Weekly Market Report: May 9th, 2025

Last weekend’s pause in Chinese tariffs generated enough positive momentum to send equity markets sharply higher for a third week of the last four. The S&P 500 (+5.3%) and growth stocks led the way while developed international (+1.5%) and emerging markets (+3.0%) also closing higher but held back by a strengthening USD. Bond yields continued to slowly grind higher leaving the 10yr UST bond yielding 4.43%. Commodity markets were mixed with WTI oil closing up 2.4% to $62.49 and natural gas (-12.5%) and gold (-4.3%) both off sharply.

Market Anecdotes

• In 28 trading days since April 8th, we have gone from a near miss bear market and surging recession calls to a positive YTD U.S. stock market, now a mere 3% below a new record high.
• Gradually rising UST yields despite cooling growth, inflation, and trade tensions likely has the FOMC and investors wondering if the proposed tax cut package is stirring the bond vigilantes.
• Tax bill details last week included an extension of the 2017 TCJA, four key POTUS priorities, increase in SALT deduction, and temporary, not permanent, provisions.
• As written, the draft cost of proposed tax cuts carry a 10yr cost of $3.8t, which rises to $5.3t if cuts are extended, taking total costs including interest to $4.6t or $6.2t, respectively.
• Moody’s joined S&P and FItch in downgrading the U.S. on Friday afternoon, making the sub-AAA rating on U.S. debt official. Validity and timing of that move is facing ample criticism.
• The China tariff rollback was welcomed by risk markets with open arms. In part due to the fact that approximately 7% of S&P 500 revenues originate from China which, given average operating leverage of 2x, implies that China accounts for approximately 14% of EPS.
• Tariff off ramps have influenced strategist calls for recession across the board including Strategas, Golman Sachs, and BCA Research all reducing their recession calls last week.
• Consumer sentiment fell to 50.8 in May, the second lowest reading in survey history while 1-year inflation expectations rose to 7.3% and 5-10yr expectations hit 4.6%. Retail Sales slowed from March 1.7% level to 0.1% but did show some resiliency.

Bullish Asset Allocation Narratives

• Administration officials, bond markets, and public opinion have and will continue to push for expedient resolutions to trade disputes. Peak tariff panic is in the rearview mirror.
• A brief growth slowdown remains much more likely than sustained stagflation given the man-made nature of the trade crisis and ability to course correct/save face abruptly.
• Swift course correction on tariff policies, possible fiscal stimulus (tax cuts), and likely business friendly deregulation encourages focus on the intermediate term horizon.

Bearish Asset Allocation Narratives

• Uncertainty can translate to deferring new hires and negative consumer sentiment risking declines in employment, capex, and consumption.
• The Fed overstaying restrictive policy due to pipeline inflation, high inflation expectations, and strong labor market poses risks to growth in the event tariff de-escalation happens quickly.
• Fundamental and technical factors in U.S. bond markets (upward pressure on rates) present unique challenges for investors and overall cost of capital implications across the economy.

Weekly Market Report: May 9th, 2025

Last week, markets digested another large dose of trade/tariff headlines, several central bank policy meetings, a relatively light economic calendar, and the last legs of 1Q earnings reports. Global financial markets were relatively calm with welcome indications of tariff de-escalation the driving force. Equity markets closed the week largely unchanged while interest rates, commodities, and the USD all moved higher.

Market Anecdotes

• The equity market bounce of the prior two weeks consolidated slightly last week with the S&P 500 closing down slightly but U.S. equity markets exhibiting some improving breadth. The S&P is now trading back up to 21x, relatively fully priced given the uncertain path forward.
• The FOMC left rates unchanged in the May meeting given resilient employment and inflation concerns. With hard data not yet capitulating, the Fed is in a wait and see mode, but tight policy and tariff driven growth drag may prove problematic after the tariff shock fades.
• Markets have pushed Fed Funds rate cut expectations back to July, now pricing in three 25bps cuts for the remainder of 2025.
• The PBOC took action last week including a 10bps cut to its policy rate and 50bps cut to reserve requirements. The BoE lowered rates by 25bps to 4.25%.
• Markets eagerly anticipating a stand down in the U.S. vs ROW trade/tariff tax negotiations received the first deal narrative, announcing the conceptual framework of a U.S.-U.K. agreement.
• Another tariff indication last week was POTUS signaling that 80% (60%) may be a better tax than 145% on certain Chinese goods imports.
• The S&P 500 earnings calendar is now 90%

