Weekly Newsletter: May 12, 2025
In what could have been an exciting week for stocks, it wound up being a bit more than a yawn. From the non-financial election of a US Pope for the first time in history with roots in Chicago (and a Sox fan!) to the beginning of talking about starting discussions with China on tariffs. Toss in a Fed meeting for good measure, and you should have seen the markets swinging around all week. Instead, it was one of the quieter weeks of the past few. Outside of heavenly help for the Cubs, the week should have provided more information than it did. Chair Powell did a great job of punting on most questions regarding tariffs, their impact, when the Fed would cut rates further, and what the path forward for rates might be over the year. The economic data, little as it was last week, remained positive, indicating, for now, that tariff impacts have been small. This week will be inflation data, which could shed light on tariffs in prices paid for goods. Of course, there will be plenty of Fed speakers now that their regular meeting is done, so the markets will once again have something to chew on over the coming few weeks. IF the talks with China go well, there could be a large boost to stock prices. However, as has been the case recently, there is a lot of smoke and little fire when it comes to discussions between the two countries.
Much of the discussion over the past month has centered around the impact of tariffs. Fed Chair Powell was asked about inflationary expectations during the press conference. Companies mentioned them often on quarterly earnings calls. Finally, combing through economic reports, only a big jump in imports provides any evidence of their impact. All of the above comes with the disclaimer: not yet. In what was a light week for economic data, jobless claims were the standout report. They are still showing a lack of layoffs and a healthy job market, backing up the monthly jobs report. This week, comes inflation data that has been trending toward the Fed’s 2% target. The “soft” data (consumer expectations) around inflation has been rising over the past few months, while the “hard” (inflation reports) remain quiescent. Much of the concern is whether the hard catches up to the soft or consumers adjust their expectations lower. Those data points have not yet shown up.
Bond investors were focused on the Fed this last week. However, not much could be gleaned from their official statement or from the press conference that followed. Expectations were for at least one cut prior to mid-year. That has gone up in tariff smoke. To be fair, the economy seems to be doing well and has not needed a boost from lower rates. The inflation report should be instructive for future cuts. Higher than expected inflation would signal no more cuts for quite some time. Lower inflation could give the Fed some breathing room to wait and see the impact of tariffs on the broad economy. Just nothing yet to move the Fed.
It is an unusual period when the dollar, oil prices, and the 10-year yields are all trading down and below their yearly average price. Surprisingly, forward returns for the market are generally better than average and, other than 2001, always positive a year later. A possible explanation might be that our goods are cheaper and get bought, creating better economic activity. Lower oil prices help the inflation picture, which allows yields to decline. The lower rates also boost economic activity. By no means is it always that simple, but it may help to explain the better equity markets when such an environment exists. With earnings season nearly in the rear-view mirror, earnings “beats” were still in the historically normal range, and even forward guidance was overall better than expected. The lack of major revisions helped support the market recovery from the “Liberation Day” lows. The markets look healthy at this point, but given the strong one-month run, they could succumb to a bit of backing and filling if the tariff talks and economic data disappoint.
The reaction and comments from discussions with China and inflation data will be front and center this week. The wild card will be ongoing trade talks.
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.