Domestic Stocks Rally: U.S. stocks staged a powerful rally last week in response to the Trump Administration’s decision on Wednesday to postpone the largest portion of its proposed reciprocal tariff increases for 90 days. All countries except China were included in the postponement. The S&P 500 Index climbed 5.7%, trimming its year-to-date losses to 8.5%. Most sectors of the Index moved higher, led by technology, industrials, communication services, and financials.

International Equity Markets Lag: Internationally, developed markets saw a modest increase of 0.8%. However, emerging markets dropped 3.8% largely due to the exclusion of China from the tariff relief.

Interest Rates Up, Bond Prices Down: Despite favorable inflation news released during the week, longer-term interest rates jumped sharply higher, putting downside pressure on bond prices. Five-year and 10-year U.S. Treasury security yields gained close to 0.5% each, closing out the week at 4.16% and 4.49%, respectively. The Bloomberg Aggregate and Bloomberg Municipal Indexes declined 2.3% and 4.0%, respectively. This lowered their year-to-date returns to 1.3% and a loss of 2.8%. The comparative weakness in the Municipal index reflected heavy new bond issuances that were greeted with seasonally weak retail demand.

Consumer Inflation Eased: The Bureau of Labor Statistics (BLS) reported that the March Consumer Price Index (CPI) eased to 2.4% from 2.8% in February. Core CPI, which excludes food and energy prices, dropped to 2.8% from 3.1%. Both indexes were 0.2% below Bloomberg consensus forecasts. All measures are calculated on a year-over-year basis.

Producer Inflation Also Eased: The BLS’s March Producer Price Index (PPI) was 2.7%, down from 3.3% in February. The Core PPI dropped to 3.3% from 3.4%. The PPI and Core PPI were 0.6% and 0.3% below Bloomberg consensus forecasts.

Jobs Holding Firm: The Department of Labor reported initial claims for unemployment benefits for the week ending April 5 at 223,000. This was in line with the Bloomberg consensus forecast. Initial weekly claims have averaged around 225,000 over the past year, a period marked by firm labor market conditions.

Consumers Are Worried: The University of Michigan's preliminary April Survey of Consumer Sentiment dropped to 50.8 from 57 in March. This measure was at 74 at the start of the year and has averaged close to 80 over the last 25 years. Survey respondents have been rattled by the Trump Administration’s tariff policies, with many of them concerned about future inflation and job market conditions. In recent years, there has been little relationship between consumer sentiment and actual spending levels because the economy has remained near full employment and wage growth has outpaced inflation. This could change if tariffs trigger significant job cuts in the months ahead. Consumer spending is a critical component of the overall health of the U.S. economy.

A Softer Tone on Tariffs? The Trump Administration’s stance on tariffs appears to be softening. In addition to the 90-day postponement announced on Wednesday, U.S. Customs and Border Protection late Friday evening published updated guidance on reciprocal tariff exclusions for specified products retroactive to April 5. The exclusions apply to smartphones, laptop computers, hard drives, computer processors, memory chips, and other technology goods. A large percentage of these items are imported from China, implying Trump’s brinkmanship with the country may have peaked earlier last week. While the exclusions could come as a relief to the equity markets on Monday, particularly the technology sector, they appear to be temporary in nature, allowing time to develop a more refined tariff structure for these items.

Although Trump appears to remain a firm believer in tariffs, the sharp selloff in U.S. Treasury securities last week seems to have pushed the limits of the pain he is willing to endure in the pursuit of fair trade. Higher interest rates threaten to worsen the U.S. budget deficit while also raising recession risks. A more measured and conciliatory approach to tariffs could help improve foreign investor appetite for U.S. Treasury securities, lowering borrowing costs.

Value In Bonds: The backup in interest rates last week has increased the appeal of bonds relative to stocks, particularly if Trump’s erratic tariff strategy causes economic growth to slow. Since the end of March, economists tracked by Bloomberg have lowered their estimate of U.S. economic growth in 2025 to 1.8% from 2.2%. However, analysts have held steady with their 2025 S&P 500 earnings per share estimate of $271 per share. This appears optimistic given the uncertainties associated with tariffs. A clearer picture of the earnings outlook will emerge over the next few weeks as the first quarter earnings reporting period comes into full swing. The economy appears to have performed well through March, suggesting analysts’ expectations for 8% year-over-year first quarter growth are reasonable. However, managements are likely to strike a cautious tone in their earnings outlooks for the balance of year, leaving analysts’ full year estimates at risk of downward revision.

Roger Khlopin, CFA
Chief Investment Officer

Aaron Nghiem, CFA, CIMA
Senior Portfolio Manager