Latest news with #TKer.co
Yahoo
18-05-2025
- Business
- Yahoo
Why you can't keep the US economy and stock market down for very long
A version of this post first appeared on One of the benefits of aging as an investor is that you accumulate invaluable experience and perspective by living through a lot of very bad economic and financial market events. These include events when, in the moment, it felt like things had permanently taken a turn for the worse. But time after time, you're reminded that you can't keep the U.S. economy and stock market down for very long. I like to reflect on those events and recall the unpleasant memories because it helps me better process current and future periods of turmoil and crisis. And the more I reflect, the more I feel like I understand why we keep bouncing back. In the late 1990s, I was just another immature high school kid without many cares in the world. I didn't really keep up with current events. But I remember the Asian Financial Crisis because it was one of the topics in prayers my dad would give at his church in Kentucky. I'll never forget hearing "IMF" come up in those Korean prayers because it was so unusual. Among other things, the Korean won collapsed by more than half against the U.S. dollar over a very short period at the time. This was a particularly big problem for immigrants closely tied to family back in Korea. I didn't quite understand it at the time, but I remember the mood being disturbingly gloomy for a while. The Asian Financial Crisis saw major currencies quickly collapse. (Source: FRED) I don't have many memories from the Dot-com Bubble bursting. Back then, I had little interest in or exposure to the stock market, and neither did the people around me. But I do remember watching 9/11 live on TV in my dorm with my roommates at Boston University. I remember not being able to get a hold of family members in New York and Kentucky because the phones were overloaded. I remember the extreme range of reactions from my friends: some fled Boston out of fear; some used it as an excuse to skip some classes; some explored joining the armed forces. Everyone was rattled. Everyone felt less safe. And for my college friends and I, it soon became clear that we would all be entering a tighter job market with an elevated unemployment rate. Things weren't great. The economy looked great when I entered college in 2000. It wasn't as great when I graduated in 2004. (Source: FRED) After graduating from college in 2004 and after months of searching, I randomly got a job as a contract paralegal where I got my first serious introduction to equity research. I quickly became hooked on learning about what made the stock market move. In 2006, I got a job at Forbes Newsletters researching and writing up stock picks. I also enrolled in the CFA program that year, which helped me develop a sophisticated understanding of things like mortgage backed securities, collateralized debt obligations, derivatives, and value-at-risk models. This education super-charged my fear and my feeling of hopelessness as the world tipped into recession in 2007 and spiraled into Global Financial Crisis (GFC) in 2008. The more I understood, the more I felt like there was no way out of it. And many pundits seemed to agree. I remember respected financial market prognosticators going on TV and proclaiming that the government's bailouts of the big banks, the automakers, and the GSEs were proof that it was "the end of capitalism." The S&P 500 fell 57% from its Oct 2007 high of 1,565 to its March 2009 low of 666. (Source: Yahoo Finance) It wasn't the end of capitalism, though many were convinced the housing market would never come back as we entered a "new normal" of slow growth. Another popular phrase in the wake of the crisis was "secular stagnation." Admittedly, I was sold on the idea that economic growth would forever be a long slog. You can't blame me. In 2010, I got laid off from my job and I re-entered a job market flooded with unemployed people with backgrounds in finance. But the post-GFC recovery helped me appreciate the resilience of the consumers and businesses propelling the economy forward. I got a great job in 2011, and over the next decade my income soared. Those years were riddled with numerous macro hiccups, but nothing could keep the economy and the stock market from accelerating again and blasting through record highs. And then came the COVID-19 pandemic. Those first 6-9 months were surreal. I remember feeling like I was living in a sci-fi horror film. At many points I thought this new strange way of life would be permanent. Meanwhile, I was constantly worried that the whole economy would collapse on itself. COVID-19 caused the economy to nearly screech to a halt. (Source: FRED) The discovery of the vaccine certainly helped things turn around. Fast forward a few years, and most things in the economy are back to normal. Notably, cruise and air travel have more than recovered as most people have gotten comfortable again with being in tight spaces with strangers โ unless it's in an office for work. So despite the pain, the trauma, and even the loss of life, all these experiences eventually confirmed that we'll always bounce back. The economy and the stock market have always had an upward bias. This makes sense if you think about it. There are way more people who want things to be better, not worse. And that demand incentivizes entrepreneurs and businesses to supply better goods and services. The winners in this process get bigger as revenue grows. Some even get big enough to get listed in the stock market. As revenue grows, so do earnings. And earnings drive stock prices. I can't imagine anything changing these attitudes. Sure, there will be periods of when we feel angry and hopeless along the way. But we're never gonna wake up one day and decide we have everything we want or settle on the idea that what we've got can't be improved on. And there will always be a sense of urgency. Even during difficult periods, people understand that life won't wait. You're getting older. Your kids are getting older. Your parents are getting older. If you have the resources, you won't put your lives on hold. This is bullish as it keeps the wheels on the economy spinning. Sure, many things change after all the events I mentioned. But things are always changing. Importantly, the changes that stuck have never prevented the economy and the markets from setting new records. If you've been following the news at all over the past two months, you've probably heard at least a few folks talking about how the Trump administration's approach to trade policy is damaging the U.S. 's standing in the world while also threatening to send the global economy into recession. As the stock market tumbled, phrases like "sell America" and "end of American exceptionalism" began to trend. Popular measures of investor sentiment tanked. Barron's Big Money poll revealed historic levels of bearishness. (Source: Barron's) To be clear, I think the past two months created some damage, and we have yet to learn the extent of that damage. It's certainly possible that we're in a recession or headed for one. And it's certainly possible the stock market could take another leg lower. But I'm nowhere near convinced that we're destined for an extended, multi-year period of turmoil and pain. Our system is amazing at self-correcting. Whether it's through votes or something else, we always seem to find a way to get things back on track toward increasing prosperity and improving our standard of living. And to repeat what I said last week: There's basically three scenarios investors always have to consider: 1) Things improve from here, and the market goes up; 2) Things get worse before they get better, which means markets could fall before resuming a more firm rally; or 3) Things get worse and never get better. If we're facing scenario 3, then we may have bigger problems than stocks not recovering. But scenario 3 has never played out. Scenarios 1 and 2 favor long-term investors. Maybe things get worse before they get better. (Note: Timing market bottoms is nearly impossible.) But staying long the stock market covers you in case the low of this cycle is behind us. I'll leave you with Warren Buffett said earlier this month at Berkshire Hathaway's annual meeting: "We're always in the process of change. We'll always find all kinds of things to criticize in the country. โฆ If you don't think the United States has changed since I was born in 1930โฆ We've gone through all kinds of things. We've gone through great recessions. We've gone through world wars. We've gone through the development of the atomic bomb that we never dreamt of when I was born. So I would not get discouraged about the fact that it doesn't look like we've solved every problem that's come along." The 94-year-old investor has lived through everything, and he's made a fortune investing in the stock market along the way. There were several notable data points and macroeconomic developments since our last review: ๐บ๐ธ Moody's downgraded its rating on the U.S. from Aaa to Aa1. Like most analysts out there, I'm not too surprised or concerned by the action. You can read my thoughts on credit rating downgrades in the this 2023 TKer: ๐ค ๐๏ธ Shopping ticks higher. Retail sales increased 0.1% in April to a record $724.1 billion. (Source: Census via FRED) For more on consumer spending, read: ๐ตโ๐ซ and ๐๏ธ ๐ณ Card spending data is holding up. From JPMorgan: "As of 08 May 2025, our Chase Consumer Card spending data (unadjusted) was 2.3% above the same day last year. Based on the Chase Consumer Card data through 08 May 2025, our estimate of the US Census May control measure of retail sales m/m is 0.54%." (Source: JPMorgan) From BofA: "Total card spending per HH was up 1.3% y/y in the week ending May 10, according to BAC aggregated credit & debit card data. Relative to last week, the biggest gains were in department stores & grocery while entertainment & lodging saw the biggest decline. Spending has recovered from the Easter slowdown. Overall, there has been some moderation but spending momentum remains." May spending is likely being boosted by consumers pulling forward purchases in an attempt to front-run tariffs. For more on consumer spending, read: ๐ตโ๐ซ and ๐๏ธ ๐ Consumer sentiment is tumbling. From the University of Michigan's