Hostilities in the Middle East caused some angst in the equity markets, but not as much as one might have expected. The major indexes were only down between -1% and -2% for the week as shown in the table. Markets await President Donald Trump’s decision regarding U.S. involvement, and that will surely play on market sentiment in the coming days.1
On a year-to-date basis, after huge advances in 2024, the three large-cap equity indexes appear to be treading water, while the small-cap Russell 2000 has given back more than half of its 2024 gain (see table). Markets appear to be more attuned to the softening economy than the Federal Reserve is.2
It was also a down week for the Magnificent 7, with only AAPL and TSLA in positive territory. For the year, it is a mixed bag for these seven. Three are positive (NVDA, MSFT, and META) while AAPL, TSLA, and GOOG are down double digits (with AMZN down in the mid-single digit range). It appears that the equity market has become much more selective as often happens in the late stages of a bull run.3
More Soft Data- Retail Sales
Much of the incoming data has been soft. Let’s begin with Retail Sales. They fell -0.9% in May. The consensus estimate was for a -0.6% drop, so a miss to the downside. In April, they also fell, but to a much milder extent (-0.1%). It appears that we are still on the downside of the curve and expect more softness going forward.4
Clearly, the U.S. consumer has become cautious. May’s decline was the largest in more than two years (since March ’23), and the April/May results are the first back-to-back declines in more than 18 months. The question is what does this tell us about the future? While the chart below shows a slight hook-up in the University of Michigan’s Consumer Sentiment Index, note that most of 2025 has shown quite a significant downtrend. And we don’t expect a sudden change in the consumer’s outlook anytime soon.
Production
Retail Sales isn’t the only indicator flashing weakness. Industrial Production, having climbed out of its nearly two-year funk in 2025, declined in May and, given the recent soft survey data (which leads the hard data), appears destined to fall into negative territory soon (see chart below). The utilities sub-component was off -2.9% (was this weather, or a thriftier consumer?), machinery -1.0%, construction supplies (-0.7%) and even the production of consumer goods was off (-0.2%). Bucking the negative trends was production in the Tech space, which was up +0.4% in May (from April) and +10% from year earlier levels. Except for Tech, weakness prevailed.5
The most recent Philadelphia Fed Manufacturing Index showed up as -4.0 in June (same as May’s -4.0) with its New Orders sub-index falling to +2.3 in June from +7.5 in May. In addition, the workweek turned negative (-1.6 in June from +2.0 in May), an indicator of a slowing manufacturing sector, and, most concerning, the employment sub-index dove to -9.8 in June from +16.5 in May, the largest drop in this sub-index since the Pandemic.6
Housing Blues
Housing, too, showed weakness in May. Unsold inventory, both in the new and existing home spaces, has risen and that is beginning to weigh on home prices. The National Association of Home Builders conducts a monthly survey of its members. The June survey score was 32, falling for four of the last five months. This was the lowest reading since December 2022. Note that the pandemic low was 30 in April ’20. Per Rosenberg Research (Breakfast with Dave June 19, 2025), the current level (32) is the same as it was in 2007 and lower than at any point in the 2001 Recession. In addition, the current sales outlook (35 vs. 37 in May) is the lowest since 2012.
In addition, Housing Starts in May surprised hugely to the downside at an annual rate of 1.256 million units. The consensus estimate was for 1.350 million. This is the lowest level since May 2020 (the depths of the Covid-19 lockdowns) and is -9.8% lower than April’s pace. Starts are now down -4.6% from year earlier levels and look to shrink further over the next few months. Furthermore, building permits (see chart above), clearly a leading indicator, fell -2.0% in May (vs. April) and have fallen in five of the past six months. There is little on the horizon that is going to change this.
Also of note is the decline in tourism. David Rosenberg noted in his June 20 daily missive (Breakfast with Dave) that tourism from Europe is off -25% through May versus a year ago, and his description of the loss of tourists from Canada was, in one word, “massive.” This bodes ill for the tourism sector going forward.
Delinquencies
In past blogs we’ve noted the rapid rise in both auto and credit card delinquencies. Add to this the Trump administration’s repeal of former President Joe Biden’s moratorium on student loan payments. The chart below says it all. Delinquencies through the roof. And note that those who are now actually making their student loan payments must forego other uses of those funds, a large portion of which was consumption. This is another negative for economic growth in the near term.