Bullish Asset Allocation Narratives

• Administration officials, bond markets, and public opinion have and will continue to push for expedient resolutions to trade disputes. Peak tariff panic is in the rearview mirror.
• A brief growth slowdown remains much more likely than sustained stagflation given the man-made nature of the trade crisis and ability to course correct/save face abruptly.
• Potential for swift course correction on tariff policies, possible fiscal stimulus (tax cuts), and likely business friendly deregulation encourages focus on the intermediate term horizon.

Bearish Asset Allocation Narratives

• Heightened and persistent uncertainty is translating to concerning indications in hiring intentions and negative sentiment risking declines in employment, capex, and consumption.
• The Fed overstaying restrictive policy due to pipeline inflation, high inflation expectations, and strong labor market poses risks to growth in the event tariff de-escalation happens quickly.
• Technical factors in U.S. bond markets (upward pressure on rates) present unique challenges for investors and overall cost of capital implications across the economy.

Weekly Market Report: May 2nd, 2025

Market Anecdotes

• Equity markets continued to rebound from the April tariff tantrum, stringing together nine consecutive positive days bolstered by earnings, labor market strength, and cautious optimism that global trade conflicts are beginning to move toward compromise.
• U.S. – China trade remained under a spotlight last week, moving from a stonewall response from China to reciprocal gestures as each exempted similar amounts of imports.
• One of the initial reverberations from the trade wars include U.S. Q1 GDP contracting 0.3% – vulnerable but not collapsing. The print was largely due to net exports detracting 4.83% but uncertainty also saw personal consumption fall to 1.8% from 4.0%.
• Another trade war ripple effect was evident in April new export orders which plunged to 43.1, a level associated with recessions and Trump 1.0 trade war.
• Bond market characteristics remain a key focus with modest credit spreads, a relatively friendly corporate bond maturity profile, and technical forces in treasuries all under close watch.
• Q1 earnings reports last week, which included most major technology companies, were encouraging with a blended bottom line at 12.8% and top line at 4.8%.
• Encouraging labor market indications came across last week including monthly payrolls, JOLTS, and ECI reports showing continued resiliency, a pillar of strength for investors and policy makers.

Bullish Asset Allocation Narratives

• Administration officials, bond markets, and public opinion have and will continue to push for expedient resolutions to trade disputes. Peak tariff panic is in the rearview mirror.
• A brief growth slowdown remains much more likely than sustained stagflation given the man-made nature of the trade crisis and ability to course correct/save face abruptly.
• Potential for swift course correction on tariff policies, possible fiscal stimulus (tax cuts), and likely business friendly deregulation encourages focus on the intermediate term horizon.

Bearish Asset Allocation Narratives

• Heightened and persistent uncertainty is translating to concerning indications in hiring intentions and negative sentiment risking declines in employment, capex, and consumption.
• Pressure on risk assets may persist until trade, monetary, and fiscal policy become more clear.
• Technical factors in U.S. bond markets (upward pressure on rates) present unique challenges for investors and overall cost of capital implications across the economy.

Weekly Market Report: April 25th, 2025

Marginally constructive tariff headlines, bolstered Fed independence, and encouraging economic data translated to a healthy week for global equity markets. Signs the U.S. administration is looking for an off ramp on trade tensions and the consummation of trade deals were welcomed by markets. Additionally, first quarter earnings reports are providing an encouraging backdrop for equity markets. Last week overall, we saw global equity markets close up 3%-5% while interest rates moved marginally lower. Reduced volatility also translated to smaller moves in the USD (+0.10%) and commodities (-0.25%).