May Surveys of Consumers: "Sentiment is now down almost 30% since January 2025. Slight increases in sentiment this month for independents were offset by a 7% decline among Republicans. While most index components were little changed, current assessments of personal finances sank nearly 10% on the basis of weakening incomes. Tariffs were spontaneously mentioned by nearly three-quarters of consumers, up from almost 60% in April; uncertainty over trade policy continues to dominate consumers' thinking about the economy." (Source: University of Michigan) Politics clearly plays a role in peoples' perception of the economy. (Source: Michael McDonough) Notably, expectations for inflation appear to be a partisan matter. (Source: Michael McDonough) For more on the state of sentiment, read: ๐ตโ๐ซ and ๐ตโ๐ซ ๐ฆ Inventory levels fall. Total business inventories increased just 0.1% to $2.58 trillion in March. However, this lagged sales growth during the period. As a result, the inventories/sales ratio declined to 1.34 in March, down from 1.35 in February. (Source: Census) For more on why we're watching inventories, read: ๐คท๐ปโโ๏ธ ๐ Inflation cools. The Consumer Price Index (CPI) in April was up 2.3% from a year ago, down from the 2.4% rate in March. Adjusted for food and energy prices, core CPI was up 2.8%, unchanged from the prior month's level. (Source: Nick Timiraos) On a month-over-month basis, CPI and core CPI increased just 0.2%. If you annualize the three-month trend in the monthly figures โ a reflection of the short-term trend in prices โ core CPI climbed 2.1%. (Source: Nick Timiraos) For more on inflation, read: ๐and โ๏ธ โฝ๏ธ Gas prices tick higher. From AAA: "Gas prices are creeping back up just in time for the busy summer driving season. The national average for a gallon of regular is up 4 cents from last week, as the price of crude oil rises and demand goes up. Typically, the seasonal increase in gas prices starts earlier in the spring, but lower crude oil prices so far this year have kept that from happening. Now, we're starting to settle in a more typical pattern. Despite the upward trend, drivers are paying about 40 cents less compared to last year, which is good news for the record 39.4 million Americans expected to take road trips over Memorial Day weekend." (Source: AAA) For more on energy prices, read: ๐ข๏ธ ๐ฐ Household finances are deteriorating but also normalizing. From the New York Fed's Q1 Household Debt & Credit report: "Transition into early delinquency held steady for nearly all debt types; the exception was for student loans, which saw a large uptick in the rate at which balances went from current to delinquent due to the resumption of reporting of delinquent student loans on credit reports after a nearly 5-year pause due to the pandemic." (Source: NY Fed) While the rate at which debt is going into delinquency has moved higher, the total amount of debt in delinquency remains low at just 4.3% of outstanding debt. (Source: NY Fed) And while credit card delinquency rates may be up, it's a mistake to say consumers are maxing out their credit cards. The $1.2 trillion in credit card balances as of Q1 represents just a tiny fraction of credit card limits. (Source: NY Fed) For more on household finances, read: ๐๏ธ ๐ผ Unemployment claims tread. Initial claims for unemployment benefits fell to 229,000 during the week ending May 10, unchanged from the week prior. This metric continues to be at levels historically associated with economic growth. (Source: DoL via FRED) For more context, read: ๐๏ธ and ๐ผ ๐ Small business optimism falls. From the NFIB's April Small Business Optimism Index report: "Very few small businesses export their goods and services, but millions acquire imported goods as inputs to their operations and those supply chains are currently at risk. Tariff policy is suddenly and dramatically changing relative prices (costs), and relative prices drive all decisions. Uncertainty remains elevated and thus caution clouds spending, hiring, and investing decisions." (Source: NFIB) For more on the state of sentiment, read: ๐ and ๐ตโ๐ซ ๐ Homebuilder sentiment sinks. From the NAHB's Robert Dietz: "Policy uncertainty stemming in large part from the stop-and-start tariff issues has hurt builder confidence but the initial trade arrangements with the United Kingdom and China are a welcome development. Still, the overall actions on tariffs in recent weeks have had a negative impact on builders, as 78% reported difficulties pricing their homes recently due to uncertainty around material prices." (Source: NAHB) ๐จ New home construction starts rise. Housing starts grew 1.6% in April to an annualized rate of 1.36 million units, according to the Census Bureau. Building permits ticked down 4.7% to an annualized rate of 1.41 million units. (Source: Census) ๐ Mortgage rates tick higher. According to Freddie Mac, the average 30-year fixed-rate mortgage rose to 6.81%, up from 6.76% last week. From Freddie Mac: "The 30-year fixed-rate mortgage remained below the 7% threshold for the 17th consecutive week. Stable mortgage rates coupled with moderately rising inventory are attracting homebuyers into the market, with purchase application activity up 18% from last year." (Source: Freddie Mac) There are 147.8 million housing units in the U.S., of which 86.1 million are owner-occupied and about 34.1 million of which are mortgage-free. Of those carrying mortgage debt, almost all have fixed-rate mortgages, and most of those mortgages have rates that were locked in before rates surged from 2021 lows. All of this is to say: Most homeowners are not particularly sensitive to movements in home prices or mortgage rates. For more on mortgages and home prices, read: ๐ ๐ฌ This is the stuff pros are worried about. From BofA's May Global Fund Manager Survey: "The US-China meeting in Geneva was announced in the middle of the May FMS survey period; even still, trade war triggering global recession continues to be seen as the biggest 'tail risk' per 62% of investors, albeit down from peak 80% in April (in 15-year history)." (Source: BofA) For more on risks, read: ๐ข, ๐ and ๐ ๐พ The entrepreneurial spirit is alive. From the Census Bureau: "Total U.S. Business Applications were 449,508 in April 2025, down 0.9% from March 2025." (Source: Census) TKer is a small business that launched three years ago. For more, read: ๐๐ ๐ ๏ธ Industrial activity flattens. Industrial production activity in April didn't change much from prior month levels. Manufacturing output decreased 0.4%. (Source: Federal Reserve) For more on economic activity cooling, read: ๐ ๐ Near-term GDP growth estimates are tracking positive. The Atlanta Fed's GDPNow model sees real GDP growth rising at a 2.4% rate in Q2. (Source: Atlanta Fed) For more on GDP and the economy, read: ๐ and ๐คจ ๐ข Offices remain relatively empty. From Kastle Systems: "Peak day office occupancy was 62.8% on Tuesday last week, down half a point from the previous week. New York and San Jose experienced the largest declines, falling 2.5 points to 66.8% and 2.9 points to 57.1%, respectively. The average low was on Friday at 34.8%, same as the previous week." (Source: Kastle) For more on office occupancy, read: ๐ข Upgrade to paid ๐จ The tariffs announced by President Trump as they stand threaten to upend global trade โ with significant implications for the U.S. economy, corporate earnings, and the stock market. Until we get some more clarity, here's where things stand: Earnings look bullish: The long-term outlook for the stock market remains favorable, bolstered by expectations for years of earnings growth. And earnings are the most important driver of stock prices. Demand is positive: Demand for goods and services remains positive, supported by healthy consumer and business balance sheets. Job creation, while cooling, also remains positive, and the Federal Reserve โ having resolved the inflation crisis โ has shifted its focus toward supporting the labor market. But growth is cooling: While the economy remains healthy, growth has normalized from much hotter levels earlier in the cycle. The economy is less "coiled" these days as major tailwinds like excess job openings have faded. It has become harder to argue that growth is destiny. Actions speak louder than words: We are in an odd period given that the hard economic data has decoupled from the soft sentiment-oriented data. Consumer and business sentiment has been relatively poor, even as tangible consumer and business activity continue to grow and trend at record levels. From an investor's perspective, what matters is that the hard economic data continues to hold up. Stocks are not the economy: Analysts expect the U.S. stock market could outperform the U.S. economy, thanks largely due to positive operating leverage. Since the pandemic, companies have adjusted their cost structures aggressively. This has come with strategic layoffs and investment in new equipment, including hardware powered by AI. These moves are resulting in positive operating leverage, which means a modest amount of sales growth โ in the cooling economy โ is translating to robust earnings growth. Mind the ever-present risks: Of course, this does not mean we should get complacent. There will always be risks to worry about โ such as U.S. political uncertainty, geopolitical turmoil, energy price volatility, cyber attacks, etc. There are also the dreaded unknowns. Any of these risks can flare up and spark short-term volatility in the markets. Investing is never a smooth ride: There's also the harsh reality that economic recessions and bear markets are developments that all long-term investors should expect to experience as they build wealth in the markets. Always keep your stock market seat belts fastened. Think long term: For now, there's no reason to believe there'll be a challenge that the economy and the markets won't be able to overcome over time. The long game remains undefeated, and it's a streak long-term investors can expect to continue. A version of this post first appeared on
Yahoo
18-05-2025
- Business
- Yahoo
Why you can't keep the US economy and stock market down for very long
