LSA Connect

Economic Update 6-9-2025

Economic data included stronger job openings, while the ISM manufacturing and services PMI indexes weakened. The employment situation report showed in showing growth, but prior revisions downward, so generally neutral.

Equities gained globally, with few surprises on the trade front, and unsurprising economic data. Bonds fell back as interest rates ticked higher. Commodities gained, led by a sharp rise in crude oil prices.

U.S. stocks fared positively again last week, with small caps leading large caps. While trade tension between the U.S. and China remains, a late week phone call between the two leaders “resulted in a very positive conclusion for both countries,” as the President put it, and buoyed sentiment. Further discussions are scheduled in London this week. The Friday jobs reports, not too hot nor too cold, also was taken positively by markets. Overall, the U.S. stock market volatility from prior months appears to have calmed down a bit, with a general consensus that trade deals are expected to be in the works, and the maximum tariff rates won’t end up being a reality. On the other hand, U.S. steel and aluminum tariffs doubled to 50% last week.

On a holiday-shortened week, economic data included a slight upgrade to Q1 U.S. GDP growth, and improvement in personal income, spending, and consumer sentiment, while durable orders fell back.

U.S. stocks saw a positive week, outperforming the rest of the world, due to variety of trade-related news items. Bonds fared positively as interest rates fell back in the U.S. Commodities fell across the board, with crude oil prices remaining range-bound.

U.S. stocks ended positively, after having started off strongly on Monday following the announced one-month reprieve of the 50% EU tariff, in addition to an improvement in consumer sentiment (which has been hard to come by as of late). The Wed. U.S. trade court ruling against the administration’s tariffs resulted in a rally early Thurs., although the gain was tempered, considering that appeals are likely, and it is unknown how other tariffs might be reconfigured to fall under other legal authority. Again, optimism is present, but uncertainty remains. Over the past few weeks, markets have already appeared to discount the worst of the tariffs, celebrating the pauses, and assuming deals will be made in coming months to lower the overall punitive rate. By Fri., trade tensions with China had again ramped up with the President’s claim that agreements were violated and Treasury Secretary Bessent noting that U.S.-China trade talks were “a bit stalled.”

Economic data included gains in both manufacturing and services PMI measures, as well as in new home sales, while existing home sales fell back. The index of leading economic indicators continued to deteriorate, although it still doesn’t point to recession at this time.

Equities declined in the U.S., but fared better overseas, in keeping with 2025 year-to-date trends. Bonds similarly lost ground domestically with higher long-term interest rates, while foreign were mixed. Commodities were also mixed, with gains in metals offset by declines in energy.

U.S. stocks fell back last week, with every sector ending in the negative. More defensive consumer staples and communication services fared slightly better, with minimal declines, while energy and technology suffered the sharpest losses upwards of 3-4% (the latter led downward by Apple, as specific tariffs on phones were threatened). Real estate fell by over -3% as well, due to interest rate movements.

Economic Update 5-12-2025

Last week, the Federal Reserve kept policy interest rates unchanged, as expected, along with mixed economic data. Within the minimal data released last week, ISM services rose a bit, further into expansion.

Equities were mixed last week, with declines in the U.S. large cap offset by gains in small cap and in Europe. Bonds pulled back with higher interest rates, with falling recession fears. Commodities were also mixed, with gains in energy and precious metals.

U.S. large cap stocks fell back last week, while small caps saw gains. Sector results were mixed, with gains of a percent in industrials and consumer discretionary offset by a -4% drop in health care from several disappointing quarterly reports. Real estate also fell back by nearly a percent, due to higher yields. These results came along with an improvement in sentiment surrounding apparent progress the U.S. administration is making toward lowering quoted maximum tariffs last month. This included a Thursday announcement of a trade deal reached with the U.K. in addition to expected progress with Chinese negotiations taking place in Switzerland, although the final outcome for that key relationship remains quite unclear. (S&P futures were up several percent as a slashing of tariffs was announced this morning.) Congressional discussions about extending the current tax policy set to expire at the end of 2025 has also been ramping up, with rumors mixed about the imposition of a higher rate on millionaire earners.

