Weekly Newsletter: May 5, 2025
If April showers bring May flowers, what does an April monsoon bring? Another historic month for the market in what has been an interesting few years for equities. April had the smallest decline after falling by at least 10% during the month since 1928. It was the seventh time that the market rallied by 10% after falling more than 10% all in one month. By the end of the month, tariff talk became a back-page issue, while earnings and economic data took center stage. Earnings from the big tech companies came in good shape, without too many comments about trade. However, consumer-related companies, including fast food establishments, had a different tune. Consumers have pulled back from some of their more “discretionary” spending, but are still spending at a healthy clip. The economic data is and has been supportive of economic growth. Employment gains were in line with the past twelve-month figures. While GDP dipped due in large part to a spike in imports, a recession remains a “maybe” sometime this year. Much of the chatter sounds like Mom’s admonishment: just wait until (tariffs) your dad gets home. With so many moving parts and changes from day to day, figuring out what the economy looks like in the fall is a fool’s errand.
The surprise to many was the strength of the jobs market. Concerns about DOGE, and layoffs surrounding economic weakness due to tariffs, so far, are overblown. Not only did the April figures hit estimates (after revisions), but they are in line with the past year’s average gains. Wage growth remains above inflation, and most surprising were hours worked. Those ticked higher as the feared layoffs have yet to materialize. The weekly jobless claims have been very consistent in “calling” a good monthly jobs report. As mentioned above, the negative GDP figure, usually a harbinger of a recession, was met with a yawn. The huge import data of the quarter is a negative for GDP, and many companies are trying to get ahead of the higher tariffs. What economic growth looks like in the quarters ahead remains a guess, but so far, a recession does not look to be the base case.
Unlike the stock market, which seems to have signaled an “all clear”, bond yields have declined during April, usually a sign of weaker economic data. As has been highlighted over the past few weeks, sentiment remains very poor, while “real” data (spending, jobs, wages) is still strong. High yield spreads, the difference between low-grade corporates and treasuries, are narrowing, indicating the fear of an economic slowdown is receding. The still relatively flat yield curve, with similar yields on bonds from 2 to 10 years, remains a warning flag. That said, if/until the economic data worsens, the bond market continues to provide good, inflation-adjusted returns.
As has been the case with prior sell-offs, the gains from the bottom have come from the technology sector. Their performance has suffered as they are likely in the target for much of the tariff pain, especially from China. However, rumblings of backroom chats between the two countries have given rise to a feeling that a resolution may be in the works. Earnings from the big tech names helped their cause as AI spending remains relatively strong. Investing outside of the US has been a winning strategy and points to better overall performance from a diversified portfolio. One note of caution regarding the strong rally during the back half of April; the averages remain below their long-term average prices, which may signal a good spot for investors who want to sit out whatever chaos may come, to lighten up on equities. Earnings have been decent so far, but long-term valuations remain a concern. Any hiccup in global growth and corporate earnings could spell trouble for stocks. For now, investors seem to believe that everything is/will be awesome.
The Fed meeting this week seems to be an afterthought, given the focus on trade. No change to rates is expected, and plenty of chatter about strong-arming from the White House and cutting rates will likely be in focus during the press conference. Keep the popcorn handy!
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.