Weekly Newsletter May 26th to May 30th
RECAPPING LAST WEEK
U.S. equity indices posted strong returns for the month of May, but gains in the shortened last week were held in check after more tariff uncertainty emerged. The S&P500, Nasdaq Composite, and Russell 2000 indices rose 2% or less for the week. Ten of eleven S&P500 sectors were positive, led by real estate and healthcare. Energy was the lone decliner, pressured by sliding crude oil prices as OPEC+ was said to be considering more production increases. Gold futures slipped 1% while Bitcoin dropped 3%. U.S. Treasury yields eased as investors sorted through the latest barrage of tariff-related news. Late on Wednesday, a U.S. trade court ruling blocked most of the tariffs initiated this year, not including sector-specific levies. However, the following day a federal appeals court paused the lower court ruling to consider the government’s request for review. Meanwhile, the White House accused China of violating the recently reached agreement on tariffs, and Treasury Secretary Bessent said that trade talks between the countries were “a bit stalled.” The involvement of the courts along with tensions between the two largest global economies add new wrinkles to an already complex and seemingly fragile situation. Economic data was generally positive last week with sentiment indicators improving. Consumer confidence jumped to 98.0 in May—a 12-point increase from the prior reading—while the consumer sentiment index edged up to 52.2 from 50.8, and inflation expectations eased slightly. The headline PCE price index fell to 2.1% YoY and the core measure slowed to 2.5%, in line with forecasts. The second estimate of Q1 GDP showed a slightly smaller contraction at -0.2%, while the U.S. goods trade deficit narrowed sharply in April as the boost from tariff front-running faded. Minutes from the last FOMC meeting revealed “difficult tradeoffs” faced by the committee if inflation and unemployment start to rise in tandem. Finally, chip giant Nvidia jumped more than 9% before pulling back, after posting first-quarter results that exceeded expectations despite challenges related to China export rules. Artificial intelligence continues to attract substantial investment, which should be seen as a tailwind to growth sectors of the markets. Overseas, Japan considered trimming issuance of super-long bonds in response to the recent rise in yields. A weak auction on Wednesday raised concerns of dwindling demand from bond investors in the heavily indebted country. Expectations for a Bank of Japan rate hike in July ramped up after two key core inflation readings accelerated. In Europe, Germany’s CPI held steady at 2.1% YoY in May, while consumer sentiment rose for a third straight month. European Central Bank President Lagarde said that erratic U.S. economic policies could present an opportunity for the euro to take on a larger global role but not without improvements in capital market structure and legal foundations.
THE WEEK AHEAD
As the calendar turns to June the focus shifts to the monthly U.S. jobs data along with central bank decisions in Canada and Europe. Jobless claims ticked up to 240,000 last week, and other U.S. employment indicators have been trending lower, so investors will be watching not only Friday’s non-farm payroll results for May but also any potential revisions for prior months. ISM manufacturing and services PMIs will be released today and Wednesday, respectively. Fed Chair Powell is scheduled to speak at a conference in Washington today. The rest of the U.S. economic calendar includes factory orders, revised productivity figures, and a consumer credit update. The European Central Bank is expected to cut rates by 25 basis points at Thursday’s meeting with another reduction not being priced in until October. The euro has benefitted from the declining U.S. dollar and may stay elevated if the ECB signals that its rate-cutting cycle is nearing an end. Consumer inflation for the Eurozone arrives on Tuesday. Meanwhile, the Bank of Canada is likely to hold rates at 2.75% with traders awaiting any forward guidance. OPEC+ was planning to meet this past Saturday to discuss a production increase in July that could mirror or exceed the 411,000 barrel a day hike in April. China’s Caixin PMI releases round out the international agenda.
CHART OF THE WEEK
Industrial Revolution
Industrial sector outperformance isn’t what one might expect during a trade war, but a deeper dive into the underlying factors helps explain the surge. The chart below shows the S&P500 Industrials sector ($SP500#20) along with a relative strength study versus the S&P500 index. Industrials are the best performing sector this year and have outpaced the broader market most of that time. Although the index’s price has been volatile, the relative strength line barely flinched through all the tariff turmoil, posting a steady upward trend. Once the pause on tariffs was in place industrials ramped up their outperformance. From a macroeconomic perspective, the current geopolitical environment has encouraged increased domestic spending in construction, logistics, and energy infrastructure, while other countries have bolstered defense budgets, further lifting the sector. Policy-driven spending like the CHIPS Act and Inflation Reduction Act are also funneling cash into this sector. Industrials have a sweet spot in the middle phase of an economic expansion, typically attracting more investment than stalwarts like utilities but without the higher volatility of the technology sector. Industrials also tend to have reliable cash flows and global demand, and given the sector’s high correlation to economic growth, there might be hints that the trade war isn’t going to produce as much damage as previously feared. Prices are consolidating near the highs, and the sector’s relative strength bodes well if the broader market holds up.
Source: Charles Schwab Corporation
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