May Market Report

Cubs Win!

Ok, before everyone gets upset with me, this really is not about the Chicago Cubs, nor the fact that they just took the weekend series against the Brewers at Wrigley Field North in Milwaukee (sorry, could not resist). It is, however, about three sayings that are synonymous with the Cubs (and, yes, Brewer fans, two of them are negative about the Cubs).  Those sayings are: “Fly the W,” “June swoon,” and “Wait till next year.”  I could add “World Series Champions,” but that might be pushing things a bit too far for most of you. “Fly the W” refers to what happens when the Cubs win a game, and the team puts up a flag with a big “W” on it on an outfield flagpole after the game. Many fans also hold “W” flags when the team wins, both at home and on the road. “June swoon” refers to what used to happen all the time in the 1970s (and, unfortunately, beyond – up until they put lights in at Wrigley) when the team would start the season by playing great baseball, only to fall apart in June and then never recover.  “Wait till next year” became the slogan used after the “June swoon” took place to signify the fans enduring confidence that next year would be our year. While those sayings may apply to the Cubs and/or sports, they also can apply to our economy and markets, and we will explore them further here. Right now, as we approach summer, there has been, and is, a lot of uncertainty surrounding the economy and the markets and that means that all three slogans could be used as the year continues to unfold. Let’s dig into the markets and various segments of the economy to see how these slogans may be used in 2025.

Financial Markets

The title of the story by Charles Dickens, A Tale of Two Cities, describes the month of April, as it really was a tale of two halves of the month in the markets. The first half was a struggle, as uncertainty over tariffs pushed the markets lower, while the second half of the month brought more optimism, as earnings and potential trade deals helped to boost the markets. Unfortunately, the strong rally was not enough to push the markets into positive territory for the month or year to date, but it was a welcome relief. The S&P 500 index fell just 0.68% in April and is now down 4.92% on the year. The good news is that it is still up 12.10% over the past year. This is a familiar refrain when it comes to most indices, with the one big exception being small cap stocks, as represented by the S&P 600 index. That index was down 4.19% in April, down 12.74% year to date, and down 1.93% over the past year. On the other hand, international stocks, as represented by the EAFE, were up 4.17% in April, up 10.58% year to date, and up 9.67% over the past year. Likewise, bonds were up 0.39% in April, up 3.18% year to date, and up 8.02% over the past year. As mentioned in previous commentaries, the 60/40 portfolio of stocks and bonds is working, even if some commentators do not want to admit it. Decent employment, inflation, consumer spending data, and better tariff news (pause, possible deals) helped boost markets, while an initial negative GDP reading, lower consumer sentiment, and weak manufacturing sentiment held them in check.  Certainly, not trying to time the markets worked as the month unfolded, as those who sold out earlier in the month missed a strong rally at the end of the month which saw the S&P 500 post its largest percentage gain over seven days since November 2020. While the month was still a mixed bag, the rally provided welcome relief to weary investors. Just do not “Fly the W” yet, because the summer doldrums are coming, earnings forecasts are being trimmed, and any other negative data could be problematic. For more information, please see the end of this commentary.

The Economy

While economists look beyond GDP to determine how the economy is performing, when a negative number is presented, it opens everyone’s eyes. Certainly, that was the case in April, although the -0.3% reading for the first quarter was widely expected, it was dramatically better than what the Atlanta Fed’s GDPNow forecasted earlier this year (as much as a 3% decline in GDP at some points).  The negative number has caused trepidation and fear over the possibility of our being in a recession. When looking deeper, however, it is hard to find enough data to substantiate the U.S. being in a recession right now, but that could change. Employment data remains strong, and the consumer continues to spend, even though consumer sentiment has fallen dramatically this year. One wonders what people are telling researchers when what they say (concerned and somewhat fearful) is different from what they do (continue to spend). Inflation seems to be stabilizing (falling energy prices help) but will be subject to future tariff related costs. While current data doesn’t support the idea of our being in a recession, it isn’t strong enough to keep us out of one should the consumer stop spending, the employment data weaken, or the effects of the tariffs become onerous (empty store shelves, higher prices, etc.).  So, do not “Fly the W” just yet because we could face a “June swoon” which would mean we all might be saying “Wait till next year.” 

