What Happened Last Week
- Risk On: Investors funded a bid for higher beta equities and boosted growth, tech, and discretionary stocks by selling defensives.
- Trade De-escalation: A well-received U.S.-China trade understanding significantly lifted market sentiment, particularly benefiting semiconductor stocks.
- Data Shrugged Off: Markets largely ignored weak retail sales and soft Consumer Price Index (CPI), though a poor University of Michigan survey caused a brief Friday dip.
What We’re Watching This Week
- Fiscal Scrutiny: The GOP’s tax and budget bill faces close examination, with early negative market reactions to potential deficit increases.
- Global PMIs: Preliminary May Purchasing Managers’ Index (PMI) readings will offer the first look at global business activity post-trade tension easing.
- U.S. Surveys: Regional Fed manufacturing and industrial reports will gauge the impact of existing trade restrictions on U.S. industry.
Investment Management Team Views
Last week, the market signaled the start of summer with a clear message: “risk on, party on,” as investors piled into higher beta equities. Risk on sentiment benefited growth, tech, and discretionary, whereas a rotation out of defensives funded the high beta party. Semi stocks got a boost from easing export restrictions and announced multibillion-dollar Middle East datacenter projects. The well-received U.S.-China trade de-escalation early last week not only helped semis but also likely drove a significant share of the punch-drunk bid to risk. The market shrugged off last week’s weak retail sales and soft CPI. Friday’s UMich survey was terrible and pushed stocks lower on Friday. Other than that, equities closed the week significantly higher.
The dizzying pace of this rally is what makes the April bloodbath increasingly feel like a fever dream. Markets are behaving under the assumption that the worst is behind us, and also appear to be pricing a scenario where the temporary U.S.-China tariff deal becomes permanent. For markets to have the potential to retest all-time highs, the temporary U.S.-China tariff agreement needs to hold, and we’ll need to see meaningful progress toward a lasting trade deal over the next four to six weeks.
This week, we get preliminary global PMI readings for May, the first reading that will take into account significantly lower global trade tensions. In the U.S., regional Fed manufacturing and industrial surveys will also help gauge the impact of existing trade restrictions. Last but certainly not least, the GOP’s tax and budget bill, which passed in committee over the weekend, will be closely scrutinized. A bill seen as too fiscally loose could reignite aversion to American financial assets. This morning, yields rose and equities were negative as investors balked at the potential $3 trillion deficit increase through 2034 if the bill were to become law. The market will have to determine the balance of pro-growth / expansionary fiscal policies against possible concerns of bond investors – there is ample time for it to weigh in, though.
