Weekly Newsletter: June 9, 2025
“One of us is changing, or maybe we just stopped trying… now it’s too late, though we really tried to make it.” Maybe not quite on the scale of Shelton/Lambert or Affleck/Garner, the “divorce” of President Trump and Elon Musk dominated the news cycle. Even though an employment report was issued on Friday (not too bad), the running commentary about the government budgets and spending was just too much to pass up. Is it something or nothing? The bill that squeaked by the House (largely on party-line voting) had plenty of detractors in the Senate from both parties. Time will tell if Musk’s comments sway Senate voting or reconciliation. Away from the Washington drama, the economy continues to chug along. The jobs report was solid, and generally in line with expectations. Wage growth remains above 4% annually, lending some credence to what could be solid consumer spending in the months ahead. Detractors point to slowing job gains over the past three months than the prior year as a sign of economic slowing. Inflation data is due this week with the potential for early tariff costs beginning to show up. Given the jobs data, unemployment rate, and inflation data hanging around 2-2.5%, it will be difficult for the Fed to justify cutting rates. Oh, and the tariff discussions continue. China and the US continue to talk about further discussions of negotiating a deal… at some point. Break up, just to make up may be the theme of the summer.
Diving into the jobs data, there was plenty to like, and as usual, a few things of concern. Job growth remains strong in healthcare and leisure/hospitality. The strength in hospitality would argue for a strong service economy and a healthy consumer willing to spend. Overall monthly job growth has been slowing gradually over the past two years. It is estimated that 150,000 jobs are the “break-even” rate, below which the unemployment rate is expected to rise. The past three-month average is 145k. If the monthly number begins to get much below 100k, the Fed may begin to sit up and take notice. So, the monthly gains might be considered a “push”. Wage growth was higher than expected, keeping annual growth near 4%, well above the inflation rate of 2-2.5%, meaning the average worker is doing better than the average price increases. Using a separate report, it showed full-time workers declined, while part-time workers increased. The stage is now set for the inflation data. Will prices rise as a result of tariffs? Are economists expecting further increases after the “pause” announced in late April? Will lower oil prices offset much of the increase in other parts of the economy? We have been told that tariffs are inflationary and spending will be reduced this year. Economic reports over the next few months, beginning with consumer prices, should answer many of the above questions.
The bond model has been bouncing back and forth, between rising and falling rates for the past two months. Commodity prices have eased a bit, but long-term rates are higher. Yield spreads had been negative for much of last year, but have now flipped to modestly positive; meaning 10-year yields are above 2-year yields. High yield spreads, after widening somewhat in the wake of the tariff increases, are back to near multi-decade lows. There is little within the bond market that is screaming higher (or lower) rates. Many see the Fed having to cut at least once this year, under the supposition that the economy will slow, unemployment will rise and inflation will fall. However, until meaningful data supports that thesis, it is hard to argue for any rate cuts this year.
Similar to the post-Covid market, the rally following the tariff announcements has been tech-dominated. Even international, which has dominated performance categories this year, has slightly underperformed the tech sector. When all else fails, buying tech seems to be the predominant theme. As was noted at the beginning of the year, the most expensive sector (tech) is also the most volatile, with some stocks falling by over 30% following the tariff news, only to rally back 30+%. Valuations on many of the names in the sector remain above historical norms and have pushed the SP500 to near historically high valuation levels. From here, future returns look to be well below average. Until the momentum trade fades, investors will continue to pile onto the tech bandwagon.
Following a decent employment report, eyes will not focus on inflation reports due this week. How much have tariffs boosted prices may only be partially answered with this report. Expect volatility around the report.
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.