Weekly Newsletter: June 23, 2025
“Sitting by the dock of the bay, watching the tide roll away.” It was expected that the last few weeks would provide some information on the impact of tariffs, inflation, employment, and interest rates. Little has changed, so we are all just sitting. Inflation has been discussed ad nauseam, and both consumer and producer prices remain very tame. The health of the consumer, as read through retail sales, was a bit disappointing, but that was on the heels of a very good report the prior month. Despite rate cuts by other central banks, the Fed stood pat last week, much to the chagrin of the administration. According to the Fed, they do not have enough information to determine whether the soon-to-expire tariff “holiday” will show up in inflation data later this year. Compounding their decision has been the expectation that the economy will slow as a result of the dislocations spurred by the tariffs. Add to the domestic “issues”, the new firestorm in the Middle East may roil the markets, especially oil. The financial market’s reaction (so far) to all the various events and news items? A collective yawn as the SP500 has been relatively unchanged for the past month. The coming week is light on economic data. However, Fed speakers will fill the void, including Chair Powell on Capitol Hill. News coming from the Middle East, especially over this past weekend, will create some havoc. Unless it expands dramatically, the losses in the equity markets may be temporary.
The Fed meeting is always much anticipated, but recently it has been a “nothing burger”. Since the start of the year, investors have been anticipating as many as four rate cuts by the Fed with at least two coming before mid-year. Now passing the summer solstice, nothing has materialized, and the number of cuts is down to maybe two, with more than a few economists believing nothing for the remainder of the year. The housing market will take center stage this week in the form of new/existing home sales. Housing has been suffering from a variety of ailments, from persistently high mortgage rates (by the recent 15-year comparison) to a lack of supply to absorb demand. Some recently hot markets in Florida and Texas have cooled some. Other markets, like New York and the West Coast bear watching as well for signs of pervasive weakness rather than specific markets. One other area that has been in focus is jobless claims. Worries over a slowing job market, as evidenced by fewer “new jobs” being created using the monthly jobs report, may still be overblown. The weekly data has been remarkably stable over the past few months and well within the range of prior years when the economy was performing well. The post-Covid economy, impacted by tariffs and different geo-political events, is a much different animal than before Covid. It can be argued that the economy has forever changed, and past metrics measuring the economy have lost much of their predictive power.
The Fed makes quarterly economic projections and did so again at last week’s meeting. It contained a few surprises as well. The Fed is adamant that tariffs will be inflationary, so they are discounting much of the good news of slowing inflation contained in the various reports. Those higher inflation expectations are being met with their expectations of a slowing economy. What makes those two expectations difficult for the Fed is how they should direct monetary policy. If inflation is a result of the tariffs, rates should be stable to rising. If the economy is slowing, then rates should be dropping. Investors continue to price in rate cuts, now down to two, with the first in September. This tightrope walk the Fed is doing does present a higher risk of a policy error. So far, this walk has been successful, but the risks are rising for problems down the road.
Surfing the big technology wave has not been successful this year. Yes, tech stocks are generally up this year, but like much of the US market, it has been up very little over the past six months. Unlike many of the past 15 years, diversification is beginning to pay off. Bond returns are roughly equal to those in the SP500, while international investing is “having a day”, with the developed international up nearly 15% and emerging markets up 10%. Technology stocks have been the key driver for the SP500, as they make up roughly 40% of the index. When the going gets tough for tech, diversification has paid off. With technology stocks valued so richly today, a return to “normal” valuations would argue for a diversified portfolio in the coming years.
The events in Iran are likely to be in focus this week, as well as Chair Powell’s Congressional testimony.
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.