Markets Rise on Trade Deal Hopes and Solid Job Growth

Brent Schutte, CFA, is chief investment officer of the Northwestern Mutual Wealth Management Company.

The major indices added to their recent winning streak last week and have now fully recovered from the early April sell-off stemming from the Trump administration's announcement of reciprocal tariffs. The levies were paused for 90 days shortly after they were announced, and since then, market performance has largely been driven by the latest developments in trade negotiations. Indeed, stocks received a boost last Friday on news that China was interested in making a trade deal after previously suggesting that it was up to the Trump administration to initiate negotiations. Last week’s news on China follows recent statements from the administration that it was in negotiations with up to 100 trading partners and hinting that an agreement might be imminent with at least one country.

Encouraging comments out of the White House have led investors to grow increasingly optimistic that the Trump administration will soften its approach to trade and as a result will reduce the likelihood of a recession. While we recognize it is possible that trade deals could be struck that will reduce the level of tariffs placed on imports from the levels announced initially, we continue to believe that the administration is determined to apply levies as part of its efforts to reorient the global economy and the role of the U.S. in it. As such, we believe the sharp rebound in equities over the past two weeks suggests that the risks that come with such a significant change to the global economy are likely not fully reflected in investor behavior. Until final trade deals are in place and their impacts are reflected in the hard data (such as employment numbers and sales data), it is premature to draw conclusions about how things will play out.

To be sure, hard data that we detail later in this commentary offers a mixed view of the economy, with the latest jobs report showing solid gains in hiring, while the initial estimate of first-quarter gross domestic product (GDP) fell short of expectations. Likewise, so-called soft reports continue to point to risks of a slowdown and rising prices as a result of new tariffs. However, these reports offer a snapshot of the economy before most of the president’s policies have been implemented. In addition to tariffs, businesses will likely be affected by changes to the tax code and deregulation. Put simply, we believe despite the recent rebound for the major indices, uncertainty will persist in the coming months, and we may see more volatility going forward.

While we believe uncertainty will remain elevated for a while, we also believe the best way to address it is by focusing on the long term and staying diversified to avoid concentrating too much on any one market segment or asset class.

Wall Street wrap

Inflation eases: The latest reading of the Personal Consumption Expenditures (PCE) index from the Bureau of Economic Analysis showed that headline inflation was unchanged in March—after rising 0.4 percent in February—and is up 2.3 percent on a year-over-year basis, down from February’s year-over-year pace of 2.7 percent. Core inflation, which strips out volatile food and energy prices and is the measure that the Fed has the greatest influence over, was also unchanged—after rising 0.5 percent in February. On a year-over-year basis, core inflation was up 2.6 percent, tied with June 2024 as the lowest level since March 2021.

The cost of goods fell 0.5 percent in March after rising 0.2 percent in February. Services prices rose by 0.2 percent, down from February’s pace of 0.5 percent. On a year-over-year basis, inflation for services came in at 3.5 percent, down 0.3 percent from February’s final reading. Meanwhile, goods prices are down 0.3 percent from the same period a year ago.

One of the secondary reports we follow, the Dallas Federal Reserve’s Trimmed Mean PCE, which removes outliers that can distort traditional PCE readings, shows that the one-month annualized inflation rate is at 1.85 percent, compared to 3.09 percent in February. On a six-month annualized basis, the measure is up 2.65 percent and is 2.45 percent higher year over year. While the most recent reading is encouraging, barring a sudden uptick in the unemployment rate, the Fed will likely want to see a sustained trend of disinflation before it will cut rates again.

Hiring stronger than expected: Last week’s Nonfarm payroll report from the Bureau of Labor Statistics (BLS) showed stronger than expected growth, with 177,000 new jobs added in April, including 167,000 positions in private industry. The diffusion index (which measures the portion of the 250 industries covered by the report that added jobs versus those in which employment is unchanged or declining) rose modestly to 54.6 percent versus March’s level of 54 percent.

