Stocks Rally Thanks to a Softer Tone on Tariffs and the Fed

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

Stocks rallied last week as tariffs and economic policy once again set the direction for the major indices. Last week’s gain came thanks to a softer tone on tariffs from President Trump as well as his assurances that he will not seek to force Federal Reserve Chair Jerome Powell out of his role. The president also announced that the administration had reached deals with 200 countries in trade negotiations and signaled that he may be willing to ease the level of duties assessed on goods from China. Although no details were released on the potential trade deals, the president said in an interview with Time magazine published last Friday that he expected negotiations would wrap up in three to four weeks. Investors embraced the news in hopes that final agreements will result in lower tariffs than those that were unveiled on April 2.

While we acknowledge it is possible that the size of the so-called reciprocal tariffs could be smaller than originally announced, we believe the administration will implement some level of across-the-board levies as part of its goal to reorient the global economy and the role of the U.S. in it. As we noted in a recent commentary, Trump has a long history of advocating for a narrowing of the trade deficit and has been a proponent of using tariffs to achieve his goals. Additionally, the president believes the U.S. military acts as a stabilizing force globally but results in additional costs for the U.S. In making the case for Trump’s approach, Stephen Miran, the chair of the Council of Economic Advisers, noted in comments a few weeks ago, “If other nations want to benefit from the U.S. geopolitical and financial umbrella, then they need to pull their weight and pay their fair share. The costs cannot be solely borne by everyday Americans who have already given so much.”

The above comments were reinforced last week by U.S. Treasury Secretary Scott Bessent in a speech before the Institute of International Finance. During the speech, Bessent said, “Everywhere we look across the international economic system today, we see imbalance. Nowhere is the imbalance I mentioned earlier more obvious than in the world of trade. That’s why the United States is taking action now to rebalance global commerce. We face the stark reality of large and persistent U.S. deficits as a result of an unfair trading system. Intentional policy choices by other countries have hollowed out America’s manufacturing sector and undermined our critical supply chains, putting our national and economic security at risk. So, this is where the administration is: a need to change all of this—and a belief that all of this has led with a domino effect to many other aspects—so not just a hollowing out of the U.S. economy but also a contribution to our debt situation.”

We note both Miran’s and Bessent’s comments not to agree or disagree with their views but instead to explain why we believe that tariffs are part of a much broader effort to remake the global economy and to reverse the more than 100-year trend toward lower tariffs on global trade. Given the magnitude of the changes envisioned by the administration, we believe trade negotiations may last longer than many expect and bring with them heightened volatility.

To be sure, the final details of trade agreements are likely to have a lasting impact on the economy, as will other elements of the administration’s economic policy, such as deregulation and potential changes to the tax code. However, the ultimate impact may take months or years to be fully felt. Given that the president is pursuing a fundamental shift in the approach the U.S. takes globally, we also expect that performance leadership among asset classes will also change. Put simply, we don’t think that yesterday’s winners are likely to reestablish their place when all is said and done. For example, international stocks led by businesses in Europe have been leading performers this year. The performance comes as countries are now planning to increase spending on defense and infrastructure. Additionally, a stronger euro has benefited U.S. investors holding European stocks.

As the administration continues to pursue its vision for a redefined economy, we believe investors will be stuck in a holding pattern as they watch to see if recent soft data (such as consumer and business surveys) begins to seep into hard data (such as employment numbers, inflation and consumer behavior). Data out last week once again raised some of the same questions about the future direction of inflation and economic growth, even as tariff policy has yet to be set. However, as we have consistently noted over the past few months, uncertainty doesn’t mean you should make significant changes to your investment portfolio. Doing so implies a belief that you are certain of how things will play out going forward. While uncertainty is a constant element in investing, we also acknowledge that the current level is higher than normal. With that in mind, we believe investors are best served by following a time-tested approach:

• Focus on diversification—that is the prime antidote for uncertainty.
• Stretch your time horizon. Recognize that stocks should be viewed over a seven- to 10-year holding period.
• Keep in mind that your investment plan was based on asset allocation that accounted for unforeseen economic slowdowns as well as better than expected expansions. Keeping this in mind should help you avoid letting emotions lead you to take actions that could hurt your financial situation in the long run.

