Market Surge, Economic Caution

Fresh news and strategies for traders. SPY Trader episode #1261. Welcome, Spy Trader listeners! I'm your host, Moneybags Mike, and it's 12 pm on Tuesday, June 24th, 2025, Pacific time. We've got a lot to unpack today as the market continues its upward march. The major US stock indices, including the Dow, S&P 500, and Nasdaq, are all up around 1% or more, building on yesterday's gains and pulling us out of a recent threeday losing streak for the S&P 500. Looking back, the S&P 500 has climbed a healthy 2.64% to 3.00% over the last month and is up over 11% compared to this time last year. A big reason for the market's recent surge is the growing optimism surrounding a potential ceasefire between Iran and Israel. This deescalation has sent oil prices tumbling, with West Texas Intermediate crude futures falling significantly to around $65.45 a barrel after hitting nearly $77 earlier in the week due to the conflict. On the domestic front, President Trump's new tariff policies, which started on April 2nd, initially caused a global stock market wobble. However, his announcement on April 9th to pause further increases sparked a historic rally. Still, these ongoing trade policies remain a point of uncertainty, with concerns that they could fuel inflation and slow economic growth. Now, let's dive deeper into the economic landscape and what it means for your portfolio. Our economy saw a slight contraction in the first quarter of 2025, with real GDP shrinking by about 0.2% to 0.3%. That's the first quarterly decline in three years, mainly due to increased imports and reduced government spending. However, the Federal Reserve Bank of Atlanta's GDPNow model is forecasting a rebound, estimating real GDP growth of 3.4% for the second quarter. But overall, forecasts for 2025 suggest economic growth will moderate compared to last year. Inflation is also a factor. The annual inflation rate, measured by the Consumer Price Index, edged up to 2.4% in May, up from 2.3% in April, marking its first acceleration in four months. Core inflation, which excludes food and energy, stayed at 2.8%. There are some thoughts that President Trump's new tariffs are contributing to this rise. Looking ahead, inflation could continue to climb, possibly peaking at 4% in the second quarter of next year, driven by those tariff effects. On the employment front, the labor market remained stable in May, with the unemployment rate holding steady at 4.2%. Nonfarm payrolls increased by 139,000 jobs, a bit less than April's 147,000. Despite overall resilience, we've seen nearly 160 companies across various sectors, including federal agencies, announce significant job cuts for June. Regarding interest rates, the Federal Reserve kept its benchmark rate at 4.25% to 4.50% at its June meeting, the fourth meeting in a row without a change. Fed Chair Jerome Powell indicated that the central bank needs more time to assess the economic impact of the tariffs before making any policy adjustments. Despite holding steady, the Fed's projections still anticipate two rate cuts in 2025, with many market participants expecting the first cut in September or October. Shifting to sector performance, over the past month ending June 20th, Energy has been the top performer, gaining over 5.5%, followed by Information Technology and Communication Services. However, on June 20th alone, Consumer Discretionary and Real Estate led the gains, while Energy was the only sector to decline. Yeartodate, Industrials have performed strongly, along with Utilities and Consumer Staples. In contrast, Health Care and Consumer Discretionary have seen declines yeartodate, with Information Technology, despite recent daily gains, up just under 2% yeartodate as of June 20th. When we look at individual companies, megacap tech stocks, particularly chipmakers like Broadcom and Nvidia, have been driving recent rallies. Nvidia, in particular, reported stellar firstquarter fiscal 2026 results with significant revenue and free cash flow growth. Starbucks also saw gains after clarifying it doesn't plan to sell its China division. On the flip side, FedEx shares are down significantly yeartodate, largely due to concerns that shipping demand is being impacted by tariffs. They're set to release their fourthquarter fiscal 2025 earnings today, so traders are bracing for a potentially volatile reaction. Trump Media & Technology Group, the parent company of Truth Social, has seen its stock gain recently, but it's still down nearly half its value since the start of 2025. And J.M. Smucker experienced a nearly 16% drop after reporting lowerthanexpected sales and profit guidance. So, what's our takeaway here? The current positive sentiment in the stock market