Hourly pay for non-supervisory production employees grew by 0.32 percent for the month and was up 4.05 percent year over year. The annual pace of wage growth is still above the 3 to 3.5 percent rate the Fed believes is consistent with its goal of inflation sustainably at 2 percent. The BLS’s other jobs report, the Household survey, showed the unemployment rate was 4.2 percent, unchanged from the prior month. The labor force participation rate edged higher to 62.6 percent from the prior month’s 62.5 percent. In total, the Household report showed 436,000 more people employed in April than during the prior month.

More on the employment picture: Announced job cuts in April totaled 105,541, up 63 percent from the same month a year ago, according to the latest report from Challenger, Gray & Christmas Outplacement Services. This marks the highest number of announced cuts in the month of April since 2020, in the early days of COVID. Cuts in the government sector drove the increase, but reductions in payrolls occurred in many sectors. In total, nearly 602,500 job cuts have been announced since the beginning of the year, which is the highest total for the first four months of a year since 2020, during COVID. For further context, announced job cuts year-to-date through April are up 87 percent from the 322,043 announced through the first four months of 2024.

While job cuts have surged since January, there has also been an uptick in hiring, although announced hires are well short of announced job cuts. Companies announced plans to hire 16,191 people in April, an increase of 65 percent from year-ago levels. This brings the total hiring announcements during the first four months of the year to 70,058, which is a 50 percent increase from the same period last year.

Finally, initial jobless claims were 241,000, up 18,000 from last week’s final figure. The four-week rolling average of new jobless claims came in at 226,000, an increase of 5,500 from the previous week’s average.

Continuing claims (those people remaining on unemployment benefits) stand at 1.92 million, up 83,000 from the previous week’s revised total and the highest number since November 2021. We view continuing claims as a more reliable indicator of the labor market, as they measure workers who are facing long-term challenges in finding a job and, as such, filter out some of the temporary noise that can be found in initial claims data. The latest report suggests that while employers continue to hold on to workers, those who are laid off have had a hard time finding new work.

Manufacturing contracts further as costs continue to rise: The latest data from the Institute of Supply Management (ISM) shows the manufacturing sector contracted for the second consecutive month. This marks the 28th time in the past 30 months the sector declined. The composite reading for the index for April came in at 48.7, down 0.3 points from the previous month (readings below 50 signal contraction). Readings for new orders moved higher to 47.2, up from the prior month’s 45.2 but still at contractionary levels. This marks the third consecutive month of shrinking demand. The production index fell 4.3 points to 44, and the employment index came in at 46.5, up 1.8 points from March. It’s worth noting that many survey respondents turned to layoffs to shrink payrolls instead of simply not filling positions as employees left payrolls. Layoffs are a quicker way to pare payrolls in the face of weaker demand. Weaker growth was once again attributed to uncertainty about the impacts of proposed trade policies from Washington. Included in comments submitted with the survey by one of the respondents was this note: “Tariff whiplash is causing us major issues with customers. The two issues we are seeing: (1) Customers are holding back orders to understand what is happening with tariffs on their products; or (2) they are forcing us to accept the tariffs, which causes us to ‘no quote’ the job, as we cannot take on that type of risk for an order.”

Tariffs also continued to drive an acceleration of price pressures for manufacturers. Prices rose, with the latest reading coming in at 69.8, up 0.4 points from March. This marks the seventh consecutive month that manufacturers have faced higher costs for raw materials. For further context, the price index has risen 15 points over the past six months and is now at the highest level since June 2022. Five of the six largest manufacturing industries reported rising prices for the month, and 49 percent of all companies reported higher costs, up from 46 percent in March.

GDP contracts: The initial estimate of first-quarter real GDP from the Bureau of Economic Analysis showed that the economy shrank at an annual rate of 0.3 percent, falling short of Wall Street expectations of modest growth. The decline was largely due to a surge in net imports, which subtracted nearly five percentage points from GDP and was likely the result of consumers and businesses buying ahead of new tariffs.

