By Pete Biebel, Senior Vice President, Senior Investment Strategist
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In recent months, investor response to news has been focused on tariffs. News of higher tariffs was like ringing a bell for the bears: Sell, sell, sell! News of lower tariffs had the bulls pressing the Buy button. That sort of Pavlovian reflex response to news on the topic of focus has been evident in markets of yore. For years, investors were programmed to buy or sell in response to news on the possible timing of future rate hikes or cuts by the U.S. Federal Reserve (Fed). In prior decades, the juicy news at various times has been the money supply or the employment numbers. Just a month or so ago, it was “Will he or won’t he fire (Fed Chairman) Powell.” There’s no doubt that future tariffs will have a significant impact on many companies and sectors, but I get a little worried when the short-term response to a specific item of news, especially on a topic with such a wide range of potential future outcomes, is so automatic and so lopsided.
The most dramatic recent examples occurred coming into and out of the holiday weekend. On the morning of Friday, May 23, the announcement that a 50% tariff on imports from the European Union (EU) would be imposed beginning June 1, had the bears drooling. The major averages gapped down on the opening to their lowest level since the gap-up opening on May 12 (following news that the U.S. and China agreed to mutual tariff reductions over the weekend). But last Tuesday morning, it was the bull’s turn to salivate. News that the new EU tariffs would be delayed until July 9, brought a surge of buying that pushed the S&P 500 Index (SPX) to a 2% gain for the day. That was the index’s best day since (you guessed it!) May 12. The NASDAQ Composite Index (COMP) was even better, gaining 2.5% on Tuesday.
The averages were essentially flat over the remaining three session of the week. For the week, SPX gained a net 1.88% and COMP tacked on 2.01%. Combined with the steep rebound gains early in the month, SPX advanced a bit more than 6% in May. That is its best monthly gain in a couple years and its best May since 1990. COMP gained about 9.5% in May, its best month in a year-and-a-half.
A big part of the reason that such reflex responses persist is that traders are quick to take advantage of any phenomenon that provides a short-term edge. The powerful stimuli become even more powerful. Regardless of my opinion on tariffs, if there’s a good chance the market is going to rally on the news, then I’ll be more than happy to jump in and buy, hoping for a short-term profit. When these Pavlovian reactions to news develop, they become self-sustaining and self-fulfilling, that is until they become too popular. They work until they don’t. Watch for a day in the near future when the market has a big, conditioned stimulus move on the opening in response to tariff news but then reverses and completely retraces the early move.
There were actually a couple early hints at that sort of behavior late in the week. On Thursday, stocks gapped up on the opening following news that the U.S. Court of International Trade ruled that the administration would have to hold off on its tariff impositions. SPX and COMP hit their highs of the week in the opening minutes of trading with roughly 1% gains. Higher than expected unemployment numbers that morning likely tempered that early gain. But the averages gave back all of the opening gain within an hour, perhaps in response to the administration’s promise to appeal that court ruling.
Then, in the pre-opening hours on Friday, indications that the U.S./China tariff deal announced three weeks ago might be falling apart, caused a spasm of index futures selling. Following President Trump’s “No more Mr. Nice Guy” social media post early that morning, in which he declared that China “HAS TOTALLY VIOLATED ITS AGREEMENT WITH US,” the bears were once again salivating, and index futures were trading sharply lower. But as was the case on Thursday, economic data later that morning took some of the edge off the initial bias. The Personal Consumption Expenditure (PCE) data revealed that the year-over-year data for both the PCE price index and the core PCE price index came in a tick or two better than consensus estimates. SPX and COMP were down just modestly on the opening and ended the day with even smaller losses.
Longer-term interest rates trended generally lower through the week. The yield on ten-year Treasury notes began the week near 4.5% and ended near 4.4%. The largest decline during the week came Thursday morning following the tariff news. The lower long-term rates helped the S&P Select Real Estate Sector Index to a 2.68% gain for the week; that was the best of the eleven S&P industry sectors.
Since the weekly low close on April 4, the three industry sectors that are dominated by mega-cap tech stocks have led the market higher. The technology sector has been the best of that group with an eight-week gain of nearly 27%. Over that time, the consumer discretionary sector gained 17% and the communication services sector rose a little over 16%. Surprisingly, the dull, old industrials sector has been second-best, gaining a little over 21% over that stretch. Four tickers in that sector, BA, HWM, GE and JCI have soared more than 40% in eight weeks. Four other stocks, PWR, ROK, TT and UAL have gained between 30% and 40%.
Both SPX and COMP fell into relatively narrow trading ranges in the second half of May. Where COMP did touch a slightly higher rebound high last week, SPX hasn’t been able to push above its high of two weeks ago. The massive rebound rallies off the April lows seem to have reached equilibrium levels. We should see evidence in the next week or two that will signal the market’s trend over the next month or two. SPX ended last week near 5912. If that index can see sustained trading above the 5975 level, then a move back into the area of the February high (just above 6100) would be likely. A second scenario might see SPX ease back into the upper-5700s to consolidate some of the recent gains. That would still allow for another attempt at breaking above 5975. The bearish case would be dropping back below 5700. Sustained trading below that area would reintroduce the possibility of falling into a downtrend and dipping lower in the 5000s.
The economic data this week that is most likely to trigger a market reaction is the employment data on Thursday and Friday. But the odds are pretty good that the tariff kerfuffle will produce one or more market moving headlines during the week. One other situation to monitor, which the stock market doesn’t yet seem to be too concerned about, is repercussions of the Ukrainian drone bombing of Russian airfields on Sunday.
| Economic Calendar (6/2/25 – 6/6/25) | Previous | Consensus | |
| Monday 6/2/2025 | No Reports Scheduled | ||
| Tuesday 6/3/2025 | U.S. Manufacturing PMI, May | 52.3 | 52.3 |
| ISM Manufacturing, May | 48.7% | 48.5% | |
| Construction Spending, April, M/M | -0.5% | +0.2% | |
| Wednesday 6/4/2025 | ADP Employment, May | +62,000 | +112,000 |
| U.S. Services PMI, May | 52.3% | ||
| ISM Services, May | 51.6% | 52.2% | |
| Fed Beige Book | |||
| Thursday 6/5/2025 | Initial Jobless Claims | 240K | |
| Continuing Claims | |||
| U.S. Productivity, Q1 | -0.8% | -0.8% | |
| U.S. Trade Deficit, April | $140.5B | $90.3B | |
| Friday 6/6/2025 | Non-Farm Payrolls, May | +177,000 | +125,000 |
| Unemployment Rate, May | 4.2% | 4.2% | |
| Hourly Wages, May | +0.2% | +0.3% | |
| Consumer Credit< April | $10.2B | $10.2B | |
Links to previously published commentaries can be found at benjaminfedwards.com/Latest Investment Insights/Market Commentary/Market