Market Anecdotes

• While it’s been a volatile first 100 days of the new U.S. administration, stock and bond market vol fell last week thanks to improved tariff headlines and healthy earnings and economic reports.
• What was obvious to most seems to be slowly taking shape within the U.S. administration which is that an off ramp to trade tensions cannot come soon enough. Signs of progress with South Korea, Japan, India, and China were noted last week with investors hoping for more.
• News of reported discussions with Japan and South Korea regarding investment in Alaska LNG export facilities and Norwegian sovereign wealth payments to the U.S. confused markets, as a reminder to be hesitant to focus too much on headlines related to trade negotiations.
• UST auction data published last week revealed normal foreign demand but also a notable drop in demand for maturities under five years, which may signal waning foreign central bank appetite.
• Policy uncertainty may be translating to reluctance of non-U.S. investors to invest in U.S. assets, contributing to falling USD and UST demand. While the “Sell America” move is likely overdone, the weakening USD may have further to go simply on a mean reversion basis.
• FOMC members acknowledged economic risks and potential for job losses relating to tariff policies last week alongside a clear willingness to respond in June as data informs the trend.

Bullish Asset Allocation Narratives

• Certain administration officials, bond markets, and public opinion have and will continue to pressure POTUS away from growth adverse trade policies.
• Tariff policies are unlikely to persist in the intermediate or long term given the potential for swift reversal of tariff policies, fiscal stimulus (tax cuts), and business friendly deregulation.
• A brief growth slowdown remains much more likely than sustained stagflation given the man made and political nature of the current climate.

Bearish Asset Allocation Narratives

• Heightened and persistent uncertainty is translating to concerning indications in hiring intentions and negative sentiment risking declines in employment, capex, and consumption.
• The rare “trifecta selloff” (USD, U.S. equities, U.S. bonds) is challenging for portfolios and may persist until trade policy, monetary policy, and fiscal policy directions become clearer.

Weekly Market Report: April 18th, 2025

Market Anecdotes

• A quick look at valuations and the term premium reinforces relatively compelling equity market valuations
  overseas, ranging from 10.3x to 13.7x, versus U.S. markets at 19.8x but the rise in UST term premium has
  garnered attention.
• The trade war with China is thriving but negotiations with 14 countries are happening as well.
• China ordered all airlines to halt purchases of U.S. equipment and to not accept Boeing plane deliveries. The U.S. is taxing all Chinese owned or built ships for docking in the U.S. and ordered Nvidia to cease sales of H20 chips to China.
• The Administration blinked again last week, announcing a number of exempted products, primarily technology from Asia, but they also published notices of request for public comment on Section 232 investigations of pharma, semiconductor, and critical minerals trade.
• Two lawsuits have been filed, challenging POTUS ‘use of IEEPA for tariff powers.
• Hard data, backward looking by default, remains relatively sanguine while soft data is indicating turbulence across both consumers and businesses.
• Cliff Clavin noted that in June 1930, a petition signed by over 1,000 economists was presented to Hoover urging him not to implement tariffs, which he proceeded with regardless.

Bullish Asset Allocation Narratives

• Bond markets and public opinion have and will continue to enforce the “Trump put” as adverse economic policies persist.
• A slowdown or mild recession remains much more likely than sustained stagflationary given the man made and political nature of the current climate.
• Stagflationary tariff policies are unlikely to persist in the intermediate or long term after which fiscal stimulus (tax cuts) and deregulation may well resume the bullish narrative.

Bullish Asset Allocation Narratives

• Soft data is growing increasingly troublesome including slowing labor markets and negative business and consumer sentiment which have the potential to lead to a self-fulfilling decline in business spending and hiring as well as personal consumption.
• The rare “trifecta selloff” (USD, U.S. equities, U.S. bonds) in 2025 has left little room to hide from the overall risk aversion trend and is likely to persist until heightened uncertainty surrounding trade policy, monetary policy, and fiscal policy begins to clear up.
• A continuation of adverse trade policy and trade wars will accelerate deterioration in sentiment and economic growth, representing a key risk to markets and the overall economy.