A version of this post first appeared on One of the benefits of aging as an investor is that you accumulate invaluable experience and perspective by living through a lot of very bad economic and financial market events. These include events when, in the moment, it felt like things had permanently taken a turn for the worse. But time after time, you're reminded that you can't keep the U.S. economy and stock market down for very long. I like to reflect on those events and recall the unpleasant memories because it helps me better process current and future periods of turmoil and crisis. And the more I reflect, the more I feel like I understand why we keep bouncing back. In the late 1990s, I was just another immature high school kid without many cares in the world. I didn't really keep up with current events. But I remember the Asian Financial Crisis because it was one of the topics in prayers my dad would give at his church in Kentucky. I'll never forget hearing "IMF" come up in those Korean prayers because it was so unusual. Among other things, the Korean won collapsed by more than half against the U.S. dollar over a very short period at the time. This was a particularly big problem for immigrants closely tied to family back in Korea. I didn't quite understand it at the time, but I remember the mood being disturbingly gloomy for a while. The Asian Financial Crisis saw major currencies quickly collapse. (Source: FRED) I don't have many memories from the Dot-com Bubble bursting. Back then, I had little interest in or exposure to the stock market, and neither did the people around me. But I do remember watching 9/11 live on TV in my dorm with my roommates at Boston University. I remember not being able to get a hold of family members in New York and Kentucky because the phones were overloaded. I remember the extreme range of reactions from my friends: some fled Boston out of fear; some used it as an excuse to skip some classes; some explored joining the armed forces. Everyone was rattled. Everyone felt less safe. And for my college friends and I, it soon became clear that we would all be entering a tighter job market with an elevated unemployment rate. Things weren't great. The economy looked great when I entered college in 2000. It wasn't as great when I graduated in 2004. (Source: FRED) After graduating from college in 2004 and after months of searching, I randomly got a job as a contract paralegal where I got my first serious introduction to equity research. I quickly became hooked on learning about what made the stock market move. In 2006, I got a job at Forbes Newsletters researching and writing up stock picks. I also enrolled in the CFA program that year, which helped me develop a sophisticated understanding of things like mortgage backed securities, collateralized debt obligations, derivatives, and value-at-risk models. This education super-charged my fear and my feeling of hopelessness as the world tipped into recession in 2007 and spiraled into Global Financial Crisis (GFC) in 2008. The more I understood, the more I felt like there was no way out of it. And many pundits seemed to agree. I remember respected financial market prognosticators going on TV and proclaiming that the government's bailouts of the big banks, the automakers, and the GSEs were proof that it was "the end of capitalism." The S&P 500 fell 57% from its Oct 2007 high of 1,565 to its March 2009 low of 666. (Source: Yahoo Finance) It wasn't the end of capitalism, though many were convinced the housing market would never come back as we entered a "new normal" of slow growth. Another popular phrase in the wake of the crisis was "secular stagnation." Admittedly, I was sold on the idea that economic growth would forever be a long slog. You can't blame me. In 2010, I got laid off from my job and I re-entered a job market flooded with unemployed people with backgrounds in finance. But the post-GFC recovery helped me appreciate the resilience of the consumers and businesses propelling the economy forward. I got a great job in 2011, and over the next decade my income soared. Those years were riddled with numerous macro hiccups, but nothing could keep the economy and the stock market from accelerating again and blasting through record highs. And then came the COVID-19 pandemic. Those first 6-9 months were surreal. I remember feeling like I was living in a sci-fi horror film. At many points I thought this new strange way of life would be permanent. Meanwhile, I was constantly worried that the whole economy would collapse on itself. COVID-19 caused the economy to nearly screech to a halt. (Source: FRED) The discovery of the vaccine certainly helped things turn around. Fast forward a few years, and most things in the economy are back to normal. Notably, cruise and air travel have more than recovered as most people have gotten comfortable again with being in tight spaces with strangers โ unless it's in an office for work. So despite the pain, the trauma, and even the loss of life, all these experiences eventually confirmed that we'll always bounce back. The economy and the stock market have always had an upward bias. This makes sense if you think about it. There are way more people who want things to be better, not worse. And that demand incentivizes entrepreneurs and businesses to supply better goods and services. The winners in this process get bigger as revenue grows. Some even get big enough to get listed in the stock market. As revenue grows, so do earnings. And earnings drive stock prices. I can't imagine anything changing these attitudes. Sure, there will be periods of when we feel angry and hopeless along the way. But we're never gonna wake up one day and decide we have everything we want or settle on the idea that what we've got can't be improved on. And there will always be a sense of urgency. Even during difficult periods, people understand that life won't wait. You're getting older. Your kids are getting older. Your parents are getting older. If you have the resources, you won't put your lives on hold. This is bullish as it keeps the wheels on the economy spinning. Sure, many things change after all the events I mentioned. But things are always changing. Importantly, the changes that stuck have never prevented the economy and the markets from setting new records. If you've been following the news at all over the past two months, you've probably heard at least a few folks talking about how the Trump administration's approach to trade policy is damaging the U.S. 's standing in the world while also threatening to send the global economy into recession. As the stock market tumbled, phrases like "sell America" and "end of American exceptionalism" began to trend. Popular measures of investor sentiment tanked. Barron's Big Money poll revealed historic levels of bearishness. (Source: Barron's) To be clear, I think the past two months created some damage, and we have yet to learn the extent of that damage. It's certainly possible that we're in a recession or headed for one. And it's certainly possible the stock market could take another leg lower. But I'm nowhere near convinced that we're destined for an extended, multi-year period of turmoil and pain. Our system is amazing at self-correcting. Whether it's through votes or something else, we always seem to find a way to get things back on track toward increasing prosperity and improving our standard of living. And to repeat what I said last week: There's basically three scenarios investors always have to consider: 1) Things improve from here, and the market goes up; 2) Things get worse before they get better, which means markets could fall before resuming a more firm rally; or 3) Things get worse and never get better. If we're facing scenario 3, then we may have bigger problems than stocks not recovering. But scenario 3 has never played out. Scenarios 1 and 2 favor long-term investors. Maybe things get worse before they get better. (Note: Timing market bottoms is nearly impossible.) But staying long the stock market covers you in case the low of this cycle is behind us. I'll leave you with Warren Buffett said earlier this month at Berkshire Hathaway's annual meeting: "We're always in the process of change. We'll always find all kinds of things to criticize in the country. โฆ If you don't think the United States has changed since I was born in 1930โฆ We've gone through all kinds of things. We've gone through great recessions. We've gone through world wars. We've gone through the development of the atomic bomb that we never dreamt of when I was born. So I would not get discouraged about the fact that it doesn't look like we've solved every problem that's come along." The 94-year-old investor has lived through everything, and he's made a fortune investing in the stock market along the way. There were several notable data points and macroeconomic developments since our last review: ๐บ๐ธ Moody's downgraded its rating on the U.S. from Aaa to Aa1. Like most analysts out there, I'm not too surprised or concerned by the action. You can read my thoughts on credit rating downgrades in the this 2023 TKer: ๐ค ๐๏ธ Shopping ticks higher. Retail sales increased 0.1% in April to a record $724.1 billion. (Source: Census via FRED) For more on consumer spending, read: ๐ตโ๐ซ and ๐๏ธ ๐ณ Card spending data is holding up. From JPMorgan: "As of 08 May 2025, our Chase Consumer Card spending data (unadjusted) was 2.3% above the same day last year. Based on the Chase Consumer Card data through 08 May 2025, our estimate of the US Census May control measure of retail sales m/m is 0.54%." (Source: JPMorgan) From BofA: "Total card spending per HH was up 1.3% y/y in the week ending May 10, according to BAC aggregated credit & debit card data. Relative to last week, the biggest gains were in department stores & grocery while entertainment & lodging saw the biggest decline. Spending has recovered from the Easter slowdown. Overall, there has been some moderation but spending momentum remains." May spending is likely being boosted by consumers pulling forward purchases in an attempt to front-run tariffs. For more on consumer spending, read: ๐ตโ๐ซ and ๐๏ธ ๐ Consumer sentiment is tumbling. From the University of Michigan's May Surveys of Consumers: "Sentiment is now down almost 30% since January 2025. Slight increases in sentiment this month for independents were offset by a 7% decline among Republicans. While most index components were little changed, current assessments of personal finances sank nearly 10% on the basis of weakening incomes. Tariffs were spontaneously mentioned