Economic Update 5-5-2025

Economic data for the week included U.S. GDP growth for Q1 coming in negative, as well as weaker manufacturing, construction spending, and consumer sentiment. On the positive side, home prices continued to rise, albeit at a slower rate, while the employment situation report came in a bit better than expected, still showing growth.

Equities saw gains globally, buoyed by positive earnings and hopes for U.S. trade deals. Bonds fell back along with higher interest rates and a stronger U.S. dollar. Commodities fell back along with weaker crude oil demand expectations.

U.S. stocks rose for the second straight week, with nine straight positive days. However, the S&P 500 price index is still down -7% from the Feb. 19 peak. By sector, industrials, technology, and communications saw the strongest gains, over 4%, while energy was the only sector in decline, with sentiment tied to falling crude oil prices, and minimal gains for defensive consumer staples and health care. Real estate also gained over 3%, despite higher interest rates.

Economic Update 4-28-2025

Economic data included a rise in durable goods orders and new home sales. On the negative side, existing home sales declined, as did consumer sentiment and the index of leading economic indicators.

Stocks saw gains globally last week, with some further optimism about U.S. trade deals coming to pass, including a de-escalation of U.S.-China tensions, and a walkback of the President’s threat to fire the Chair of the Federal Reserve. Bonds fared positively along with falling yields, related to some reduction in inflation fears. Commodities were mixed, with energy falling with high supply and gold flows pulling back as global tensions abated a bit.

U.S. stocks rose sharply last week, despite Monday starting off poorly, with the President’s comments about firing Fed Chair Powell causing some consternation, as noted earlier. In typical recent back-and-forth fashion, Tuesday saw a recovery along with a quick walkback on the Powell firing talk, along with Treasury Secretary Bessent’s comments that alluded to tariff de-escalation, with current levels at an “unsustainable” path. There were further hints that the 145% rate on China won’t persist as the administration expects to reach a deal “in the very near future,” and the President intending to be “very nice” to China.

On a Good Friday-shortened week, economic data included gains in retail sales, while industrial production and housing starts fell back.

Equities experienced a slightly mellower week compared to the one prior, ending lower for U.S. large cap stocks, but a positive week for U.S. small caps and foreign developed markets overall. Bonds fared positively as interest rates fell back. Commodities also fared positively in several areas, including precious metals and energy.

U.S. stocks settled down from the volatility of the prior week, although it was relative, ending in the negative on net, although small cap stocks saw gains. By sector, energy led with gains of over 5%, followed by materials and more defensive consumer staples and utilities. On the negative side were declines of over a percent in technology (largely Nvidia and Microsoft), consumer discretionary (Amazon, Starbucks, and Tesla), and communications. Nvidia (along with a group of related companies) was hampered by news that its specialized H20 chips, quality-restricted to satisfy prior export limitations to China, could be disallowed and placed in same category as other unavailable specialized chips. Real estate also gained over 5% along with lower yields across the U.S. Treasury curve.

Economic Update 4-14-2025

Economic data included a significant pause in the U.S. administration’s total tariff policy, resulting in some relief of recession fears for now. Consumer price inflation came in slower than expected, with the year-over-year rates also declining, as did producer price inflation to some degree. Consumer sentiment remained poor, with inflation expectations rising sharply.

Global stock markets experienced one of the more volatile weeks in many years, but ended on a positive note largely due to Wednesday’s gains as a pause for some tariffs was announced. Bonds fell sharply due to a spike in longer-term U.S. Treasury yields. Commodities were mixed to higher, helped by a falling dollar and flight to quality in precious metals.

