Data is for Preparation, Not Prediction 

Five Things You Should Know

1. Equity Markets – saw positive performance this week with U.S. stocks (S&P 500) up 1.64% while international stocks (EAFE) were up 1.05%.
2. Fixed Income Markets – declined this week with investment grade bonds (AGG) down -0.83% and high yield bonds (JNK) down -0.31%. 
3. Jobs Report – Nonfarm payrolls increased by 139,000 in May and beat consensus expectations of 126,000 while March and April numbers were revised down. The unemployment rate remained unchanged at 4.2% while average hourly earnings rose 0.4%. Earnings are now up 3.9% year-over-year. 
4. Trade Talk – Chinese leader Xi Jinping agreed to further trade talks with the U.S. as the two world powers look towards a compromise on recent rising tensions over rare-earth minerals. President Trump spoke with Jinping this week stating they had a “very good” call that “resulted in a very positive conclusion for both countries.” 
5. Key Insight – [VIDEO & ARTICLE] People and pundits alike love to sift through all types of data in an attempt to “read the tea leaves” and deduce what may lie ahead. But what is an investor to do when the different data seems to stand in stark contrast with other data, and what, if any, merit do such efforts have? We discuss it in greater detail this week while looking at the current state of both the economy and the equity market.

Insights for Investors

By Tim Mitrovich

Data is for Preparation, Not Prediction 

The Data Appears to Disagree 

While certainly not a “first” the gap seemingly disconnects between soft data (think sentiment surveys) and hard data (actual economic numbers) has created plenty of discussion among media commentators. 

To date this year, survey data whether consumer sentiment or investor sentiment has been abysmal much of the time while hard data has been remarkably resilient. 

Of late, that dynamic appears to be switching with the latest US consumer sentiment reading rebounding in its latest release, albeit from a historically low reading in April. And investor sentiment is rising to neutral/greed levels on CNN’s Fear & Greed Index in recent weeks. On the other hand, hard data finally appears to be weakening. 

TrendMacro pointed out this Wednesday that after recent resiliency in economic hard data that “US services PMI dips ever-so-slightly below 50, with weakness in all subcategories (except prices!). And the ADP Payroll survey shows only 37,000 new jobs. Tomorrow’s unemployment claims data could be critical, but the elephant in this week’s room is Friday’s non-farm payroll report. Our payrolls model based on contemporaneous labor market data is now estimating 110,000 net payrolls (the estimate will change tomorrow when we see claims). As it stands, that would be a miss versus the consensus of 130,000. Trump is “truthing” that the Fed is “too late.” Maybe, but the futures curve is pointing to more than two cuts by year-end.” 

Similarly, ISM Manufacturing disappointed staying in contraction territory with a reading of just 48.5 in May versus expectations of 49.5 (a reading of 50 or more indicates growth, while sub-50 indicates a sector in contraction).  Chief Economist of First Trust Brian Wesbury opined on the latest report, stating “the worst part of the report is that inflation remains a problem, even while manufacturing stagnates.  The prices index declined to 69.4, but besides last month that is the highest level since 2022. Not a good sign for the economy.  In other new this morning, construction spending fell 0.5% in April, led by drops in homebuilding, manufacturing, and power projects.” 

Not all data is disappointing however, with the vital Personal Income data showing gains of 0.8% in April, and 5.5% year over year. Along with that increasing spending power has come…increased spending, which is critical for a US economy built around services and consumerism (the latest reading showed spending increases of 5.4% in the last year). 

How to Frame the Use of Data 

Before we get into the market outlook from here, I want to call out two important points. 

First, trying to trade off either hard or soft data is foolish. There is no amount of “data” that one can consume/monitor that would enable them to predict with any exactitude the future direction of the market, including the timing of events, that would enable an investor to trade/time markets. As we discussed above, different data often seemingly contradicts any one narrative with hard or soft data “seemingly” taking on the role of “leading indicator” at different times, making its use as such largely worthless for such efforts. 

Second, as we stress time and time again the market and economy are not always the same thing, meaning they also do not act in tandem as investors may expect. The general explanation for this is that markets do not solely/simply move based on whether data of any type is good or bad, but also (perhaps even primarily) based on expectations. That is why, for investors, “less bad” can result in better outcomes than “less good.” 

So, where do expectations lie in today’s “uncertain” world? 

The Current Market Set-Up 

From the team at Strategas this week came the following take on current market conditions in light of historically high uncertainty, “We have a very simple view: when policy uncertainty increases to extreme levels, the S&P 500 does well 3, 6, 9, and 12 months later. The rise in policy uncertainty in March and April over tariffs was enough for the fire engines to arrive on the scene. Static tariffs enacted have fallen from $660bn to $270bn in the past six weeks. This is an easier level of tariffs to sterilize with the tax bill. Not coincidentally, policy uncertainty has fallen, and stocks have rebounded. We are less of the view of TACO and TALO that the media discuss. Rather, the Trump team has a model to maximize tariff revenue rates. A 145% rate in China and 50% in Europe is too high. Coming off those rates is not “chickening out,” but rather trying to balance growth with tariff leverage.” (see accompanying graphics below) 

Put simply, after the tumult of April, expectations for both the economy and the stock market were very low, leading to a low “hurdle” for equity outlooks to meet that largely explains the rebound we’ve seen in recent weeks.  