by nearly three-quarters of consumers, up from almost 60% in April; uncertainty over trade policy continues to dominate consumers' thinking about the economy." (Source: University of Michigan) Politics clearly plays a role in peoples' perception of the economy. (Source: Michael McDonough) Notably, expectations for inflation appear to be a partisan matter. (Source: Michael McDonough) For more on the state of sentiment, read: ๐ตโ๐ซ and ๐ตโ๐ซ ๐ฆ Inventory levels fall. Total business inventories increased just 0.1% to $2.58 trillion in March. However, this lagged sales growth during the period. As a result, the inventories/sales ratio declined to 1.34 in March, down from 1.35 in February. (Source: Census) For more on why we're watching inventories, read: ๐คท๐ปโโ๏ธ ๐ Inflation cools. The Consumer Price Index (CPI) in April was up 2.3% from a year ago, down from the 2.4% rate in March. Adjusted for food and energy prices, core CPI was up 2.8%, unchanged from the prior month's level. (Source: Nick Timiraos) On a month-over-month basis, CPI and core CPI increased just 0.2%. If you annualize the three-month trend in the monthly figures โ a reflection of the short-term trend in prices โ core CPI climbed 2.1%. (Source: Nick Timiraos) For more on inflation, read: ๐and โ๏ธ โฝ๏ธ Gas prices tick higher. From AAA: "Gas prices are creeping back up just in time for the busy summer driving season. The national average for a gallon of regular is up 4 cents from last week, as the price of crude oil rises and demand goes up. Typically, the seasonal increase in gas prices starts earlier in the spring, but lower crude oil prices so far this year have kept that from happening. Now, we're starting to settle in a more typical pattern. Despite the upward trend, drivers are paying about 40 cents less compared to last year, which is good news for the record 39.4 million Americans expected to take road trips over Memorial Day weekend." (Source: AAA) For more on energy prices, read: ๐ข๏ธ ๐ฐ Household finances are deteriorating but also normalizing. From the New York Fed's Q1 Household Debt & Credit report: "Transition into early delinquency held steady for nearly all debt types; the exception was for student loans, which saw a large uptick in the rate at which balances went from current to delinquent due to the resumption of reporting of delinquent student loans on credit reports after a nearly 5-year pause due to the pandemic." (Source: NY Fed) While the rate at which debt is going into delinquency has moved higher, the total amount of debt in delinquency remains low at just 4.3% of outstanding debt. (Source: NY Fed) And while credit card delinquency rates may be up, it's a mistake to say consumers are maxing out their credit cards. The $1.2 trillion in credit card balances as of Q1 represents just a tiny fraction of credit card limits. (Source: NY Fed) For more on household finances, read: ๐๏ธ ๐ผ Unemployment claims tread. Initial claims for unemployment benefits fell to 229,000 during the week ending May 10, unchanged from the week prior. This metric continues to be at levels historically associated with economic growth. (Source: DoL via FRED) For more context, read: ๐๏ธ and ๐ผ ๐ Small business optimism falls. From the NFIB's April Small Business Optimism Index report: "Very few small businesses export their goods and services, but millions acquire imported goods as inputs to their operations and those supply chains are currently at risk. Tariff policy is suddenly and dramatically changing relative prices (costs), and relative prices drive all decisions. Uncertainty remains elevated and thus caution clouds spending, hiring, and investing decisions." (Source: NFIB) For more on the state of sentiment, read: ๐ and ๐ตโ๐ซ ๐ Homebuilder sentiment sinks. From the NAHB's Robert Dietz: "Policy uncertainty stemming in large part from the stop-and-start tariff issues has hurt builder confidence but the initial trade arrangements with the United Kingdom and China are a welcome development. Still, the overall actions on tariffs in recent weeks have had a negative impact on builders, as 78% reported difficulties pricing their homes recently due to uncertainty around material prices." (Source: NAHB) ๐จ New home construction starts rise. Housing starts grew 1.6% in April to an annualized rate of 1.36 million units, according to the Census Bureau. Building permits ticked down 4.7% to an annualized rate of 1.41 million units. (Source: Census) ๐ Mortgage rates tick higher. According to Freddie Mac, the average 30-year fixed-rate mortgage rose to 6.81%, up from 6.76% last week. From Freddie Mac: "The 30-year fixed-rate mortgage remained below the 7% threshold for the 17th consecutive week. Stable mortgage rates coupled with moderately rising inventory are attracting homebuyers into the market, with purchase application activity up 18% from last year." (Source: Freddie Mac) There are 147.8 million housing units in the U.S., of which 86.1 million are owner-occupied and about 34.1 million of which are mortgage-free. Of those carrying mortgage debt, almost all have fixed-rate mortgages, and most of those mortgages have rates that were locked in before rates surged from 2021 lows. All of this is to say: Most homeowners are not particularly sensitive to movements in home prices or mortgage rates. For more on mortgages and home prices, read: ๐ ๐ฌ This is the stuff pros are worried about. From BofA's May Global Fund Manager Survey: "The US-China meeting in Geneva was announced in the middle of the May FMS survey period; even still, trade war triggering global recession continues to be seen as the biggest 'tail risk' per 62% of investors, albeit down from peak 80% in April (in 15-year history)." (Source: BofA) For more on risks, read: ๐ข, ๐ and ๐ ๐พ The entrepreneurial spirit is alive. From the Census Bureau: "Total U.S. Business Applications were 449,508 in April 2025, down 0.9% from March 2025." (Source: Census) TKer is a small business that launched three years ago. For more, read: ๐๐ ๐ ๏ธ Industrial activity flattens. Industrial production activity in April didn't change much from prior month levels. Manufacturing output decreased 0.4%. (Source: Federal Reserve) For more on economic activity cooling, read: ๐ ๐ Near-term GDP growth estimates are tracking positive. The Atlanta Fed's GDPNow model sees real GDP growth rising at a 2.4% rate in Q2. (Source: Atlanta Fed) For more on GDP and the economy, read: ๐ and ๐คจ ๐ข Offices remain relatively empty. From Kastle Systems: "Peak day office occupancy was 62.8% on Tuesday last week, down half a point from the previous week. New York and San Jose experienced the largest declines, falling 2.5 points to 66.8% and 2.9 points to 57.1%, respectively. The average low was on Friday at 34.8%, same as the previous week." (Source: Kastle) For more on office occupancy, read: ๐ข Upgrade to paid ๐จ The tariffs announced by President Trump as they stand threaten to upend global trade โ with significant implications for the U.S. economy, corporate earnings, and the stock market. Until we get some more clarity, here's where things stand: Earnings look bullish: The long-term outlook for the stock market remains favorable, bolstered by expectations for years of earnings growth. And earnings are the most important driver of stock prices. Demand is positive: Demand for goods and services remains positive, supported by healthy consumer and business balance sheets. Job creation, while cooling, also remains positive, and the Federal Reserve โ having resolved the inflation crisis โ has shifted its focus toward supporting the labor market. But growth is cooling: While the economy remains healthy, growth has normalized from much hotter levels earlier in the cycle. The economy is less "coiled" these days as major tailwinds like excess job openings have faded. It has become harder to argue that growth is destiny. Actions speak louder than words: We are in an odd period given that the hard economic data has decoupled from the soft sentiment-oriented data. Consumer and business sentiment has been relatively poor, even as tangible consumer and business activity continue to grow and trend at record levels. From an investor's perspective, what matters is that the hard economic data continues to hold up. Stocks are not the economy: Analysts expect the U.S. stock market could outperform the U.S. economy, thanks largely due to positive operating leverage. Since the pandemic, companies have adjusted their cost structures aggressively. This has come with strategic layoffs and investment in new equipment, including hardware powered by AI. These moves are resulting in positive operating leverage, which means a modest amount of sales growth โ in the cooling economy โ is translating to robust earnings growth. Mind the ever-present risks: Of course, this does not mean we should get complacent. There will always be risks to worry about โ such as U.S. political uncertainty, geopolitical turmoil, energy price volatility, cyber attacks, etc. There are also the dreaded unknowns. Any of these risks can flare up and spark short-term volatility in the markets. Investing is never a smooth ride: There's also the harsh reality that economic recessions and bear markets are developments that all long-term investors should expect to experience as they build wealth in the markets. Always keep your stock market seat belts fastened. Think long term: For now, there's no reason to believe there'll be a challenge that the economy and the markets won't be able to overcome over time. The long game remains undefeated, and it's a streak long-term investors can expect to continue. A version of this post first appeared on Sign in to access your portfolio
Yahoo
05-05-2025
- Business
- Yahoo
Buffett succession: Berkshire's business has been 'changing forever'
