A week ago, Friday (May 2nd), both the S&P 500 and the Dow Jones Industrials reached a milestone that has not occurred for more than 20 years. That milestone: nine consecutive sessions of higher index closes. During the April 21 through May 2 sessions, the S&P 500 rose 9.6% and the Dow Jones was up +8.2%. And while the Nasdaq and small cap Russell 2000 didn’t have that nine-session positive streak, over that period, they managed to rise 13.3% and 9.8% respectively.
After such a rise, it isn’t any wonder why, this week, those markets have paused. The first table shows a flat line for the week for those four major indexes, all with marginal losses. Note that, despite the media hype, all the indexes are negative for the year with the small cap Russell 2000 down more than -9%.
For the Magnificent 7, there were mixed results. Nvidia and Tesla rose, while Apple and Google showed losses. A simple average for the week also shows a flat line.
It appears that markets have entered a period of reassessment, now pausing before deciding the direction for the next move.
The Fed
Despite the negative tone in the forward-looking data, the Fed held interest constant at its May 6-7 meeting while communicating that “…uncertainty about the economic outlook has increased further.” As a rule, in the economics business, rising “uncertainty” causes increasing caution both in the business community and in the consuming public which results in lower levels of investment and a rise in cautionary savings (less consumption). The leading indicators (soft data) are telling us that the economy is slowing down.
It is well established that monetary policy actions take several months to have a meaningful impact on the economy. Thus, it would make sense for monetary policy actions to coincide with the signals from those leading gauges, especially since the impact of monetary policy changes on the economy and the lead time of those indicators are similar.
Leading Indicators
The FIBER Leading Indicator series just turned negative, the first time in two years, and the Conference Board’s Leading Economic Indicators showed up at -0.7% in March, the fourth consecutive monthly decline and the 12th in the last 13 months. Critics will say that they have been negative since mid-2022 and we have not yet had a Recession. True enough. But we note that GDP growth in Q1 was -0.3% with the expectation that Q2 will also be negative. If that’s the case, then the rule of thumb (two negative GDP growth quarters in a row) for a Recession applies.
Tariffs
The tariff file also is a huge source of uncertainty, especially where China is concerned.
- Maersk, the world’s largest shipper, recently reported that shipping volumes between the U.S. and China are off -30% to -40%.
- China to U.S. ship bookings have fallen -60% since April 9th.
- Container traffic at southern CA ports was off -35% the week of May 9th vs. a year ago.
- The list of companies reducing guidance continues to expand. Ford and Mattel pulled their 2025 guidance altogether, while Clorox and Kellog cut their 2025 outlooks.
As for the U.S. consumer, revolving credit balances (including credit card balances) fell $-54.7 billion in Q1, according to Rosenberg Research (Breakfast with Dave, 05/08/2025). Such balances have fallen in five of the last seven months. In the most recent (April) New York Fed Survey of Consumer Expectations, 14% of respondents expect that they will not be able to meet all their minimum debt payments over the next three months. That is very close to the 16% level that occurred in the initial days of the pandemic. Such trends are usually observed during Recessions. In any case, the data clearly shows a slowing in consumption which will show up in Q2 GDP.
Inflation
The tariff file has put a scare into consumers regarding inflation, with the one-year inflation expectation holding at 3.6% in the New York Fed Survey. This is the highest level since September 2023. Perhaps that was a contributing factor in the Fed’s decision on May 7th to stand pat on rates.
Nevertheless, recent trends in the CPI appear hopeful. As of March, the year/year CPI inflation rate fell to 2.41%. Past issues of this blog have discussed the shortcomings of the BLS’ CPI calculation, especially the long lag in the highly weighted (35%) rental component of the index. According to the Apartment List website, the median rent paid for new apartment leases has been falling since mid-2023 and the Cleveland Fed notes a similar trend. It is our view that, despite the tariff issue, the 12-month inflation rate, as measured by the CPI, will reach the Fed’s 2% goal sometime in Q3 or Q4.
Final Thoughts
Financial markets appear to be reassessing today’s economy. For the week ended May 9th, the major indexes were flat to slightly down as was a simple average of the Magnificent 7. Perhaps the Fed played a role, now apparently waiting for the soft survey data to show up in the hard data. We know from history that when the Fed waits for the hard data, they fall behind the curve and monetary policy becomes a hindrance to economic growth. Apparently, this time won’t be different.
Already we are seeing an impact of the tariffs, as shipping volumes have fallen dramatically. And some economically sensitive U.S. corporations have pulled guidance as the future becomes increasingly uncertain.
On the positive side, it does look like inflation will be at the Fed’s 2% goal before year’s end. Our view is that there is a significant chance that the economy faces a bout of deflation, especially since it appears that the Fed’s monetary policy has become a hindrance to economic growth.
(Joshua Barone and Eugene Hoover contributed to this blog.)