GDP (Gross Domestic Product) – The initial estimate of first quarter GDP was -0.3%, raising fears of a recession. However, when one strips away some of the items to get to core GDP, we find that the rate increased by 3.0% in the first quarter, which was in line with the growth rate during 2024. The core metric removes things like government purchases, inventories, and international trade. Looking at those items, it is easy to see where the weakness comes from, as government purchasing is being trimmed (non-defense discretionary spending is expected to be closer to $700 billion versus the nearly $1 trillion forecasted as recently as January).  Inventories and international trade both moved higher in the first quarter as consumers and businesses bought more to get ahead of projected tariffs, and they caused a drag on domestic GDP. First quarter industrial production and manufacturing increased at annual rates of 5.4% and 5.1%, respectively. This data, combined with continued better than expected employment data and reasonable inflation, means a recession is not in the cards currently. But, like we have said, do not “Fly the W” just yet as there will be some turbulence coming as the effects of the tariffs have not fully kicked in yet. The “June swoon” could be a real thing but, if so, the saying “Wait till next year” might mean a forecast of better economic data next year.

Inflation – “Wait till next year” seems to be the most apt phrase when it comes to inflation over the past year or two. While the rate did decline 0.1% in March to an annual rate of just 2.4%, no one broke out the champagne as if we had won the World Series. For one thing, the rate is not yet at the 2.0% target and, secondly, the expected impact due to tariffs has not yet kicked in. Certainly, it is good news but, once again, let’s not “Fly the W” just yet. Food prices ticked slightly higher, but gasoline prices fell. The prices of used cars and trucks, along with auto insurance, fell, and that is good news, especially on the insurance front. Airline fares ticked lower, but that could be due to tariff issues limiting the number of international fliers and/or travelers dialing back their expenditures due to an uncertain economy. Truflation reported a rate of 1.45% as of May 5^th and has been rangebound recently. Tariff costs are causing some concern for companies as they grapple with the uncertainty over tariff related costs, and that is why inflation is expected to tick slightly higher in the coming months. But as stated at the beginning of this section, just “Wait till next year” to hopefully get to the Fed’s 2.0% target.

Unemployment – As a recessionary signal, economists and investors are watching the employment data closely for any signs of a worsening picture. Try as they might, it just is not happening right now. The unemployment rate held steady at 4.2% in April, as payrolls increased by 177,000. Average monthly increases in non-farm payrolls are at 144,000 in 2025 and, even better news is that less job growth is occurring in government or government related positions and more in warehousing, transportation, and financial services. Given some of the uncertainty in the industrial sector, it is encouraging to note that employment there was little changed (no gain is better than any drop). Wisconsin unemployment stood at 3.2% and Madison’s rate was 2.7% (both preliminary and through March). Average hourly earnings ticked higher by 0.2% in April and have increased by 3.8% over the past year. While we may have to take it down at some point, the employment “W” flag continues to fly, and let us hope it remains that way.

The Fed Watch

The Fed is finding itself in a bit of a pickle lately. With economic uncertainty they might normally be sitting by the switch ready to cut rates with any further sign of weakness, but with a generally decent economy (see GDP discussion above) and concern over higher inflation due to tariffs, they are almost certainly stuck on the sidelines until the data more clearly points in one direction or the other.  Combine that with political pressure (this occurs with every president), it is likely that they will sit pat in May but could provide some guidance as to what they may do in June. By the time you read this, they will have met and provided more information, but whether it is helpful or not remains to be seen. Prior to the meeting, expectations are for a couple of rate cuts this year, with the first occurring in June. We will be looking for any guidance they provide and will discuss it further next month.