Alongside Berkshire Hathaway's (BRK-B, BRK-A) first quarter earnings results, chairman and CEO Warren Buffett, 94, announced at the company's annual shareholders meeting that he will step down and be succeeded by Berkshire Hathaway Energy Chair Greg Abel at the end of the year. editor Sam Ro reacts to Buffett's retirement announcement, how investors should expect to respond to this passing of the torch, and Buffett's own comments on why trade policies should not be used as "a weapon." To watch more expert insights and analysis on the latest market action, check out more Morning Brief here. Berkshire Hathaway's board voting unanimously to name Greg Abel as Warren Buffett's successor. Abel will take over as president and CEO of the company starting January 1st of 2026. Buffett's plan to step down after 60 years at the helm was just one of the biggest takeaways from Berkshire Hathaway's annual shareholder meeting. Our next guest, Sam Roe, he is the editor. He was on the ground this weekend, and we're going to discuss with him. Sam, great to have you here. Uh, you know, I love getting your insights. Talk to me about the reaction in the room when Buffett announced that he would in fact be leaving the top position at the company by the end of this year. What did you hear from folks on the ground? Well, yeah, I mean, initially it was stunned silence. Because, you know, if you listen to his words carefully, he didn't say I intend to retire. He says, I think it's time for Greg Abel to become CEO. And so your brain has to sort of, you know, make some logical jumps there to say, well, if Buffett's the CEO, then that means Buffett has to retire. So, you know, the wording was really interesting and and, yeah, it was stunned silence. Um, but uh, I I think uh, you know, as much as it came to a shock for a lot of people, it's also something that's been in the works for an incredibly long amount of time. Um, you know, first of all, he's 94 years old. You know, you're never going to be surprised to hear when a 94 year old decides that he's going to, not only retire, but retire at the end of the year. Um, and the other thing is that, you know, the uh, Berkshire succession planning has been one of the most carefully thought out, communicated, transparent processes, you know, maybe in the history of corporate America. Um, you know, we've known that Greg Abel, uh, very, you know, he became a, you know, vice chair of Berkshire Hathaway, I think in 2018. And so we've known him for a long time. And even in 2021, uh, Buffett and Munger actually announced their intention to to, um, you know, elevate uh, Abel to this position. So all that said, of course, when, you know, you've uh, been following someone for 60 years, or I mean, you know, much less for me and I'm sure you guys too, but like our entire careers, uh, for a lot of people, their entire lifetimes, they've seen him as a fixture at this company, who's also been giving all this wisdom to everybody. So, so yeah, it's it's definitely a surprise. And so, Sam, is there a material difference that we anticipate or expect at all between the trading ideologies as instituted by Warren Buffett and Charlie Munger for decades, for 60 years versus those of Greg Abel? Yeah, you know, um, I think there's there's two ways to think of this. Um, inevitably it's going to change. Uh, the, but but that's actually kind of been the history of of Berkshire Hathaway and Warren Buffett and Charlie Munger themselves. You know, from a corporate standpoint, the company was founded as a a textile company that evolved into an insurance company that evolved into this multi-global conglomerate that also has this big stock portfolio. So that company's business has been changing forever. Um, and then even just strictly from an investment perspective, you know, Buffett started out as this guy who, you know, did quote unquote cigar butt investing, you know, finding extremely undervalued companies and uh stocks that that he believed were trading under, below their fair value, but then that ideology actually evolved into something where that gave him way to uh give him an excuse to, you know, buy stocks like Apple. So, you know, uh, I I think change is actually, you know, inherent in this company's culture. Um, that said, you know, again, Abel has been in a next in line to be CEO for years, and, you know, he's actually spoken at the shareholder meetings right next to Buffett. So, you know, the quote, I mean, if there's a question to be asked now, is well, how much of the past couple of years have actually been determined by Greg Abel's decisions? I'm sure a lot of it has already. And Sam, investors were anxious to hear Warren Buffett's commentary, specifically on the development of the trade war, which he said trade should not be used as a weapon. And and he did say that it is a quote act of war. Uh, talk to me about how that impacts your thinking on the impact of the trade war on financial markets as you are writing about the impact of the trade war on financial markets. Yeah, I mean, you know, uh, as blunt as as Buffett was when he was talking about trade and trade policy and how it should be implemented, um, I don't think he actually said anything particularly controversial. Protectionist trade policies is negative for everybody. Um, and especially when you're using it, not to, you know, advance your economy and not to, you know, build wealth for everybody, but if you're using as a tool to advance your political interest, then, yeah, you're weaponizing trade. And as Buffett said, it can be interpreted as an act of war. Um, protectionist trade policies hurt economies. So, you know, what happens when you hurt economies? People get unemployed. They can't afford groceries. They can't pay their healthcare bills. Uh, crime goes up. Um, so so, yeah, it's, you know, it's not an act of peace. So, you know, maybe it's not surprising when when Buffett comes out so clearly and and says that it's an act of war. But um, you know, just so that we're um, uh, you know, giving Buffett a fair shake here, um, you know, again, he words things very carefully. And at no point did he actually say address specifically Trump and Trump's policies uh along this way, but he just spoke as a general matter that when you do, um, you know, uh implement protectionist trade policies and you use trade policy as a tool to advance other interests, um, it's not a good thing. All right. Sam, always great to speak with you. Thanks for making the time for us. Appreciate it. Sign in to access your portfolio
Yahoo
04-05-2025
- Business
- Yahoo
Warren Buffett: 'The long-term trend is up'
A version of this post first appeared on OMAHA, Neb. โ Warren Buffett, CEO of Berkshire Hathaway, remains bullish on the long run. At the same time, he acknowledges that people will continue to be distracted by short-term market moves, which will continue to be unpredictable. "The long-term trend is up," Buffett said at Berkshire's annual shareholders meeting on Saturday. "Nobody knows what the market is going to do tomorrow, next week, next month," he added. "But they spend all their time talking about it, because it's easy to talk about. But it has no value." Buffett was responding to a shareholder's question about Berkshire's massive cash pile, which grew to $347 billion in Q1. He reiterated what he said in his annual letter, which was that his preference is not to be sitting in so much cash. But he made clear that holding cash was smarter than making brash acquisitions. "We would rather have conditions that have developed where we would have like $50 billion or something like that," he said. "But that just isn't the way the business works." Buffett explained if he acquired businesses or accumulated stock solely for the sake of getting that cash pile down to $50 billion, "That would be the dumbest thing in the world to invest in that manner." For now, Buffett believes it's better to keep dry powder for when Berkshire could be "bombarded with offerings" that offer better risk-reward opportunities than what he's seeing today. "We have made a lot of money by not wanting to be fully invested at all times," he said. Of course, this strategy is not for everyone. Buffett and Berkshire are in the business of acquiring companies and picking stocks. In fact, Buffett has historically recommended most people to invest in passively managed S&P 500 index funds. "We don't think it's improper for people who are passive investors to just make a few simple investments and sit for their life in them," he said. "But we've made the decision to be in this business. So we think we can do a little better than that." A shareholder asked Buffett specifically about the market swings we experienced in the past month. "What has happened in the last 30, 45 days, 100 days โฆ it's really nothing," he said. "This is not a huge move. โฆ This has not been a dramatic bear market or anything of the sort." Indeed, you can get smoked in the short-term. It's one of the truths about the stock market. "If it makes a difference to you whether your stocks are down 15% or not, you need to get a somewhat different investment philosophy," Buffett said. "The world is not going to adapt to you. You're going to have to adapt to the world." Buffett cautioned that just because he doesn't think the recent market swings were notable doesn't mean we won't get a more violent downturn some time in the future. He said "certainly in the next 20 years" we will get a "hair curler" event. "The world makes big, big, big mistakes, and surprises happen in dramatic ways," he said. "The more sophisticated the system gets, the more the surprises can be out of right field. That's part of the stock market. That's what makes it a good place to focus your efforts if you have the proper temperament for it โ and a terrible place to get involved if you get frightened by markets that decline and get excited when stock markets go up. I don't mean to sound particularly critical. People have emotions. But you have to check them at the door when you invest." Buffett covered a lot during his five-hour long Q&A. His comments on protectionist trade policy and pessimism toward the U.S. economy were particularly interesting. A lot of media outlets are covering it. I may write about it later. But the big news out of this year's event was Buffett's announcement that he intends to step down as CEO as he makes way for vice chairman Greg Abel to succeed him. "I think the time has arrived where Greg should become the chief executive officer of the company at year-end," Buffett said. Buffett's time at the helm of Berkshire may be coming to an end. But his timeless investing lessons will surely endure. There were several notable data points and macroeconomic developments since our last review: ๐ The stock market rallied last week, with the S&P 500 climbing 2.9% to close at 5,686.67. It's now down 7.4% from its February 19 