Market Report: May

We want to provide you with a clear and concise update on the recent U.S.-China tariff de-escalation and its implications for the economy and your investments. Here’s what you need to know and our perspective on how to position your portfolio moving forward.

Key Developments

• Tariff Relief: The U.S. has reduced tariffs on Chinese goods from 145% to 30%, while China cut its retaliatory tariffs from 125% to 10%, with an additional 20% fentanyl-related tariff, totaling 30%. This 90-day pause has alleviated the de facto trade embargo, fueling a strong market rally since early April.

• Market Response: Equity markets have largely retraced to pre-crisis levels, reflecting optimism about reduced trade tensions. However, tariffs remain higher than earlier this year, posing ongoing challenges to economic growth.

• Economic Context: While recession risks have diminished, the economy is cooling. Labor market momentum is slowing, consumer spending remains the primary growth driver, and sectors like housing and capital expenditure are stagnating. Potential Section 232 tariffs on industries like semiconductors and pharmaceuticals add uncertainty.

Our Perspective

The market’s enthusiasm is understandable, but we believe it may be overdone. Here’s why:

• Tariffs Still a Headwind: Although reduced, the effective tariff rate, after accounting for trade flow adjustments, is only marginally lower. At 30%, tariffs act as a de facto tax, potentially increasing costs for consumers or squeezing corporate margins.

• Growth Challenges: Cooling labor markets, muted business investment, and fiscal uncertainties (e.g., the ongoing reconciliation package) suggest tepid growth in 2025. Strong household and corporate balance sheets provide a buffer, reducing the risk of a deep recession, but a milder slowdown remains likely.

• Market Outlook: The recent rally may consolidate as investors reassess fundamentals. If economic data reflects further cooling, markets could face a “growth scare” in the coming months. However, any pullback should present a compelling opportunity to add risk, especially if the Federal Reserve cuts rates in response to weaker growth and softer inflation from lower energy prices.

What This Means for Your Portfolio

• Stay Balanced: We recommend maintaining a diversified portfolio to weather potential volatility. The current range-bound market environment favors a mix of defensive and growth-oriented assets.

• Monitor Data: Upcoming economic indicators, particularly labor market and consumer spending data, will be critical. We’ll keep you informed as these trends unfold.

• Position for Opportunities: A potential market pullback could offer attractive entry points, particularly in sectors less exposed to tariff-related costs. We’ll proactively identify these opportunities for you.

• Fed Watch: Reduced trade tensions and lower energy prices may prompt the Fed to ease rates if growth softens further. This could support risk assets, and we’ll adjust your portfolio accordingly.