U.S. stocks earned surprisingly solid positive returns on net last week, with several daily price swings dominated by Wednesday’s explosive gains. Sector results were led by technology (up nearly 10%), industrials, and financials, while energy and defensive consumer staples and health care lagged with far lesser gains of a few percent. Real estate declined only slightly, despite the spike in yields.

U.S. stocks haven’t experienced this much day-to-day (or hour-to-hour) volatility in years, by some measures since the fall of 1987, Great Financial Crisis in 2008, and 2020 pandemic—comparisons that have unnerved many investors. The primary driver has obviously been the ‘uncertainty’ and real-time changes in the U.S. administration’s tariff policy. Practically daily, these have included steadfast or escalations in tariff stances corresponding to drawdowns and signs of relief or pause reverting to temporary euphoria. Based on estimates from Goldman Sachs, the ending tariff rate could well remain far higher than it was, but stopping at a weighted average of around 15%, as opposed to the earlier estimates of 20-25%. So, a strain on the economy and inflation no doubt, but not quite as bad as the worst fears.

During the week, stocks had resumed their negative path from the prior week on Monday morning, down several percent further, but quickly flipped upward into positive territory with rumors of the White House implementing a 90-day pause on new tariff policy. Though, when that was dismissed as rumor (at least at that time, and perhaps spooking investors holding short positions as much as anyone), stocks reversed back into decline, but flip-flopped several times, on one of the more volatile days in a decade. While tariffs on China of an additional 50% were threatened, the latter vowed to ‘fight to the end,’ with a U.S. tariff of 104% being imposed, followed by their own tariff of 84% on U.S. goods. (Chinese imports from the U.S. are relatively small in the whole scheme of global trade. However, U.S. tariffs on Chinese exports are expected to pull down Chinese GDP by several percentage points—with growth there already being in a fragile state as of late. Likely, such pressure was precisely the point of the announcements.) Along with some apparent pushback from some well-known names in the financial community and Senate, not to mention rising interest rates, Wednesday’s announcement of an actual 90-day pause in the country-specific tariffs (while keeping the 10% global minimum reciprocal rate) created the strongest upward day for the S&P 500 (+9.5%) since 2008 and 24 years for the Nasdaq (+12%). However, tariffs on China were taken up to 145%, and that reality hit home as tempered sentiment resulted with declines again on Thurs. The Chinese reciprocated to some extent, taking their tariff rate on the U.S. to 125%, but appeared to indicate that was the limit. Over the weekend, electronic products like smartphones and laptops were labeled as exempt from tariffs, with further clarity expected early this week.

In the wake of last week’s market soap opera, investors continue to weigh the impacts of overall tariff rates on individual sectors and companies, complicated by a fast-changing environment with hopes for extensions and pauses in policy implementation. The backdrop includes a deep-seeded concern that the longer that robust tariff rates last, the higher the chances of moving straight into a U.S. recession (and potentially a global one as well). This has been viewed by many economists as an ‘own goal’ of sorts, with investors using the broad ‘uncertainty’ cloud to pull back on risk generally until the dust clears, which could hinge on more substantive updates from the U.S. administration. That said, it’s again a reminder that markets dislike ‘uncertainty’ much more than they dislike even terrible news, which can be digested more quickly. That said, recession odds appear to have risen, but perhaps still not over 50% at this point, according to a variety of economists.

Almost an afterthought, first quarter earnings reports for U.S. companies have just begun, with FactSet predicting 7% S&P 500 EPS growth for Q1, led by health care, technology, and utilities. Revenue growth of over 4% is expected for the index as well. The assumption is that Q1 might be largely disregarded, due to the intense investor focus on tariff impacts on future quarters and management tone around consumer spending sentiment and status of capex spending plans in light of current trade policies.

Developed market foreign stocks earned negative returns in local terms, while a decline in the U.S. dollar boosted Japan and Europe into the positive for U.S. investors. There were few unique stories other than a focus on impacts from U.S. tariffs as we might expect to see until greater clarity surfaces. This was particularly true in emerging markets, where Chinese stocks fell by around -8%, presumably due to the negative economic impact of a trade war.