closing high of 6,144.15 and up 59% from its October 12, 2022 closing low of 3,577.03. For more on how the market moves, read: One of the most misunderstood moments in stock market cycles โฑ๏ธ ๐ The labor market continues to add jobs. According to the BLS's Employment Situation report released Friday, U.S. employers added 177,000 jobs in April. The report reflected the 52nd straight month of gains, reaffirming an economy with growing demand for labor. Total payroll employment is at a record 159.5 million jobs, up 7.2 million from the prepandemic high. The unemployment rate โ that is, the number of workers who identify as unemployed as a percentage of the civilian labor force โ stood at 4.2% during the month. While it continues to hover near 50-year lows, the metric is near its highest level since November 2021. While the major metrics continue to reflect job growth and low unemployment, the labor market isn't as hot as it used to be. For more on the labor market, read: ๐ผ and ๐ ๐ธ Wage growth ticks lower. Average hourly earnings rose by 0.2% month-over-month in April, down from the 0.3% pace in March. On a year-over-year basis, this metric is up 3.8%. For more on why policymakers are watching wage growth, read: ๐ ๐ผ Job openings fall. According to the BLS's Job Openings and Labor Turnover Survey, employers had 7.19 million job openings in March, down from 7.48 million in February. During the period, there were 7.08 million unemployed people โ meaning there were 1.01 job openings per unemployed person. This continues to be one of the more obvious signs of excess demand for labor. However, this metric has returned to prepandemic levels. For more on job openings, read: ๐คจ and ๐ ๐ Layoffs remain depressed, hiring remains firm. Employers laid off 1.56 million people in March. While challenging for all those affected, this figure represents just 1.0% of total employment. This metric remains below prepandemic levels. For more on layoffs, read: ๐ Hiring activity continues to be much higher than layoff activity. During the month, employers hired 5.4 million people. That said, the hiring rate โ the number of hires as a percentage of the employed workforce โ has been trending lower, which could be a sign of trouble to come in the labor market. For more on why this metric matters, read: ๐งฉ ๐ค People are quitting less. In March, 3.3 million workers quit their jobs. This represents 2.1% of the workforce. While the rate is above recent lows, it continues to trend below prepandemic levels. A low quits rate could mean a number of things: more people are satisfied with their job; workers have fewer outside job opportunities; wage growth is cooling; productivity will improve as fewer people are entering new unfamiliar roles. For more, read: โ๏ธ ๐ Job switchers still get better pay. According to ADP, which tracks private payrolls and employs a different methodology than the BLS, annual pay growth in April for people who changed jobs was up 6.9% from a year ago. For those who stayed at their job, pay growth was 4.5%. ๐ต Key labor costs metric ticks up. The employment cost index in the Q1 was up 0.9% from the prior quarter. For more on why policymakers are watching wage growth, read: ๐ ๐ผ Unemployment claims tick higher. Initial claims for unemployment benefits rose to 241,000 during the week ending April 26, up from 223,000 the week prior. This metric continues to be at levels historically associated with economic growth. For more context, read: ๐๏ธ and ๐ผ ๐ Consumer vibes deteriorate. The Conference Board's Consumer Confidence Index fell in April. From the firm's Stephanie Guichard: "The decline was largely driven by consumers' expectations. The three expectation componentsโbusiness conditions, employment prospects, and future incomeโall deteriorated sharply, reflecting pervasive pessimism about the future. Notably, the share of consumers expecting fewer jobs in the next six months (32.1%) was nearly as high as in April 2009, in the middle of the Great Recession. In addition, expectations about future income prospects turned clearly negative for the first time in five years, suggesting that concerns about the economy have now spread to consumers worrying about their own personal situations." "Consumers' Perceived Likelihood of a U.S. Recession over the Next 12 Months rose in February." Relatively weak consumer sentiment readings appear to contradict resilient consumer spending data. For more on this contradiction, read: ๐ and ๐ตโ๐ซ ๐ Consumers feel worse about the labor market. From The Conference Board's April Consumer Confidence survey: "Consumers' views of the labor market weakened in April. 31.7% of consumers said jobs were 'plentiful,' down from 33.6% in March. 16.6% of consumers said jobs were 'hard to get,' up from 16.1%." Many economists monitor the spread between these two percentages (a.k.a., the labor market differential), and it's been reflecting a cooling labor market. For more on the labor market, read: ๐ผ ๐ Inflation cools. The personal consumption expenditures (PCE) price index in March was up 2.2% from a year ago. The core PCE price index โ the Federal Reserve's preferred measure of inflation โ was up 2.6% during the month, down from February's 3.0% rate. While it's above the Fed's 2% target, it remains near its lowest level since March 2021. On a month over month basis, the core PCE price index was up 0.03%. If you annualized the rolling three-month and six-month figures, the core PCE price index was up 3.5% and 3.0%, respectively. For more on inflation and the outlook for monetary policy, read: โ๏ธ and ๐ง ๐๏ธ Consumer spending ticks up. According to BEA data, personal consumption expenditures increased 0.7% month over month in March to a record annual rate of $20.65 trillion. Adjusted for inflation, real personal consumption expenditures increased by 0.7% For more on consumer spending, read: ๐๏ธ and ๐ ๐ณ Card spending data is holding up. From JPMorgan: "As of 22 Apr 2025, our Chase Consumer Card spending data (unadjusted) was 1.0% below the same day last year. Based on the Chase Consumer Card data through 22 Apr 2025, our estimate of the US Census April control measure of retail sales m/m is 0.50%." From BofA: "Total card spending per HH was down 1.9% y/y in the week ending Apr 26, according to BAC aggregated credit & debit card data. Easter Sunday (historically lower spending Sunday) timing mismatch (4/20/25 vs 3/31/24) likely drove the y/y rate decline. Meanwhile, total card spending per HH was up 0.9% on a 52-week basis in the six days after Easter Sunday." April spending is likely being boosted by consumers pulling forward purchases in an attempt to front-run tariffs. For more on consumer spending, read: ๐ตโ๐ซ and ๐๏ธ โฝ๏ธ Gas prices tick higher. From AAA: "The national average for a gallon of regular saw few changes over the past week, going up slightly to $3.18. Even though this is the time of year when we typically see seasonal increases and rising demand, the price of crude oil has been plunging. A couple of factors are at play: economic concerns and the decision by OPEC+ (the group of oil-producing countries) to increase output and add more oil to the market, despite tepid demand. The lower the price of oil, the less drivers pay at the pump. The national average is almost 50 cents less than it was this time last year." For more on energy prices, read: ๐ข๏ธ ๐ข Imports surge. Here's Bloomberg on March Census data: "The US merchandise-trade deficit unexpectedly widened in March to a record as companies continued importing goods to get ahead of tariffs, indicating a large hit to the economy in the first quarter. โฆ In the March merchandise trade report, imports rose 5% to $342.7 billion, led by a record surge in consumer goods, while inbound shipments of motor vehicles and capital goods also increased. Exports increased 1.2%." For more on the implications of purchases pulled forward ahead of tariffs, read: ๐ค and ๐ ๐ Mortgage rates tick lower. According to Freddie Mac, the average 30-year fixed-rate mortgage declined to 6.76% from 6.81% last week. From Freddie Mac: "Mortgage rates again declined this week. In recent weeks, rates for the 30-year fixed-rate mortgage have fallen even lower than the first quarter average of 6.83%." There are 147.8 million housing units in the U.S., of which 86.1 million are owner-occupied and about 34.1 million of which are mortgage-free. Of those carrying mortgage debt, almost all have fixed-rate mortgages, and most of those mortgages have rates that were locked in before rates surged from 2021 lows. All of this is to say: Most homeowners are not particularly sensitive to movements in home prices or mortgage rates. For more on mortgages and home prices, read: ๐ ๐ Home prices rise. According to the S&P CoreLogic Case-Shiller index, home prices rose 0.3% month-over-month in February. From S&P Dow Jones Indices' Nicholas Godec: "Even with mortgage rates remaining in the mid-6% range and affordability challenges lingering, home prices have shown notable resilience. Buyer demand has certainly cooled compared to the frenzied pace of prior years, but limited housing supply continues to underpin prices in most markets. Rather than broad declines, we are seeing a slower, more sustainable pace of price growth." ๐จ Construction spending ticks lower. Construction spending increased 0.7% to an annual rate of $2.196 trillion in March. ๐ Manufacturing surveys weren't great. From S&P Global's April U.S. Manufacturing PMI: "Manufacturing continued to flat-line in April amid worrying downside risks to the outlook and sharply rising costs. Factory output fell for a second successive month as tariffs were widely blamed on a slump in export orders and curbed spending among customers more broadly amid rising uncertainty. Although the survey saw some producers report evidence of beneficial tariff-related switching of customer demand away from imports, any such sales increase was countered by worries over tariff-related disruptions to supply chains and lost export sales." The ISM Manufacturing PMI also deteriorated, signaling contraction in the industry. Keep in mind that during times of perceived stress, soft survey data tends to be more exaggerated than actual hard data. For more on soft sentiment data, read: ๐ and ๐ ๐ Texas area managers are worried about the future. From the Dallas Fed's Texas Manufacturing