US Strategy Weekly: The Bull Market Remains Intact

As an example of how fragile geopolitics can be, India conducted military strikes on nine sites in Pakistan on Wednesday in response to a deadly militant attack on Hindu tourists in Indian Kashmir. India’s strike killed at least one child and wounded two other people in what Pakistan has called a “blatant act of war.” Pakistan’s ambassador to the US stated his country has not seen a “shred of evidence” to suggest they were behind the Kashmir tourist attacks and called on President Donald Trump to step in and help alleviate rising tensions with India. In coming days, the financial markets are apt to react negatively to this escalation of fighting between two longstanding enemies, both with nuclear powers.

On a positive note, President Trump and newly elected Canadian Prime Minister Mark Carney held a friendly press conference after their White House meeting this week and Treasury Secretary Scott Bessent and chief trade negotiator Jamieson Greer will meet China’s top economic official in Switzerland later in the week in what could be a first step toward resolving a trade war between the world’s two largest economies. Still, stocks fell just ahead of the Federal Reserve’s June meeting under the assumption that no policy change will materialize. We agree.

The White House continues to suggest trade deals will be announced soon, but to date, none has emerged, and in the absence of news, stocks have weakened a bit. Nevertheless, the last week has been a time of good news on the economic front and of improvement in the market’s technical indicators.

The ISM manufacturing index was relatively unchanged in April, edging down 0.3 points, to 48.7, but with six of its 10 components lower in the month. The ISM nonmanufacturing index rose 0.8, to 51.6, with only one weak component – imports – which fell from 52.6 to 44.3. While imports declined in both surveys, exports strengthened in services and fell in manufacturing. Prices paid were higher in both surveys, but particularly in the nonmanufacturing survey. On a positive note, new orders rose in both surveys. See page 3.

The April employment index rose in both ISM surveys, from 44.7 to 46.5 in manufacturing and from 46.2 to 49.0 in nonmanufacturing. This follows significant weakness in both surveys in March. However, business activity, or production, declined in both surveys, from 48.3 to 44.0 in manufacturing and from 55.9 to 53.7 in the nonmanufacturing survey. See page 4.

The initial estimate for first quarter GDP showed a decline in economic activity of 0.3% (SAAR), with the weakness due almost entirely to net trade as imports surged in anticipation of higher tariffs. Net exports declined a huge 4.8% (SAAR) in the quarter and government consumption fell a modest 0.25%. But aside from trade, economic activity was strong. Gross private domestic investment increased 3.6% and personal consumption expenditures increased 1.2% on a quarter-over-quarter basis. On a nominal dollar basis, gross private domestic investment rose 5.4% YOY led by investment in technology and software. See page 5.

The first quarter’s net trade balance in goods and services showed a deficit of $1.26 trillion, the result of imports of $4.54 trillion and exports of $3.28 trillion. This means imports represented 12.2% of GDP and exports represented 10.9% of GDP, leading to a 4.2% reduction in GDP driven by falling net exports. This was the largest negative contribution to GDP since the negative 4.3% in the first quarter of 2022. See page 6. However, note that April’s ISM surveys suggest imports fell significantly in April which implies trade may not continue to be a major negative factor for second quarter GDP.

In the month of April employment grew by 177,000 jobs although prior months were lowered by a total of 58,000. However, while federal government employment fell 8,700 in April, gains in local government employment resulted in total government employment increasing by 10,000. Employment gains were broadly based in the month but were particularly strong in healthcare, food services, transportation and warehousing. Our favorite employment indicator is the year-over-year growth in jobs, and this was clearly positive in April. The establishment survey showed job growth of 1.2% YOY (slightly below the 1.7% long-term average) while the household survey indicated jobs grew 1.52% YOY (above the 1.51% long-term average). See page 7.

Economists have been discussing the recent disparity between hard and soft data, and the dichotomy between the two is clearly displayed on page 8. The University of Michigan consumer confidence survey plunged to recessionary levels in recent months, but employment statistics are showing job growth that is at or above average levels. Moreover, in April average hourly earnings were $31.06 and grew 4.1% YOY, just fractionally below the historic 4.2% pace. Average weekly earnings were $1,049.83, in April, growing at 4.4% YOY, which was well above the long-term average of 4.0% YOY. In sum, employment and wage trends are healthy, which suggests that like many political polls, consumer sentiment data appears overly negative and biased.

Personal income reported for March was strong with headline income increasing 4.3% YOY and disposable personal income rising 4.0%. The key statistic – real personal disposable income – rose 1.7% YOY, up from 1.5% in February. The savings rate fell from 4.1% in February to 3.9% in March, which was not surprising since personal consumption expenditures rose 4.3% YOY. Spending on durable goods rose 7.2% YOY and vehicle sales increased 8% YOY. The personal consumption deflator rose 2.3% YOY in March, a nice improvement from the 2.7% seen in February. More impressive was the core PCE deflator which increased 2.6% YOY but was down from the 3.0% seen in February. Most economists are expecting inflation to pick up in April as tariffs become a factor, but we would point out that WTI crude oil prices are falling and will continue to lower headline CPI. In short, inflation releases may be a source of positive surprises in coming months.

Technical Outlook

After excellent rallies off the April lows, the popular indices were challenging their 50-day moving averages last week, and to date, only the S&P 500 and the Nasdaq Composite have bettered these levels. This is positive; however, we expect the 200-day moving average lines to be resistance for all the indices in the near term and do not anticipate these levels to be exceeded in coming months. To move significantly higher from current levels investors may require a combination of catalysts such as a good second quarter earnings season, the passage of the reconciliation bill later this year, and possibly a Fed rate cut. Nonetheless, the recent improvement in breadth statistics is impressive and though the Nasdaq Composite and Russell 2000 are 12% and 19%, respectively, below their record highs, the S&P and DJIA are now less than 10% below their record highs. The NYSE cumulative advance/decline line made a new record high on May 5, 2025 and this suggests that the long-term bull market remains intact.

Gail Dudack

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