The one constant in economic assessments is, unsurprisingly, the ever present unpredictability of the unforeseeable. We recently wrote that inflation would begin to moderate again as the elevated levels caused by last spring’s tariffs roll off the year-to-date numbers this spring. But, alas, an armed conflict emerged literally out of nowhere, sending oil prices soaring and surprising the markets. Even if the conflict proves short lived, the damage to trust and stability in oil, the world’s most relied upon energy source, will take time and effort to repair before it can again be considered reliably stable and affordable for the global economy. Interestingly, the crude oil market has adapted admirably, continuing to meet global demand through a number of alternative sources, though at substantially higher prices.
Over the past year, the financial markets have struggled, with one notable surge last October that quickly faded. However, in the past three weeks we have seen consistent, steady growth return in the overall stock market, but especially in technology, as demonstrated by a burst of strength in the semiconductor industry with blockbuster earnings this past week from both Intel and AMD. The broader economy has shown stability in the labor market and inflation, despite the disruptions caused by tariff policies and higher energy costs.
We frequently discuss the actions of the Federal Reserve because interest rates exert a powerful influence on the present value of all financial instruments, especially equities. Last year, the Fed reduced short-term rates modestly to mitigate the adverse effects of tariff policies. With inflation subdued, steady but still below target, and with a resilient and stable labor market, the Fed is signaling no anticipated rate changes in the near term. In our view, this suggests that the past year’s pause in market growth was an adjustment to this interest rate reality. Based on this month’s strong and persistent market performance, the rising market appears to be a response to higher earnings growth.
Our outlook remains positive, and we believe the market will continue the current upward trend. At the same time, we continue to monitor risks closely and remain cautious and vigilant. Please remember that these quarterly thumbnail sketches are intentionally brief; so do not hesitate to call if you would like to discuss your account or our outlook in greater detail.
Very Best Regards,
Joseph L. Toronto, CFA
Affiliated Investment Advisors 