Outlook Survey: "Perceptions of broader business conditions continued to worsen notably in April. The general business activity index fell 20 points to -35.8, its lowest reading since May 2020. The company outlook index also retreated to a postpandemic low of -28.3. The outlook uncertainty index pushed up 11 points to 47.1." Comments from survey respondents were riddled with references to "uncertainty" related to the Trump administration's tariff policy. They included: "There is really no way to predict anything accurately six months out or even six weeks out now for our industry due to the tariff and trade uncertainty." "President Trump, tariffs and maximum business uncertainty [are issues affecting our business]. [We see a] probable recession soon." "The current economic environment is confusing. President Trump keeps things in turmoil, and we do not know what he will do next." "Tariffs and tariff uncertainty are wreaking havoc on our supply lines and capital spending plans." "Tariffs are causing uncertainty and a reduction in demand for our products. We buy all raw materials domestically but are still experiencing adverse business climate due to reduction in demand." "Tariffs. Tariffs. Tariffs. There was a better way to do this." For more on soft sentiment data, read: ๐ ๐บ๐ธ GDP declined in Q1. The BEA estimated that real GDP contracted at a 0.3% rate in Q1. This is down from the +2.4% growth rate in Q4 2024. However, this was driven by a spike in imports. Negative net exports cut a record 4.83 percentage points from the GDP growth rate. Because the way GDP is calculated includes a lot of quirks, economists will often point to "real final sales to private domestic purchasers" to get a better sense of the underlying health of the economy. This metric excludes net exports, inventory adjustments, and government spending. That metric grew at a respectable 3.0% rate in Q1, up modestly from the 2.9% rate in Q4. For more on GDP, read: ๐ค ๐ญ Business investment activity ticks higher. Orders for nondefense capital goods excluding aircraft โ a.k.a. core capex or business investment โ rose 0.1% to $75.05 billion in March. Core capex orders are a leading indicator, meaning they foretell economic activity down the road. The growth rate had leveled off a bit, but they've perked up in recent months. However, economists caution that this may reflect a pull forward in sales ahead of new tariffs. For more on core capex, read: ๐ค and ๐ ๐ Key recession indicators point to growth. Here's a great chart from economist Justin Wolfers tracking the trajectory of key measures of economic activity. From Wolfers: "My guess: There remains a *substantial chance* that the NBER will at some point declare there's a 2025 recession. But given that other reliable data suggest the economy was still humming along through most of Q1, it's unlikely that recession began in Jan or Feb." For more on how recessions are defined, read: ๐คจ ๐ Near-term GDP growth estimates are tracking positive. The Atlanta Fed's GDPNow model sees real GDP growth rising at a 1.1% rate in Q2. For more on GDP and the economy, read: ๐ and ๐คจ ๐ข Offices remain relatively empty. From Kastle Systems: "Peak day office occupancy was 63% on Tuesday last week, down six tenths of a point from the previous week. Washington, D.C. experienced the biggest single-day drop, falling more than eight points on Wednesday as local government offices were closed to observe Emancipation Day. New York's high was 62.9% on Tuesday, down nearly six points from the previous week. The average low was on Friday at 35.2%, down 1.1 points from the previous week." For more on office occupancy, read: ๐ข ๐จ The tariffs announced by President Trump as they stand threaten to upend global trade โ with significant implications for the U.S. economy, corporate earnings, and the stock market. Until we get some more clarity, here's where things stand: Earnings look bullish: The long-term outlook for the stock market remains favorable, bolstered by expectations for years of earnings growth. And earnings are the most important driver of stock prices. Demand is positive: Demand for goods and services remains positive, supported by healthy consumer and business balance sheets. Job creation, while cooling, also remains positive, and the Federal Reserve โ having resolved the inflation crisis โ has shifted its focus toward supporting the labor market. But growth is cooling: While the economy remains healthy, growth has normalized from much hotter levels earlier in the cycle. The economy is less "coiled" these days as major tailwinds like excess job openings have faded. It has become harder to argue that growth is destiny. Actions speak louder than words: We are in an odd period given that the hard economic data has decoupled from the soft sentiment-oriented data. Consumer and business sentiment has been relatively poor, even as tangible consumer and business activity continue to grow and trend at record levels. From an investor's perspective, what matters is that the hard economic data continues to hold up. Stocks are not the economy: Analysts expect the U.S. stock market could outperform the U.S. economy, thanks largely due to positive operating leverage. Since the pandemic, companies have adjusted their cost structures aggressively. This has come with strategic layoffs and investment in new equipment, including hardware powered by AI. These moves are resulting in positive operating leverage, which means a modest amount of sales growth โ in the cooling economy โ is translating to robust earnings growth. Mind the ever-present risks: Of course, this does not mean we should get complacent. There will always be risks to worry about โ such as U.S. political uncertainty, geopolitical turmoil, energy price volatility, cyber attacks, etc. There are also the dreaded unknowns. Any of these risks can flare up and spark short-term volatility in the markets. Investing is never a smooth ride: There's also the harsh reality that economic recessions and bear markets are developments that all long-term investors should expect to experience as they build wealth in the markets. Always keep your stock market seat belts fastened. Think long term: For now, there's no reason to believe there'll be a challenge that the economy and the markets won't be able to overcome over time. The long game remains undefeated, and it's a streak long-term investors can expect to continue. A version of this post first appeared on
Yahoo
27-04-2025
- Business
- Yahoo
The confusing state of the economy
A version of this post first appeared on We've been getting ambiguous signals in the economic data. On one hand, the soft, sentiment-oriented data has been disappointing. The University of Michigan and the Conference Board's surveys of consumer confidence have turned sharply lower in recent months. The NFIB's Small Business Optimism index has tanked. Sentiment among CEOs and CFOs has turned south. Purchasing managers at manufacturing and services firms have also become increasingly cautious. And it's all because of the Trump administration's volatile position on tariffs โ which most people agree are net negative for the economy. On the other hand, the hard data, which reflects actual activity, has been strong. Retail sales hit a record high in March, and weekly card spending data โ which you can see below in TKer's weekly review of macro crosscurrents โ suggest that strength has continued into April. Durable goods orders and shipments continue at elevated levels. Meanwhile, key labor market metrics including job creation, unemployment, and claims for unemployment insurance continue to trend at levels associated with economic expansion. This narrative of contradictions is illustrated nicely in this chart from Goldman Sachs, which shows how soft data has been surprising to the downside while hard data has been surprising to the upside. In other words, sentiment has been weaker than expected while realized activity has been stronger than expected. The hard data has been surprisingly good despite the soft data being surprisingly bad. (Source: Goldman Sachs) Renaissance Macro's Neil Dutta wrote about these "data discontinuities" in his April 21 note. "It's probable that much of the recent upside surprises in hard data reflect pulling forward activity in the anticipation of tariffs," Dutta wrote. "Consumers pulled forward auto sales and consumption on other household durables, as an example. Firms likely pulled forward some orders too. That likely gives the veneer of strength in the recent high-frequency dataflow." During much of the economic expansion that began in 2020, it's paid off to focus on what consumers and businesses did (i.e., the hard data) over what they said (i.e., the soft data). The Federal Reserve just published research explaining this phenomenon. But in a world where many are aware of the inflationary risks of new tariffs, this pull-forward of sales comes with two issues: 1) it masks what may be a much weaker underlying economy, and 2) we could get depressed sales in the future when these pulled-forward sales would've normally occurred. "[R]ecent hard data in the U.S., mostly for March, are overstating activity and it's worth noting that conditions were not especially strong to begin with," Dutta added. "The collapse across a range of survey-based measures of activity suggest that actual activity will continue to slowdown, in a potentially abrupt manner. Recession may already be here." We'll only know with the benefit of hindsight whether or not we're in a recession or going into a recession. However, we know that the economy had been cooling and that the threat of tariffs increased the risk of recession. Importantly, as long term investors, we should understand that recessions and market downturns will happen as you build wealth with stocks. The economy has been in expansion about 80% of the time. Similarly, stocks have been in a bull market about 80% of the time. Maybe we're currently going through an unpleasant period that has historically occurred about 20% of the time. There were several notable data points and macroeconomic developments since our last review: ๐ญ Business investment activity rises. Orders for nondefense capital goods excluding aircraft โ a.k.a. core capex or business investment โ rose 0.1% to a record $75.1 billion in March. (Source: Census via