The Fed (Behind The Curve)
At its June meeting, the Fed kept rates at their relatively high levels. It appears to us that the Fed has fallen further behind the curve. Chair Jerome Powell continues to indicate that the Fed is waiting for the “hard” data to soften. Well, retail sales are falling, the housing sector has turned soft, and production continues to decline. While the U3 Unemployment Rate remained at 4.2% in May, it was only because of a shrinkage in the Labor Force Participation Rate (the denominator). In our view, this occurred because jobs are harder to find than they were a couple quarters ago, and people just drop out. The -626,000 job loss that showed up in the Household Survey should have been a wake-up call to the Fed. Clearly, it wasn’t.6
In their June dot-plots, the Federal Open Market Committee sees two rate cuts in 2025, which would leave the Federal Funds Rate somewhere near 3.75%. Neutral, by the Fed’s own definition is 2.5%. With weakness in the survey and now showing up in Retail Sales, Housing, Production and Consumer Sentiment, that 3.75% forecast year-end rate will be uber-restrictive. Since changes in Monetary Policy impact the economy with a significant lag, the incoming data says that the Fed should be easing now.
On Friday (June 19), Fed Governor Christopher Waller, a leading candidate for the chairmanship once Powell’s term as chair expires next May, commented on CNBC that he would consider a rate cut at the July meeting. We hope other FOMC members see what he sees.6
Final Thoughts
Financial markets held up better than expected in the face of Middle-East hostilities. We suspect that won’t be true if the U.S. enters the fight. After the large run-up in 2024, nearly halfway through 2025 shows near breakeven in the major indexes and a -5% loss in the small-caps. Without a new stimulant, and with an economic cooling trend now evident in the data, there appears to be limited upside for the general indexes. “Selectivity” will become the new watchword.2 3
Incoming data continues to show softness, including Retail Sales and Industrial Production. Consumer Sentiment is on a downward trend. These are not good signs for economic growth. Nearly every piece of data coming out of the housing sector is negative. This includes housing starts and building permits. We are just beginning to see home prices stabilize and perhaps pull back a little bit.
Tourism to the U.S. from both Europe and Canada has fallen significantly (perhaps there will be bargains this summer for American tourists).
Delinquencies continue to rise. Now that the payment moratorium on student loans has ended, add the student loan category to the list. And note that those who are now making their monthly payments have fewer dollars for discretionary purchases.
Meanwhile, in the face of a weakening economy, the Fed kept policy tight, and the new dot-plot reveals an FOMC moving a bit toward even more hawkishness. We hope that Governor Waller’s view (open to a rate cut in July) gains traction among FOMC members as the soft economic data dribble in.6
(Joshua Barone and Eugene Hoover contributed to this blog.)
Robert Barone, Joshua Barone and Eugene Hoover are investment adviser representatives with Savvy Advisors, Inc. (“Savvy Advisors”). Savvy Advisors is an SEC registered investment advisor. Material prepared herein has been created for informational purposes only and should not be considered investment advice or a recommendation. Information was obtained from sources believed to be reliable but was not verified for accuracy.
Ancora West Advisors, LLC dba Universal Value Advisors (“UVA”) is an investment advisor firm registered with the Securities and Exchange Commission. Savvy Advisors, Inc. (“Savvy Advisors”) is also an investment advisor firm registered with the SEC. UVA and Savvy are not affiliated or related.
References:
1 https://www.investing.com/indices/major-indices
2 https://www.gurufocus.com/news/2629849/nvidia-and-tech-giants-outpace-entire-russell-2000-jefferies-predicts-smallcap-rally-by-2025
3 https://www.businessinsider.com/stock-market-outlook-magnificent-7-tech-stocks-valuations-earnings-nvda-2025-5?op=1&rut=daefb4c6eabba5ff3810d7d7b7dab08c53f97e049140998480c7a3b260f81526
4 https://www.ons.gov.uk/businessindustryandtrade/retailindustry/bulletins/retailsales/may2025
5 https://www.federalreserve.gov/releases/g17/current/g17.pdf
6 Vizo Financial FOMC Update, June 20, 2025 (YouTube)