That rebound is not isolated to just the stock market, as the broader economy is also surprising to the upside including a noteworthy upgrade to Q2 GDP by the Atlanta Fed to +3.8%. Especially noteworthy after a slight decline in Q1. For more on this check out the great piece below (see here), and Wesbury’s primary takeaway that as the saying goes “things are neither as good or bad as they may seem.” 

In Closing 

Is all this data useless or analysis useless then? Of course not, but again it should be used as a part of a process of preparation (especially emotional) and NOT to attempt to predict markets. Doing so helps you as an investor stay in the right frame of mind to make constructive long-term decisions as opposed to emotionally charged short-term ones. 

As always, we are here to help you and those you care about navigate it all. 

Have a wonderful weekend, 

Tim and the team at TEN Capital 

GDP Up, Inflation Down 
 
Brian S. Wesbury, Chief Economist 
Robert Stein, Deputy Chief Economist 
Date: 6/2/2025 

Conventional wisdom was that the tariffs imposed by the Trump Administration would cause higher inflation and slower growth – stagflation as far as the eye could see.  But this past week brought economic news that defied this prediction. 

The trade deficit plummeted in April, signaling that economic growth could surge in the second quarter.  The Atlanta Fed GDPNow model has Q2 at a +3.8% for now.  Inflation also slowed sharply with the Federal Reserve’s preferred measure of inflation now up only 2.1% on a year-ago comparison basis, just a hair above the official target of 2.0%. 

Investors can be forgiven for being confused.  After real GDP declined at a 0.2% annual rate in the first quarter, many (especially those opposed to Trump) thought this dip was a harbinger of recession, with more declining real GDP ahead. 

But, as we said at the time, the decline in Q1 real GDP was largely due to an unprecedented surge in imports (front-running tariffs), and that would reverse in Q2 and beyond.  At this point, it looks like this is happening now. 

We like to focus on “Core GDP” which is real GDP excluding government purchases, inventories, and international trade, each of which is volatile from quarter to quarter.  Core GDP grew at a 2.5% annual rate in Q1, faster than the average annual rate of 2.2% in the past twenty years. 

Imagine a store that sells furniture manufactured in both the US and abroad.  Once President Trump was elected and seemed intent on eventually raising tariffs, it made sense for that store to “front-run” the tariffs by temporarily increasing orders from foreign suppliers while temporarily reducing orders from US suppliers.  Even if sales (consumption) did not change, the accelerated imports were subtracted from GDP, which is what caused the decline in real GDP in Q1. 

With Friday’s advance report on international trade in April signaling the largest drop in the trade deficit for any month in modern US economic history, that process is reversing.  But even if growth comes in at 3.8%, or better, don’t be confused. 

The economy was not in massive trouble in Q1, and it is not booming in Q2.  Now that some of the threatened tariffs have finally taken effect, firms selling goods in the US are back to ordering more from their domestic suppliers. 

In the meantime, the fact that inflation continues to decline really shouldn’t surprise anyone.  The M2 money supply is basically flat since 2022.   Yes, tariffs can mean the items being tariffed cost more.  But inflation is ultimately a monetary phenomenon, and tariffs don’t change monetary policy.  So, if the tariffed goods cost more, that means less money is leftover to buy other goods and services, putting downward pressure on those other items.  Net, net, M2 growth says low inflation. 

Inflation data show a quiet past three months, with PCE prices up a mere 0.1% in April.  They are now up only 2.1% from a year ago, a much slower increase versus last year. 

None of this means we are out of the woods on recession risk or that the inflation dragon has been slain.  If the Fed were to dramatically loosen monetary policy, inflation could come back quickly.  What it does mean is that investors need to be wary of getting caught up in news about the economy that often has a partisan political angle. 

Data, Just the Data

• Eurozone Retail Sales – rose 0.1% in April following an upward revision to 0.4% for March’s figure. Year-over-year sales now sit at +2.3%. 
• U.S. Jobless Claims – initial claims rose by 8,000 to 247,000 last week despite expectations for a decline to 235,000. On the other hand, continuing claims fell by 3,000 to 1.904 million. 

• U.S. Manufacturing PMI – fell to a reading of 48.5 compared to expectations of 49.5. This marks the 3rd consecutive month of contraction for the manufacturing sector. 
• U.K. Composite PMI – crossed back over into expansionary territory in May with a reading of 50.3 and beating expectations. Despite the rise the reading still marks the second-lowest reading since October 2023.