FRED) Core capex orders are a leading indicator, meaning they foretell economic activity down the road. The growth rate had leveled off a bit, but they've perked up in recent months. For more on core capex, read: ๐ญ and โฏ ๐ณ Card spending data is holding up. From JPMorgan: "As of 18 Apr 2025, our Chase Consumer Card spending data (unadjusted) was 3.3% above the same day last year. Based on the Chase Consumer Card data through 18 Apr 2025, our estimate of the US Census April control measure of retail sales m/m is 0.51%." (Source: JPMorgan) From BofA: "So far, Bank of America card data through April 19 suggests that consumers are continuing to spend at a healthy rate, with spending up YoY throughout most of the month. In the week ending April 19, total card spending per household was up 3.1% YoY, with the YoY partly being boosted by the later timing of Easter this year. " (Source: BofA) April spending is likely being boosted by consumers pulling forward purchases in an attempt to front-run tariffs. For more on consumer spending, read: ๐ตโ๐ซ and ๐๏ธ ๐ผ Unemployment claims tick higher. Initial claims for unemployment benefits rose to 222,000 during the week ending April 19, up from 216,000 the week prior. This metric continues to be at levels historically associated with economic growth. (Source: DoL via FRED) For more context, read: ๐๏ธ and ๐ผ ๐ณ Bank accounts remain in pretty good shape. From BofA: "While household median deposit levels have declined since 2021, they increased across the income spectrum last month and remain at least 40% higher than 2019 levels on a nominal basis and 15% above inflation adjusted levels, according to Bank of America checking and savings account data. โฆ Additionally, the rate of decline in deposits is significantly slower compared to two years ago, reflecting easing inflation over the same period. This is especially true for lower-income households. While median deposits fell around 3% YoY in March, that's a noteworthy improvement from the 15% YoY decline that occurred three years ago." (Source: BofA) For more on household finances, read: ๐๏ธ ๐ Pay expectations are deteriorating. From the New York Fed: "The average reservation wage โ the lowest wage respondents would be willing to accept for a new job โ sharply retreated to $74,236 from a series high of $82,135 in November. This decrease was most pronounced for men and respondents over age 45." (Source: New York Fed) For more on why policymakers watch wage growth, read: ๐ ๐ Consumer sentiment is tumbling. From the University of Michigan's April Surveys of Consumers: "While this month's deterioration was particularly strong for middle-income families, expectations worsened for vast swaths of the population across age, education, income, and political affiliation. Consumers perceived risks to multiple aspects of the economy, in large part due to ongoing uncertainty around trade policy and the potential for a resurgence of inflation looming ahead. Labor market expectations remained bleak. Even more concerning for the path of the economy, consumers anticipated weaker income growth for themselves in the year ahead." (Source: University of Michigan) Politics clearly plays a role in peoples' perception of the economy. Notably, expectations for inflation appear to be a partisan matter. (Source: Michael McDonough) For more on the state of sentiment, read: ๐ตโ๐ซ and ๐ตโ๐ซ ๐ Home sales fall. Sales of previously owned homes fell by 5.9% in March to an annualized rate of 4.02 million units. From NAR chief economist Lawrence Yun: "Home buying and selling remained sluggish in March due to the affordability challenges associated with high mortgage rates. Residential housing mobility, currently at historical lows, signals the troublesome possibility of less economic mobility for society." (Source: NAR) ๐ธ Home prices rise. Prices for previously owned homes increased from last month's levels and year ago levels. From the NAR: "The median existing-home sales price for all housing types in March was $403,700, up 2.7% from one year ago ($392,900). All four U.S. regions registered price increases." (Source: NAR) ๐๏ธ New home sales rise. Sales of newly built homes rose 7.4% in March to an annualized rate of 724,000 units. ๐ Mortgage rates tick lower. According to Freddie Mac, the average 30-year fixed-rate mortgage declined to 6.81% from 6.83% last week. From Freddie Mac: "The average mortgage rate decreased slightly this week. Over the last couple of months, the 30-year fixed-rate mortgage has fluctuated less than 20 basis points, and this stability continues to bode well for buyers and sellers alike." There are 147.4 million housing units in the U.S., of which 86.9 million are owner-occupied and about 34.1 million of which are mortgage-free. Of those carrying mortgage debt, almost all have fixed-rate mortgages, and most of those mortgages have rates that were locked in before rates surged from 2021 lows. All of this is to say: Most homeowners are not particularly sensitive to movements in home prices or mortgage rates. For more on mortgages and home prices, read: ๐ โฝ๏ธ Gas prices tick higher. From AAA: "The national average for a gallon of regular is slightly higher than a week ago and 5 cents higher than a month ago. An increase in demand โ as the weather gets nicer and more people get out and about โ is pushing prices up slightly. But at $3.17, the national average remains well below what drivers were paying this time last year. That's because the price of crude oil is on the lower side at $62 a barrel compared to $82 a barrel one year ago." (Source: AAA) For more on energy prices, read: ๐ข๏ธ ๐ข Offices remain relatively empty. From Kastle Systems: "Peak day office occupancy was 63% on Tuesday last week, down six tenths of a point from the previous week. Washington, D.C. experienced the biggest single-day drop, falling more than eight points on Wednesday as local government offices were closed to observe Emancipation Day. New York's high was 62.9% on Tuesday, down nearly six points from the previous week. The average low was on Friday at 35.2%, down 1.1 points from the previous week." (Source: Kastle) For more on office occupancy, read: ๐ข ๐ Activity surveys look bad. From S&P Global's April U.S. PMI: "The early flash PMI data for April point to a marked slowing of business activity growth at the start of the second quarter, accompanied by a slump in optimism about the outlook. At the same time, price pressures intensified, creating a headache for a central bank which is coming under increasing pressure to shore up a weakening economy just as inflation looks set to rise." (Source: S&P Global) Keep in mind that during times of perceived stress, soft survey data tends to be more exaggerated than actual hard data. For more on this, read: ๐ ๐บ๐ธ Most U.S. states are still growing. From the Philly Fed's March State Coincident Indexes report: "Over the past three months, the indexes increased in 43 states, decreased in four states, and remained stable in three, for a three-month diffusion index of 78. Additionally, in the past month, the indexes increased in 39 states, decreased in seven states, and remained stable in four, for a one-month diffusion index of 64." (Source: Philly Fed) ๐ Near-term GDP growth estimates are tracking negative. The Atlanta Fed's GDPNow model sees real GDP growth declining at a 2.5% rate in Q1. Adjusted for the impact of gold imports and exports, they see GDP falling at a 0.4% rate. (Source: Atlanta Fed) For more on GDP and the economy, read: ๐ and ๐คจ Upgrade to paid ๐จ The tariffs announced by President Trump as they stand threaten to upend global trade โ with significant implications for the U.S. economy, corporate earnings, and the stock market. Until we get some more clarity, here's where things stand: Earnings look bullish: The long-term outlook for the stock market remains favorable, bolstered by expectations for years of earnings growth. And earnings are the most important driver of stock prices. Demand is positive: Demand for goods and services remains positive, supported by healthy consumer and business balance sheets. Job creation, while cooling, also remains positive, and the Federal Reserve โ having resolved the inflation crisis โ has shifted its focus toward supporting the labor market. But growth is cooling: While the economy remains healthy, growth has normalized from much hotter levels earlier in the cycle. The economy is less "coiled" these days as major tailwinds like excess job openings have faded. It has become harder to argue that growth is destiny. Actions speak louder than words: We are in an odd period given that the hard economic data has decoupled from the soft sentiment-oriented data. Consumer and business sentiment has been relatively poor, even as tangible consumer and business activity continue to grow and trend at record levels. From an investor's perspective, what matters is that the hard economic data continues to hold up. Stocks are not the economy: Analysts expect the U.S. stock market could outperform the U.S. economy, thanks largely due to positive operating leverage. Since the pandemic, companies have adjusted their cost structures aggressively. This has come with strategic layoffs and investment in new equipment, including hardware powered by AI. These moves are resulting in positive operating leverage, which means a modest amount of sales growth โ in the cooling economy โ is translating to robust earnings growth. Mind the ever-present risks: Of course, this does not mean we should get complacent. There will always be risks to worry about โ such as U.S. political uncertainty, geopolitical turmoil, energy price volatility, cyber attacks, etc. There are also the dreaded unknowns. Any of these risks can flare up and spark short-term volatility in the markets. Investing is never a smooth ride: There's also the harsh reality that economic recessions and bear markets are developments that all long-term investors should expect to experience as they build wealth in the markets. Always keep your stock market seat belts fastened. Think long term: For now, there's no reason to believe there'll be a challenge that the economy and the markets won't be able to overcome over time. The long game remains undefeated, and it's a streak long-term investors can expect to continue. A version of this post first appeared on