Bonds also experienced a rough week, which was a bit mysterious to some observers, due to their more frequent role as a positive safe haven in times of stock market turmoil. While a drop in long-term yields the prior week appeared to be driven by the easier common explanation of weaker growth fears, last week was full of speculation about causes for the sharp upward move in rates. These included theories about general unwinding of U.S. assets by foreign investors, such as rumors of China dumping more of their already-shrinking U.S. Treasury holdings. It’s worthwhile noting that moves of that magnitude could be a double-edged sword to some degree, as a large owner of Treasuries would also need to find another asset capable of absorbing as much liquidity and providing the same safe haven benefits that U.S. government bonds do. (There aren’t many lower-risk/high credit quality assets in the world that can fulfill both criteria.) This decline in Chinese holdings of U.S. debt has already been a work in progress for a decade, as their rank as a percentage of total foreign owners has fallen from $1.3 trillion (or 20% of total foreign ownership) around the peak in late 2013, to around $750 bil. today (less than 10% of foreign ownership). Also, much of the Treasury debt they do own has a maturity of 5 years or less. Other immediate causes of the yield spike have allegedly been due to some institutional forced sales in efforts to raise cash. As with several prior volatility episodes (albeit more extreme, LTCM in 1998 and the GFC in 2008), even ‘safe’ assets become pools of ready capital for meeting margin calls and other liquidity needs. These also include higher volatility from ‘basis’ trades, where some market participants attempt to take advantage of yield differentials between Treasury bond spot and futures rates, and are often sharply leveraged, resulting in margin calls due to extremely high rate volatility.

Was the pause in tariff implementation by U.S. officials forced by higher U.S. Treasury funding rates? Given that no substantial country-specific concessions had been made prior, this seems at least partially at play. A larger open question has been a feared potential shift in foreign investor sentiment away from U.S. assets generally, seen somewhat with a reversal in the U.S. dollar back down from a recent cyclical peak (in contrast to a typical strengthening reaction to tariff announcements), with the USD index now down -7% year-to-date. The status of the USD as a global safe haven certainly may have eroded a bit, due to the recent trade policy aggressiveness and announcement inconsistency, as well as the appearance of self-inflicted damage to near-term U.S. economic growth relative to other regions. Long-term, though, as the largest and most liquid global bond market, the role remains little changed with few other competing alternatives with comparable size and scale.

Commodities were mixed last week, with a drop of several percent in the U.S. dollar, and sharp gains in precious metals as global investors sought a safe haven from volatility in both stocks and bonds. Gains were also seen in industrial metals and agriculture, while energy fell back. Crude oil prices fell a bit last week to $61/barrel, with volatility largely driven by wavering positive and negative sentiment surrounding global demand and recession risk, as with other risk assets, while natural gas prices fell even further.

Sources:  LSA Portfolio Analytics, American Association for Individual Investors (AAII), Associated Press, Barclays Capital, Bloomberg, Deutsche Bank, FactSet, Financial Times, Goldman Sachs, JPMorgan Asset Management, Kiplinger’s, Marketfield Asset Management, Minyanville, Morgan Stanley, MSCI, Morningstar, Northern Trust, Oppenheimer Funds, Payden & Rygel, PIMCO, Rafferty Capital Markets, LLC, Schroder’s, Standard & Poor’s, The Conference Board, Thomson Reuters, U.S. Bureau of Economic Analysis, U.S. Federal Reserve, Wells Capital Management, Yahoo!, Zacks Investment Research.  Index performance is shown as total return, which includes dividends, with the exception of MSCI-EM, which is quoted as price return/excluding dividends.  Performance for the MSCI-EAFE and MSCI-EM indexes is quoted in U.S. Dollar investor terms.

