Daily Newsletter 5/5/25

The market has staged a significant rally from oversold conditions, including a rebound from extremely negative sentiment.

We believe the tariff war will have a tangible negative impact on the economy, and we continue to anticipate a mild recession-although the likelihood of more severe, worst-case scenarios has diminished considerably. We do not believe that all uncertainty has been eliminated.

We’ve been surprised by the strength of the market’s rally-it almost seems as though investors are disregarding any significant risks. However, market sentiment is tense, with the VIX over 24 and internal correlation levels still running high. While “soft” indicators point to significant anxiety in the economy, the “hard” economic data has yet to show substantial weakness. If and when the hard data deteriorates, we can expect another wave of fear to grip the market. It’s no surprise there were numerous positive earnings surprises, given that estimates had been lowered so significantly.

The trade war with China is highly complicated and is likely to take much longer to resolve. It is unrealistic to expect American businesses to overhaul their supply chains within just 90 days. We anticipate significant disruption as a result.

The U.S. should pursue fairer trade terms, but taking on every country at once is a strategy we find difficult to support.

Employment growth has decelerated, but not dramatically. It's important to remember that employment is a lagging indicator.

Today, we are closely monitoring volatility and the direction of gold stocks and ETFs. In our view, the upcoming FOMC meeting is likely to trigger another spike in market volatility. The Fed's forward guidance should be examined very carefully. When risks are "two-sided" market participants, businesses, and households are especially sensitive to signals from the Federal Reserve about its future policy intentions.

Expect a pivotal week, with the FOMC meeting and Fed communications in the spotlight. Markets will be sensitive to any changes in tone or guidance from the Fed, as well as to fresh data on U.S. services activity, trade, labor market, and productivity. Global economic indicators and central bank commentary will add to the week’s potential for market volatility. Market activity may be lighter at the start of the week due to holidays in Japan, South Korea, China, the UK, and Hong Kong.

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