“Hot town, summer in the city…walking on the sidewalk, hotter than a match head.” Since the summer solstice a week ago, summer has hit the country full on. Temperatures are rising (as they always do) in Washington as various deadlines for a budget bill and tariffs loom. Wall Street is also hot, taking only 90 days from a 15% correction to new all-time highs. Is there any shade to take in a cool drink of water? If you believe some economists, they will argue the economy is cooling. Credit card balances are dropping (a sign of slower spending, not fiscal responsibility!), and employment growth is slowing. Even the Fed acknowledges that they may need to cut interest rates at least once, if not twice, this year to keep the economy chugging along. There is an argument to make that interest rate cuts are not necessary and may do more harm than good. While the number of new jobs created (and an update is coming Thursday) is slowing, it remains at a level that keeps the unemployment rate steady. If you believe the textbooks, full employment is anything below 5% and the economy has been below that level since September 2021. The other side of the Fed’s mandate is low inflation. The Fed’s favorite measure of inflation, the PCE, rose a bit last month, and the fears of higher inflation due to tariffs remain on everyone’s mind. The debate will remain heated between those believing a cut is needed and those who wish to keep on truckin’.
The economic data for the week was mixed at best, with tariffs playing a role in some of the data points. As mentioned above, the PCE came in a bit higher than expected. This matches up with various “core” measures of inflation released earlier in the month. Lower energy prices had a positive impact on consumer prices, but service prices rose. Consumer spending dropped, but that followed two months of abnormally high spending to get ahead of price increases due to the tariffs. Smoothing out the data, spending has slowed a bit, but not yet enough to worry. One sign that the consumer may be struggling is a decline in credit card debt and not necessarily due to paying off the debt. Delinquencies are rising, and card usage is down; both are troubling signs for the consumer in the long term. This holiday-shortened week will be packed with economic data that may bolster the argument for either rate cuts or increases. If the non-farm payroll figure (estimates are 115k) comes in well below 100k, the heat will get turned up on the Fed to cut rates quickly. Anything over 115k will be steady as she goes. One report that usually gets bypassed but will be in focus this week is the trade deficit. A bigger deficit will increase the tariff talk; a smaller one may give some credence to the effectiveness of tariffs. As usual, it will be interesting.
Chair Powell’s testimony in front of Congress was generally a snoozer, as he reiterated the official stance of “wait and see” on the impact of tariffs on the economy and inflation. The first half of the year was a very good one for bond investors as the returns on bonds, until last week, compared favorably with those of the SP500. The loud call for lower interest rates by year-end could make for one of the better years for bonds. Inflation may be the only thing to derail lower rates, so keeping an eye on consumer and producer prices will be important for bond investors.
The rapid recovery to new all-time highs from a 15% decline is among the fastest in market history. As has been the case with other market declines, the recovery has been led by technology. The top 10 names within the SP500 accounted for nearly all of the gains from the April low. Today, just over 50% of stocks in the SP500 are above their long-term average price. As was the case at the beginning of the year, the market overall and specifically technology stocks are richly valued for their earnings. All that said does not mean the markets turn tail lower. Usually, the momentum continues for quite some time before petering out. Today, there are some signs, but the weight of the evidence favors higher stock prices. Of course, as was the case early in April, an announcement on tariffs can quickly derail prices. The tariff “due date” is July 9th, and there are some discussions of extending it further. The cheaper, more value-oriented parts of the market have lagged since the tariff bottom and may play some catch-up if the market continues to rise during the summer.
Watch for the employment report on Thursday ahead of the long July 4th weekend.
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.