As we often note, the U.S. economy is too large and dynamic to precisely predict how things will play out. Instead, we are simply noting risks as we currently see them. And while risks may be elevated, we do not believe they call for dramatic changes to your investment plan. Instead, the current environment serves as a valuable reminder that an unpredictable future will lead to unpredictable opportunities for investors in the intermediate and long terms. And capitalizing on these unforeseen opportunities is best done through diversification.

Conversely, investors who sell during periods of volatility help to create opportunities for extra returns for those who stay true to their asset allocation. 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

Pace of economic growth slows: Preliminary data from the latest S&P Global Purchasing Managers Index (PMI) showed that the pace of growth slowed in April, with activity in services declining to a two-month low but manufacturing continuing to hover in modest expansionary territory. The latest preliminary data, which tracks both the manufacturing and services sectors, shows that the Composite Output Index came in with a reading of 51.2 (levels above 50 signal growth), down from March’s final reading of 53.4 and the lowest reading in 16 months.

Manufacturing PMI came in at 50.7, up 0.5 points from March. The Manufacturing Output Index rose 1.6 points to 50.2, as goods-producing companies saw a modest uptick in domestic demand but a decline in export orders due to U.S. trade policy. Meanwhile, the Services Business Activity Index fell to 51.4, down three points from March and the lowest level in two months and the second weakest number in the past year.

New orders on the services side were at the lowest reading in 11 months, with many respondents citing uncertainty around tariffs and the economy for dampened demand. Demand for tourism and cross-border activities declined at the fastest rate since January 2023.

Input prices continued to rise for both sides of the economy, with input costs for manufacturers rising at the fastest rate since August 2022. The pace of inflation for costs faced by service providers slowed modestly from the prior month but still was at the second fastest pace in the past six months. The rise in costs for services was attributed to an uptick in raw material costs as well as wage gains. Tariffs, a weakening dollar and supply concerns were cited as the driving force behind higher costs. Escalating manufacturing costs translated to higher prices being charged to customers. The pace of price hikes for end users was the highest in 29 months. Services prices also rose but at a more modest pace, rising at the fastest pace in seven months. Combined, the pace of price inflation was at the highest level in 13 months.

The combination of slowing demand and sharply rising prices captured by the report highlights how recent soft data has pointed to a tricky path ahead for the Federal Reserve.

“The early flash PMI data for April point to a marked slowing of business activity growth at the start of the second quarter, accompanied by a slump in optimism about the outlook. At the same time, price pressures intensified, creating a headache for a central bank [that] is coming under increasing pressure to shore up a weakening economy just as inflation looks set to rise,” Chief Business Economist of S&P Global Market Intelligence Chris Williamson noted in comments released with the report.

Forward-looking indicators point to slow growth: The latest Leading Economic Indicators (LEI) report from the Conference Board weakened but doesn’t signal a recession. The March LEI reading fell 0.7 percent after February’s final reading showed a decline of 0.2 percent. The reading is now down 2.3 percent on an annualized basis over the past six months, weaker than the six-month annualized decline of 1.8 percent reported in February. The six-month diffusion index (the measure of indicators showing improvement versus declines) showed improvement, registering 70 percent, up from last month’s 50 percent reading. A downturn in consumer expectations weighed most heavily, followed by a decline in the stock market and weaker new orders for manufacturers. While recent readings mark an improvement from levels seen last year, they still suggest economic growth is slowing.

Beige book shows little change as businesses take a wait-and-see stance: The latest release of the Federal Reserve’s Beige Book, which provides real-time anecdotal assessments of business conditions across the country, shows the pace of the economy is little changed from the previous report released in early March. Five of 12 districts reported slight growth, three noted little change, and four districts report slight to modest declines. Similarly, employment on balance was little changed, with one district reporting a modest uptick in hiring and four districts noting a slight rise, four reporting no change and three districts reporting a slight decline in payrolls. The lack of movement in the employment picture reflects uncertainty about the direction of the economy; several districts reported holding off on headcount decisions as they wait to see how the Trump administration’s policies affect growth. However, there were scattered reports of some businesses preparing to lay off employees.