The information above has been obtained from sources considered reliable, but no representation is made as to its completeness, accuracy or timeliness.  All information and opinions expressed are subject to change without notice.  Information provided in this report is not intended to be, and should not be construed as, investment, legal or tax advice; and does not constitute an offer, or a solicitation of any offer, to buy or sell any security, investment or other product. 

Economic Update 4-07-2025

Economic data included the announcement of substantial global tariffs by the U.S. administration, which were taken negatively worldwide, but especially in the U.S. Other releases included a weakening of ISM manufacturing and services activity, and JOLTS job openings. The Friday employment situation report came in stronger than expected, with reversals of some earlier seasonal effects.

Equities suffered their worst week since the pandemic, reacting negatively to the U.S. administration’s tariff news. However, government bonds fared positively, as long-term yields fell sharply. Commodities also lost ground across the board, with the combination of uncertain trade and growth impacts.

U.S. stocks began the week on another negative note, as comments from the administration over the prior weekend were taken negatively by markets (notably, those noting a disregard for auto manufacturer pain and possibilities of a recession, brought on by policies). Wednesday’s ‘Liberation Day’ announcement was done after the market close, but stock futures fell immediately afterward and carried over to a decline of nearly -5% on Thursday, one of the worst single days since the pandemic in 2020. The damage continued Friday, with markets down beyond -5%, as markets reacted to China’s retaliatory tariff of 34%. From the peak on Feb. 19, the S&P has fallen over -17% (up to nearly -20% if this morning’s futures are included). As noted separately, the market was prepared for tariffs to some extent, but these came out definitely stronger than expected.

Financial markets were on pins and needles as ‘Liberation Day’ approached on Wednesday, after a volatile few weeks of uncertainty surrounding tariff policy. Despite news of a 10% global tariff rate being broadly applied, and a smorgasbord of individual country- and product-specific rates, we only have some improved clarity on trade conditions compared to a few weeks ago. (The full announcement from the White House is available here.)

Some pessimists were surprised by the high overall tariff percentage rates, which included a 10% blanket global base level, as well as higher specific rates of 54% on China, 20% on the EU, 24% on Japan, and 26% on India, all set to begin in the coming week. The overall net tariff rate has risen dramatically, at least in its initial form. Excluded were some specific items already hashed out, like steel, and Mexico and Canada, based on the earlier announcements and likely re-negotiation of the USMCA (formerly NAFTA) trade agreement later this year. In total, about one-third of imports were deemed exempt, which tempers the bad news a bit. On the other hand, several countries announced retaliatory measures, which could solicit their own further U.S. response. Per the administration’s prior actions, some optimists might point to yesterday’s announcement as being a likely ‘starting point’ for negotiations, which will likely reduce the overall tariff rate as separate deals are made (quickly or slowly). Global trade agreements include thousands of individual products, including different rates and exceptions, so the process involves a lot more complexity than is often assumed.

From the President’s own words, aside from a desire to follow the “golden rule on trade” of “treat us like we treat you,” the objective was to raise around $600 bil. in revenue, which is just over 2% of U.S. GDP. While tariffs pale in comparison to revenue raised through income taxes, it appears to be intended as provide a runway for tax cuts this year, in terms of replacing at least some of the lost revenue. This assumes, of course, that economic growth plugs along at its current pace, as a slowdown in activity would reduce tax revenue from both trade and income. Tariffs can reduce buying power on a macro level, and yes, the irony is that taxes are ramping up on the front end to be coupled with possible reductions this year on the back end. A story for another time is that these revenue amounts are quite small in relation to the Federal budget deficit and certainly to the overall level of U.S. government debt. For the latter, with over 70% of the budget dedicated to mandatory expenditures (the bulk of which being tied to Social Security, Medicare, Medicaid, and related benefits), other ‘tweaks’ will have to be eventually looked at, as closing the deficit and/or reducing the debt load through smaller policies is unlikely to make a sizable dent.