Good morning,
For the week, so far, the S&P 500 Index is up +4.59%, and it is on track for the 2nd best week of the year (Futures are pointing up this morning at +.20%). This with federal tariff policy moving somewhat out of the spotlight as the week unfolded. U.S. asset markets have received a boost from a good old-fashioned source: benign inflation data. While this week’s CPI/PPI data is not forward-looking, they suggest that the trajectory of inflation heading into tariff implementation was less than expected.
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The market has recovered with indicator improvement. This does not mean there has been a significant increase in clarity about the months ahead. To what extent will the weakness in the soft economic data be followed by weakness in the hard data? When the tariffs hit, to what extent will we see uptrends in prices, inflation expectations, and bond yields, with U.S. Treasury yields potentially driven higher by mounting deficit concerns?
With indicator improvement and lasting uncertainty, the underlying trend is neither bearish nor bullish. We are forced to move to a neutral weighting. In a neutral, indecisive environment with uncertainty continuing to define 2025, what could lead to bullish or bearish outcomes?
In a bullish scenario, the hard data would refuse to confirm the soft, with the U.S. labor market holding up, consumers continuing to spend, and manufacturing momentum persisting. In a bearish scenario, evidence of the hard data confirming soft data would raise the probability of a recession and the commensurate earnings contraction.
There is a path in between – a sideways, range-bound market ahead.
Be well,
Mike