While the latest report showed little or modest change in activity, most districts reported modest to moderate price growth. The contacts in the majority of districts expect tariffs will cause input costs to rise for their businesses. Should the increased costs materialize, it could be bad news for consumers, as most businesses expect to pass along higher costs, at least in part, to customers. Some of the businesses that have already faced higher costs in anticipation of tariffs noted they are seeing margins shrink, as they have weak demand in some sectors and lack pricing power as a result.

Capital spending trending down: Preliminary results for March showed that durable goods orders soared for the month, rising 9.2 percent compared to 0.9 percent the previous month. While economists often shrug off this volatile number, the report also contains nondefense capital goods orders and shipments, excluding aircraft, that are viewed as proxies for overall business spending. That measure rose 0.1 percent after falling 0.3 percent in February. Nondefense capital goods shipments excluding aircraft rose 0.2 percent after rising 0.7 percent in February.

Existing home sales drop as inventory expands: The National Association of Realtors (NAR) reported that existing home sales in the U.S. fell 5.2 percent in March to a seasonally adjusted annual rate of 4.02 million units, which was below Wall Street expectations. With the monthly decrease, sales were down 2.4 percent from year-ago levels, marking the second consecutive month of year-over-year declines. The inventory of available homes grew by 8.1 percent in March to 1.33 million units, or about four months of supply.

High mortgage rates and rising prices continued to weigh on sales. Details of the latest sales figures show that affordability issues have skewed sales activity toward high-priced units, which are likely being bought by those who have benefited or been insulated from higher interest rates. Sales of properties above $1 million rose 13.8 percent from year-ago levels. Mean transactions for houses valued at $500,000 or less declined year over year. This trend has persisted for a while, highlighting that the economy is still bifurcated.

The latest data shows little progress on the issue of affordability. The median price for existing homes came in at $403,700, up from the prior month and 2.7 percent higher than in March 2024.

The week ahead

Tuesday: The Conference Board’s Consumer Confidence report for April comes out in the morning. Last month’s report showed a drop in confidence. Given the Federal Reserve’s ongoing focus on the employment picture, we will continue to focus on the labor market differential, which is based on the difference between the number of respondents who believe jobs are easy to find and those who report challenges in finding work. We’ll also be looking for signs about how consumers are feeling about their financial prospects going forward.

We’ll be watching the S&P CoreLogic Case-Shiller Index of property values covering February. Prices overall have moved higher, albeit at a slower pace, in the past several months. We will be looking to see if home prices continue to rise.

The Bureau of Labor Statistics (BLS) will release its Job Openings and Labor Turnover Survey report for March. We’ll watch for changes in the gap between job openings and job seekers. We’ll also keep an eye on the so-called quits rate to see if workers are feeling confident in their ability to find different or better jobs.

Wednesday: The March Personal Consumption Expenditures Price Index from the Bureau of Economic Analysis will be out before the opening bell. This is the preferred measure of inflation used by the Federal Reserve when making interest rate decisions. We’ll be monitoring to see if the latest data shows additional signs of progress in the disinflation process.

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: The Institute for Supply Management releases its latest Purchasing Managers Manufacturing Index. Last month’s report showed that manufacturing dipped back into contraction after two consecutive months of modest expansion, while input costs rose. We will be watching to see if the latest data points to continued rising costs or changes in the pace of growth.

Friday: The BLS will release the Jobs report for April. We’ll be watching to see if last month’s stronger than expected hiring continued. Importantly, we will be monitoring the pace of wage growth. Last month’s data showed the pace of wage growth was still above the pace the Fed believes consistent with its long-term inflation goal, and we will be looking to see if that trend continues, as it could weigh into the Fed’s actions on rates in the future.

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