seems to be a reaction to the deescalation of the IsraelIran conflict. This reduces geopolitical risk, especially in the oil market, which can ease inflation concerns and support economic stability. The sharp drop in crude oil prices reinforces this 'riskon' environment, making investors more eager to buy stocks. However, this shortterm optimism is happening alongside some real economic complexities. The first quarter GDP contraction is a clear concern, signaling a slowdown in economic activity. While the Atlanta Fed suggests a bounce back in Q2, overall forecasts for 2025 still point to more moderate growth. The rising inflation rate in May, likely influenced by tariffs, creates a challenge for the Federal Reserve. The Fed's decision to hold interest rates steady reflects a cautious approach, as they want to fully assess the impact of new tariff policies before adjusting. Their projections for two rate cuts later this year indicate a bias towards easing, but this is contingent on economic data aligning with their expectations for inflation and employment. The labor market, while still resilient, is showing signs of softening, with slower monthly job gains and significant layoff announcements this month. This could indicate a cooling economy, which, alongside inflation, puts the Fed in a tricky balancing act. Sector performance reflects these mixed signals. The recent strength in technology, especially AIrelated stocks like Nvidia, suggests continued investor confidence in growth areas despite broader economic uncertainties. The rebound in consumer discretionary and real estate on June 20th could indicate renewed confidence after the geopolitical news. However, their yeartodate underperformance, along with healthcare, suggests investors have been cautious in sectors sensitive to economic downturns. The yeartodate strength in industrials and utilities might point to a flight to quality earlier in the year. So, what should you be doing as an investor in this environment? First, maintain diversification and quality. While the market is rallying, the macroeconomic picture is still uncertain with tariffs, inflation, and a moderating labor market. Spreading your investments across different sectors and asset classes is key to managing risk. Focus on strong companies with healthy balance sheets, consistent earnings, and competitive advantages, as these tend to be more resilient during uncertain times. Second, monitor geopolitical developments closely. The current market strength is heavily tied to the deescalation in the Middle East. Any renewed conflict could quickly reverse sentiment and trigger market volatility, especially impacting energy prices and global supply chains. Third, watch Federal Reserve communications and economic data. The Fed's stance on interest rates is a major market driver. Pay close attention to Chair Powell's statements, upcoming inflation reports like the CPI and PCE, and employment data, such as the jobs report, to gauge the likelihood and timing of potential rate cuts. If inflation proves more persistent due to tariffs, the Fed might delay cuts further, which could be a headwind for the market. Fourth, evaluate tariff impacts. The full implications of President Trump's tariff policies are still unfolding and could continue to affect corporate earnings, consumer spending, and inflation. Companies heavily reliant on international trade or those with complex supply chains might face increased costs and reduced demand. Assess individual company exposures to these policies. Fifth, consider sector rotation. Continue to monitor leading technology and AI companies like Nvidia, but always consider their valuations carefully. In light of a potential economic slowdown and persistent inflation, defensive sectors such as Utilities and Consumer Staples might offer more stability. However, if the secondquarter GDP rebound proves strong and there's clearer evidence of an economic 'soft landing' rather than a sharp slowdown, cyclical sectors like Consumer Discretionary and Industrials could see sustained improvement. But given the firstquarter GDP contraction and ongoing layoff announcements, caution is advised. Sixth, review your bond allocations. With the Fed potentially cutting rates later in the year, fixedincome investments may become more attractive. If bond yields fall, existing bonds with higher yields could appreciate in value. Consider laddering bond maturities to capture potential future rate changes. Finally, engage in taxaware planning. Given legislative activities around taxandspending bills and a presidential election year, it's prudent to implement taxsmart planning and investing strategies. That's all for today's Spy Trader. Stay sharp, and happy trading!