This marks the first contraction in GDP since 2022 and represents a steep decline from the previous quarter’s 2.4 percent annual rate of growth. While imports were a drag on growth, personal consumption expenditures grew by 1.8 percent, contributing positively (and, perhaps, a sign of anticipatory buying).

Fixed investment showed strength, growing 7.8 percent quarter over quarter, driven by nonresidential investment, suggesting healthy private-sector business demand. However, government consumption fell, marking its first decline since early 2022. Despite these mixed outcomes, aggregate demand appeared solid, with real final sales to domestic purchasers (which excludes trade and inventories) rising at a solid 3 percent pace. Going forward, we will be watching to see whether consumers were buying ahead, and, if so, if it will result in weak demand from consumers and businesses in coming quarters.

Consumer confidence falls further: The Conference Board’s Consumer Confidence Index released last week came in at 86 for April, down 7.9 points from March, marking the fifth consecutive month of declines. Overall confidence has fallen to a level not seen since the onset of COVID. Views of current economic conditions declined modestly, coming in at 133.5, down 0.9 points from the prior month’s final reading. Expectations for the future tumbled 12.5 points for the month to 54.4, marking the lowest reading since October 2011 and significantly below the 80-point level that has typically served as a threshold indicating a recession was approaching. Declines were seen in four of the five measures used to gauge consumer views. Views of current business conditions rose modestly.

The labor differential, which measures the gap between those who find it easy or hard to get a job, fell to 15.1 from March’s final reading of 17.5 percent. Still, the level is well below the record high of 47.1 recorded in March 2022. Respondents aren’t optimistic about the future of the job market, with the latest reading showing the outlook for jobs dimming. Decreases in this measure have historically coincided with an increase in the unemployment rate. Compared to March, more respondents expect the number of available jobs to decrease in the next six months, and more expect their income to decrease.

Write-in comments by respondents also showed tariffs are the top concern for consumers, with the latest survey seeing the most mentions of levies in the history of the survey. Inflation was also a top concern, with year-ahead inflation expectations coming in at 7 percent, the highest level since November 2022. Perhaps in anticipation of higher prices, plans to buy big-ticket items fell in the latest survey but are still up on a six-month moving average basis.

Home prices continue to climb: The latest S&P CoreLogic Case-Shiller Index report shows that home prices nationally rose 0.26 percent on a seasonally adjusted basis from the prior month. February’s reading shows home prices are up 3.9 percent on a year-over-year basis compared to January’s year-over-year pace of 4.1 percent. While the pace of year-over-year gains has eased since July 2024, mortgage interest rates have remained elevated. The continued rise in selling prices and high mortgage rates means affordability issues continue for average buyers.

The week ahead

Monday: A light week of data kicks off with the release of the latest Purchasing Managers Services Index from the Institute for Supply Management (ISM) mid-morning. Recent data has shown increased inflationary pressures and slowing growth in the services sector. Given that the services side of the economy has driven much of the economy’s growth over the past two years, we will be looking for signs of any changes in underlying strength in this report.

Wednesday: The focus for the day will be on the Federal Reserve as it releases its statement following the latest meeting of the Federal Open Markets Committee. The Fed is widely expected to leave rates unchanged. We will be listening to Federal Reserve Chairman Jerome Powell’s post-meeting press conference for insights into how the Fed views the state of the job market and economy and what he has to say about the impact potential tariffs are having on the disinflationary process.

The Federal Reserve will release its latest look at the financial condition of consumers through its Consumer Credit report. Consumers have pulled back on credit usage recently; that could signal a change in spending habits. We will be looking to see if the trend continues in the latest data.

The Bureau of Economic Advisors will release its first estimate of gross domestic product growth for the first quarter. Estimates call for overall economic growth to clock in at 0.4 percent after last quarter’s 2.4 percent. We will be looking for any significant divergence from consensus estimates.

Thursday: Initial and continuing jobless claims will be out before the market opens. Continuing claims have been trending higher, and we’ll continue to monitor this report for further signs of eroding strength of the employment picture.

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