Stocks Rally on Earnings, Economic News, and Hopes of Trade Deals; Bonds Slump

Good morning,

The Dow (+3.0%), NASDAQ (+3.4%), and S&P 500 (+2.9%) all finished the week solidly higher.  Taxable bonds fell about 0.3% while tax-free municipal bonds gained 0.7%.  The 10-year Treasury yield rose 0.05% to finish the week at 4.31%.

Lots of economic news reported last week, along with being in the height of corporate earnings season.  US Gross Domestic Product (GDP – a measure of the US economy) fell 0.3% for the first quarter, which was less than the expected drop of 0.4%.  In fact, a contributing factor to this being negative was the unusually large amount of imports to the US (which lowers GDP) because of concerns with potential forthcoming tariffs.  Personal Consumption Expenditures (PCE – the Fed-favored inflation gauge) was unchanged over the prior month and up 2.6% over the prior year, which was lower than the prior month.  The Institute of Supply Managers (ISM) Manufacturing report dipped slightly, but the overall US economy remains in expansion territory.  Lastly, the important monthly jobs report showed the US economy added more jobs in April than economists expected.  As for corporate earnings, Microsoft reported better than expected earnings and vaulted 11% for the week.  Microsoft is a large contributor to all 3 market indices, so they all benefitted from this jump.

So, what does all this mean?  The 800-pound gorilla remains in the room, and that is the uncertainty surrounding tariffs.  If the US can negotiate favorable trade deals with other countries, notably China, the European Union, Canada, Mexico, and Japan, this could lessen the trade war fears and provide some tailwinds for the markets.  Further, with inflation easing, this gives the Fed the green light to cut interest rates.  However, the Fed is waiting to see the results of tariff negotiations, as the Fed fears that the tariffs could be inflationary, and cutting rates would add to that inflation risk.  In short, the same old thing is driving market volatility, and that is the tariffs.  The markets dropped sharply (almost 15%) following “liberation day” on April 2, but they have since recovered those losses.  Next on the docket is the budget battle that is brewing in Washington, which always creates bickering between parties until it is finally passed.  Thus, we can expect both of those issues in Washington to be capturing the headlines for the foreseeable future. 

Have a great day and terrific week!

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