Let's make a deal

This week I traveled to Maine to present “The Rise of the Female Investor” before a large group of bankers. If I’m being honest, it was better received by the women than the men in the audience. Hey, don’t shoot the messenger! Responding to my observation that baby boomers have remained in the workforce longer than any prior generation, a gentleman shared the anger his millennial daughter feels that we won’t vacate jobs to make room for her generation. Fair. Dad told her to look at the bright side—“she will inherit everything I own, once I turn 105!” We are now in the midst of the fifteenth drop of 20% or more in the S&P 500 since its inception in 1957. Only twice in those fifteen 20% declines—in 2008 and 2022—did the market go on to make a new low once it had retraced 50% of its loss. We’ve now recovered the losses since “Liberation Day,” and are hovering just below the 200-day moving average. Good odds that we’ve seen the low, especially given the strength in credit and with global indexes at fresh highs. High-yield spreads are around 355 basis points now versus an average 590 bps at the onset of the past three recessions. Unemployment claims haven’t yet seen a spike that historically meant a recession was on its way.  Whether it’s a bear market rally or a durable upswing depends on what comes next. Leuthold is unpersuaded by the current market, seeing too little movement in economically sensitive sectors. Sentiment has been sharply negative, with bearish sentiment above 50% for 11 consecutive weeks, a rare streak not seen since 1987 (although the May 7 survey improved to 48.9% bearish). From a contrarian point of view, this can be good. Earnings estimates for 2025 keep getting revised downward yet at consensus $264 a growth rate of 7.7% is implied.

It’s not just China to which Trump objects. A number of Asian countries emphasize exports with trade surpluses stored in Treasurys, a practice solidified after the 1997 currency crisis. Trump objects to the imbalances this export model has created. But fixing it without harming the economy or the stock market is a tall order. The rest of the world has no easy means of rebalancing away from the US so long as the US runs a current account deficit—which suggests the dollar may have to keep going lower. We learned this week that in March (pre-Liberation Day) China’s share of US imports fell to 2002 levels. It appears that Taiwan and Vietnam are taking up some of the slack. (Note that the Taiwanese dollar recently had its biggest two-day rally in more than 40 years.) Those who study such things have created an export similarity index, which indicates that Vietnam, Korea and Mexico have an approach to exporting that most nearly resembles China’s. Even as the market recovers from its selloff, consumer confidence remains dispiriting—the Conference Board’s Consumer Expectations Index fell to depths only seen once (mid-2011) outside a recession. Uncertainty is the word of the moment; perhaps it’s no surprise that gold, that most fixed of goods, has been rallying. Earnings season has been largely positive: guidance has been better than feared, mega cap tech remains powerful and corporate fundamentals are solid. But now India and Pakistan—two nuclear-armed nations—are in open conflict with one another. At least we are certain of one thing—there’s a new pope!

Maybe uncertainty works both ways—firms aren’t expanding but they aren’t trimming down either. They’re not hiring, but they’re also not firing. Meanwhile, inventories will be running dry as soon as next month, at which time tariffs will start to be felt. And the Fed appears to be of the view that, without slower growth, tariff-related inflation may be more than “transitory.” Richard Clarida, who was vice chair of the Fed for three years under Powell, says that the Fed would “actually need to see” evidence of a labor market slowdown before they cut rates. Uh oh. Lael Brainard, who succeeded Clarida as vice chair, said that Powell’s record is of waiting until he’s “very sure about the data and then going very fast.” Hmm. As for the big beautiful tax bill, opinion is divided as to whether it is stimulative (and fiscally irresponsible) or an austerity package. The tariffs push the overall tax burden toward austerity; Congress may need to account for them with additional tax cuts to fend off a recession. As the tax bill winds its way through Congress, it appears the Trump administration is requesting additional corporate tax cuts, which if enacted would be good for earnings. Wolfe Research says the bill’s fiscal stimulus should actually increase in 2026-27, if not as much this year. Now, with the threatened tariff on foreign films, Trump broached the subject of services, the dominant sector of our economy. Unlike goods, the US runs a global trade surplus in services. This potentially opens a rich field for retaliation from our trading partners if no deals can be made first. The news that the US and China will hold trade talks in Switzerland is great, but it’s likely to be a long road. In the absence of a Fed cut, the market, hovering around its 200-day moving average, waits for trade deals (the devil can’t be in the details if there are no details!), the tax bill (something by July 4, please!) and deregulation meat on the bones. Come on, let’s make a deal!

