Highlights for This Week Include:

• While business and consumer confidence surveys continue to reflect tariff uncertainty, the “hard data” remains consistent with economic growth, including this week’s retail sales and industrial production.
• Further labor market strength remains the key for future consumer spending and economic growth, and weekly jobless claims, a timely and accurate labor market indicator, remain consistent with job growth.
• Stocks remain under pressure due to heightened uncertainty created by tariffs. Importantly, tariffs are a policy decision that can be modified, as evidenced by Trump delaying reciprocal tariffs that resulted in a historical market rally. Negotiations are also taking place with trading partners that could ultimately result in trade deals that would reduce uncertainty.
• We note that deregulation and the promise of low taxes are also in the works that offer economic tailwinds.
• We continue to recommend that investors stay focused on their long-term investment plans, where stocks play the key role in maintaining a well-diversified portfolio’s purchasing power.

Tariff Uncertainty Reflected in Powell’s Comments and Trump’s Delay of Reciprocal Tariffs

While stocks sold off on Wednesday after Federal Reserve Chairman Powell’s comments regarding the impact on inflation, economic growth, and the Fed’s ability to react to tariff impacts, we note that tariffs are a policy decision that can be modified. This was highlighted by Trump’s 3-month delay of reciprocal tariffs, which resulted in historical gains for the major stock averages. We also note that negotiations are taking place with trading partners that could ultimately result in trade deals that would reduce uncertainty.

Economic Readings Remain Consistent with Further Economic Growth

While business and consumer confidence surveys continue to reflect tariff uncertainty, the “hard data” remains consistent with economic growth. Retail sales accelerated 1.4% m/m in March, boosted by a surge in auto sales ahead of tariffs. This data suggests real consumer spending (adjusted for inflation) increased a strong 0.6% in March and implies a 1% annualized quarterly consumption gain. While certainly a slowdown from the second half of last year’s robust 4% annualized pace, it appears that plunging consumer expectations haven’t yet led to a substantial pullback in actual spending.

Importantly, the strength of the labor market remains the key linchpin for future consumer spending, and we are watching it closely for signs of weakness. Weekly jobless claims provide a timely and accurate reading of labor market health. Encouragingly, initial claims fell 8,000 last week to 215,000 and below consensus expectations of 225,000. In addition, federal government-sensitive claims have shown a minimal DOGE-related spending cut impact so far. Jobless claims remain at historically low levels, consistent with a healthy labor market and further economic growth.

While industrial production fell 0.3% m/m, the weakness was concentrated in weather-impacted utilities, with most other components doing better. Manufacturing output increased by 0.3%, and mining was up 0.6%, but utilities fell 5.8% m/m due to warmer-than-normal March temperatures. High-tech industries (part of business equipment) keep outpacing broader industrial production, buoyed by AI investment.

Manufacturing output for the first quarter overall shot up 5.1% on an annualized basis, the fastest rise in over three years. It should be noted that some of this strength reflects a front-running of production ahead of tariffs. Business surveys that reflect tariff uncertainty suggest this strength could be difficult to maintain.

Market Dynamics Support a Cautious Outlook for Stocks

Stocks continue to digest the considerable uncertainty generated by tariffs. This uncertainty was reflected by Federal Reserve Chairman Powell’s comments on Wednesday, which resulted in lower stock prices. We note that tariffs are a policy decision that can be modified as evidenced by Trump delaying reciprocal tariffs, which resulted in a historical market rally last week. For now, we advise a cautious stance toward risk assets.

We are seeing downward revisions to the economic and earnings outlook for this year, while defensive sectors are outperforming cyclical sectors. The defensive Consumer Staples, Health Care, and Utilities sectors are outperforming the cyclical Consumer Discretionary and Technology sectors. In addition, corporate bonds are beginning to price in a higher probability of future defaults, which is consistent with economic weakness

Importantly, we emphasize that stocks remain a critical part of a well-diversified portfolio and are key to maintaining portfolio purchasing power. We note that corrections are common, even during bull markets, with the average year seeing a 14% correction while ultimately returning a positive 10%. We continue to recommend that investors stick with their long-term investment plans.