hear. Commodity prices are rising anew, bolstered by higher oil and metals prices. But the yield curve is slowly making its way toward a more normal upward sloping shape. Finally, after a bit of a freak-out, high-yield bond spreads have declined a bit, an early indication that just maybe the worst is past.
The tech wreck continued anew this past week as investors remain concerned about exposures to China and potential monopolistic litigation. Investors that held anything but technology stocks fared well last week, as value, small, and international investments all showed gains on the week. From strictly a valuation perspective, growth stocks, especially large-cap growth, should underperform the rest of the markets as their valuations remain very high from a historical perspective. They are also in the crosshairs of the trade tensions with China. In fact, Nvidia is working to carve out its own “deal” with China, in stark contrast to the war of words from Washington. Theoretically, continued trade tensions should help the smaller US companies that have a smaller portion of their revenue coming from overseas and international investments that would benefit from a (still) weaker dollar. The large tech companies dominate the various indices and could make “the market” look a lot worse than it is when looking beyond those heavyweights.
Tech earnings will be in focus this week as well as plenty of Fed governors speaking. Regional banks may shed light on loan activity, while some “fast casual” restaurants may provide insight into consumer spending. Finally, Tesla and Google also report this week in a precursor to the other tech names reporting next week.
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.