Positives

• Good news; pre-tariffs, though The ISM non-manufacturing composite rose 0.8% to 51.6 in April, better than expected (consensus 50.3%), perhaps benefiting from pre-tariff demand pull-forward. Notably, the prices paid index rose from 60.9 to 65.1, a new high post-Covid. 22V Research notes there is a correspondence between this measure and inflation in the Core PCE Services Ex-Housing Price Index, referred to as the Powell Supercore. UBS says that despite composite readings being above 50 for most of the last two years, they are consistent with a 1.75% real GDP growth pre-pandemic. The S&P Global services PMI, which is not a composite but rather a business activity index, was revised down to 50.8 from its preliminary reading in April.
• No news is good news The opening sentence in the FOMC statement downplayed recent weakness in the Q1 real GDP data, describing economic activity as “solid.” The press conference repeated that the Fed is in wait-and-see mode until there is more clarity on policy and its impact on data. Fed Chair Powell acknowledged in his press conference that business and consumer sentiment have turned sour but emphasized that the hard data on growth still look adequate in the US. The Fed will not preemptively cut rates and will not be influenced by politics.
• Not an “ongoing inflation problem,” yet In April, consumer inflation expectations in the Empire State Fed survey rose 0.2% to 3.2%, and fell 0.2% to 2.7% over the next three and five years, respectively. In his FOMC remarks, Fed Chair Powell noted that most measures of longer-term expectations remain consistent with the Fed’s 2% inflation goal. He noted the importance of well-anchored inflation expectations in preventing a one-time increase in the price level from "becoming an ongoing inflation problem". Short-run inflation expectations remained at 3.6%, but perceptions about households’ current financial situations deteriorated sharply y/y, as 39.0% of households (up 5.4%) reported a worse situation, while just 16.1% reported a better situation (down 3.6%). 

Negatives

• Headwinds for consumer spending Consumers are dour in the surveys but keep on spending, benefiting from lower oil prices and a strong tax refund season. However, in March, consumer credit climbed $10.2 billion, more than expected ($9.4 billion), according to the Federal Reserve. And now the Department of Education is restarting collections on defaulted student loans after more than five years of forbearance. Wage garnishment for non-payers starts this summer, as only 38% of approximately 43 million borrowers (of a total $1.6 trillion student loan debt) are current on their student loans, with more than 5 million having made no payments in at least 360 days and another 4 million in late-stage delinquency (over 90 days). The Consumer Financial Protection Bureau estimates over 450k student loan borrowers aged 62 and older receiving Social Security could face deductions.
• Frontrunning from everywhere but China The overall trade deficit widened to -$140.5 billion (+14%) in March, beyond consensus (-$137.2 billion). Adjusting for import/export prices, the “real” trade gap widened sharply too. Looking at the details for signs of tariff front-running, year-to-date in 2025, US imports from many of its top partners have surged relative to the same period in 2024, including: Mexico (+9.6%), Canada (+7.9%), Switzerland (+464.3%), Ireland (+173.2%), Germany (+7.6%), Vietnam (+36.4%), Taiwan (+48.8%), India (+30.0%) and the UK (+14.9%). Imports from China fell back to the lowest monthly level since March 2020. Twenty percent of our trade gap is with China.
• An unproductive start to the year Nonfarm business productivity declined an expected 0.8% (q/q annualized) in Q1 and the y/y rate declined by 0.6% to 1.4%. Still, since the fourth quarter of 2019, labor productivity has grown at an annualized rate of 2.0%. Unit labor costs grew 5.7% in Q1, ahead of consensus expectations of 5.1%. 22V Research reminds that we knew from the GDP and employment reports that Q1 productivity would be quite weak. And, historically, productivity growth tends to be very cyclical.

What Else

What a difference a year makes Strategas reports that flows suggest equity rally skepticism. Since the equity market low on April 8, ETF category flows have been led by Treasury Bill ETFs, gold and crypto. Conversely, small-caps and cyclicals lead outflows. This is a change from last year.

Rental sweet rental It’s still more expensive to own a home than to rent. In fact, the gap might be getting wider, according to a recent report by Redfin. To afford a median-priced home, a household now needs to bring in $116,633, vs. $64,160 to afford a median-priced rental—a difference of more than $52,000, requiring 81% more income. A Bankrate study agrees, finding that in the 50 largest metropolitan areas, renting is more affordable than the monthly costs associated with owning a home (including mortgage, property taxes and insurance, which have all skyrocketed of late).

How gray is recession blond, do you think? Jeffries notes that TikTok is reviving recession blond, a hairstyle where women grow out natural roots to save money at the salon. Jeffries also shares, and our new American (!) pope might not know, that the Vatican City State has the most CFA Charterholders and Bloomberg terminals per capita of any country globally.