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Financial Highlights
Markets patient but disappointed as neither the Fed nor the Middle East ease up
The Federal Reserve kept rates unchanged at 4.25%-4.5% for a fourth straight meeting, as the economy remains intact despite widening cracks in the labor and housing markets. While officials remain divided, Chair Powell emphasized the Fed is staying patient amid ongoing uncertainty. Eight members see two rate cuts this year while seven expect none. Inflation remains contained for now, with Core PCE at a four-year low (2.6% expected for May), but tariffs could soon drive prices higher as inventories run down and firms begin passing on costs. The average effective U.S. tariff rate now stands at 15%, the highest since 1936.
Despite a Q1 GDP dip (-0.2%), the Atlanta Fed and New York Fed both project a rebound in Q2, +3.4% and +1.9% respectively. Methodologies differ with each Bank’s forecast, but I give the edge to the Atlanta Fed under these conditions. The new Summary of Economic Projections from the U.S. Fed this week showed that the median expectation for the full year GDP is +1.4%. Retail sales showed mixed signals in May, with headline sales down 0.9%, largely due to auto sales distortions, while core sales rose 0.4%. Meanwhile, housing starts hit a five-year low, and builder sentiment dipped, weighed down by high mortgage rates and tariff-driven uncertainty.
Geopolitical tensions, especially the escalating Israel-Iran conflict, pushed oil prices higher (+1.2% this week), adding another layer of uncertainty. However, history suggests such events often have a limited long-term market impact, especially with the U.S. now a net petroleum exporter. Any jams in the Strait of Hormuz impact China much more than the U.S right now.
Markets remained volatile but resilient. The S&P 500 finished the week slightly lower, while small-cap stocks posted gains. Treasuries advanced as yields fell on softer economic data and geopolitical concerns. Investment-grade corporate debt outperformed, and new issues were over subscribed as investors look out for yield and stability.
What this means for investors
Expect a choppy summer as the Fed watches inflation, tariffs, and geopolitical risks. There is going to be a lot of noise around a weakening labor market. If you’re position isn’t at risk, don’t let it impact your investment strategy. If it is, buffering your cash reserves can’t hurt you while rates on high-yield savings are still healthy. I continue to favor diversified portfolios, balancing U.S. and international equities, and high-quality bonds with medium-term maturities. Alternatives like gold can still offer benefits: season to taste.
Market Activity
There is a lot going on in the world and the markets are struggling to digest it all right now. The various markets move for a myriad of reasons, and sometimes no (clear) reason at all. Trying to divine the logic in every day or week’s moves can drive you mad.
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Fed stayed put as expected and the talking points from the press conference left me with little doubt they’ll stay put again in July even as the chorus for cuts grow louder. I think the case for cuts is better today than anytime since Liberation Day. The labor market is slowly weakening, businesses are frozen on hiring and investment, and housing market is getting seriously stressed. Maybe the economy can take it, but maybe it can’t. The uncertainty argument is getting a little stale. It’s not like the rest of us aren’t just guessing in our own day jobs.
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Recommendations
“#s are misleading; the job market is far from OK” - Guy on LinkedIn
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Short attention spans
Four minutes | Read this piece or research a stock. Takes the same amount of time apparently.
Unstable coins
When A Dollar Isn't a Dollar | A worthy repost from Economic Forces. “I would like my dollar.” “You have one right there. That is as good as a dollar. You have my word.”
Fine, another tariff article
What are inflation surprises telling us about tariffs? | Consumers have yet to see prices increase, so where are they? Claudia Sahm on the missing inflation.
Chart(s) of the Week
"There's little evidence from the long run of history that [high valuations] lead to poor returns." Looking only at valuations is not a good determinant of whether to invest or not. Valuations are only one metric, and offer little predictive power. Naturally, low valuations offer higher relative returns, and high valuations offer lower relative returns. However, on an absolute basis, high valuations don’t predict low returns to the point that investors should avoid investing at times of high valuations.
Source: Bespoke via Daily Chartbook
Everything is relative, so this is no judgement on appropriate value, but its hard to claim now is the top on the market. With the economy slowing and 3 hot wars (Israel and Iran, Ukraine and Russia, and Powell and Trump), there is risk out there, but completely overheated market valuation isn’t necessarily one of them. I was a buyer in 2021. I’m a buyer today.
Source: TCAF
Sherwood covers a list of Goldman Sachs’ high Sharpe Ratio basket, those they think are offering strong forward risk-adjusted returns based on expected price gains. As you can see, many of these are way down YTD so they aren’t without risk or volatility, but may offer more asymmetric upside from this point. Finding the winners isn’t easy, and I have no particular conviction on any of these names. For the stock pickers out there: if you want to be a lion, you have to hunt.
Source: Bespoke via Daily Chartbook
Data is a little stale but Canada is just built different. RIP homebuyers.
Related: Boom or Bluff? The U.S. Economy’s Quiet Strength vs. Global Trade Risks