Tariffs

The dominant cause of uncertainty is certainly tariffs! While there has been a lot of talk about the size of the tariffs, why they are being used, the benefits and costs of tariffs, and what might be the goal for using them, one thing is clear and that is that we are only in the early innings of this game.  We are nowhere near the point of declaring any sort of victory, even with the recent stock market rally. Recent tariff announcements surrounding the entertainment and film industry and on the pharmaceutical industry have only added to the uncertainty that already exists. We continue to get talk of a “big announcement” that is “coming soon,” but just what that means nobody seems to know. One thing that is certain is that no matter how many countries want to discuss trade policies, agreements take time. Currently, although not certain, there is an expectation that deals are moving ahead with Japan and India. In the case of India, something does seem to be brewing, as Apple has recently announced that it will be moving the bulk of its iPhone production from China to India soon. That would not happen if a trade deal were not in the works. The 90-day deadline is ticking for deals to be done, and one should not be surprised when that deadline comes and goes with just announcements that talks are taking place and deals will be announced “soon”.  That would be okay if the deadlines were extended but would only add to volatility if they expired and dramatic increases in tariffs occur.

While there is a lot of talk surrounding the manufacturing sector and the need to bring manufacturing back home, and rightfully so, it overlooks the fact that we still have a robust and healthy sector. The reality is that industrial output is at all-time highs, and we are the world’s second largest manufacturer, behind only China, and our output is greater than the combined total of Japan, Germany, and South Korea (the next three largest manufacturing countries). In addition, the quality of our manufacturing (as measured by value added per worker) is the best in the world (due to our high-tech industries including airline, defense, biotech, semiconductors, etc.) and is about seven times greater than that of China.  So, while it is a worthy goal to bring more manufacturing back to the United States for strategic purposes, it is a misnomer to think that we do not already lead the world in that sector.

It will be some time before we see the true nature of what the economic impact will be from the tariffs, but volatility will be a fact of life for the foreseeable future. Let’s just hope that a “June swoon” is not in the works, be it in the form of a recession, higher inflation, or a market meltdown. Should the tariff issue be resolved favorably to the U.S., we could see the volatility to the upside, and that would be cause for a celebration where we could “Fly the W”!

Outlook/Summary

Can it be only the beginning of May? We have seen many years’ worth of market volatility within just a few months. The market’s main nemesis, “uncertainty,” has ruled the day, every day, and that has led to spikes in volatility to both the upside and downside. The Magnificent Seven stocks have underperformed but still dominate the world’s most valuable companies list. Bonds have held up in the face of great uncertainty, and international stocks have finally outperformed. Add it all up and what should an investor do? As we have said repeatedly, have a plan and stick to the plan. Don’t try and outguess the markets or try and time the markets but continue to diversify. All are hallmarks of our approach with the addition of looking to protect the downside first (adequate and appropriate fixed income exposure, defensive holdings, dividend payers, appropriate downside capture ratios, etc.) and then get upside performance (growth stocks, small caps, strong upside capture ratios).  We believe that this is the methodology to being able to achieve long-term success (“Fly the W”) and reduce the pain that can occur when the markets experience periods of negative volatility (aka, the dreaded “June Swoon”). While some clarity will come into the markets over time (“Wait till next year”) as the tariff picture clears up, we want to be positioned to provide steady long-term performance no matter what happens in the economy or markets.

We understand that this is an unsettling time, and to that end if you would like to discuss your portfolio or strategy, please call the Wealth Management division of Lake Ridge Bank at (608)826-3570. We look forward to speaking with you.  Oh, and Go Cubs!

Market/Economic Data

As of April 30th, 2025…. Unemployment data is through April for national, Madison and Wisconsin data (both preliminary) are through March, and inflation data is through March:

Thank you for your business – we look forward to speaking with you soon. (Note – this commentary used various articles from JP Morgan, Morningstar, the Wall Street Journal, Investor’s Business Daily, Northern Trust, CNNMoney.com, msn.com, Kiplingers.com, nytimes.com, Fidelity Investments, American Funds, LPL Financial and other tools as sources of information.