Happy Cinco de Mayo!

What a tumultuous month in the equity markets, marked by the biggest stock declines since the early days of the Covid pandemic, huge single-day surges and similar swings in other investments, such as U.S. Treasuries. Despite the violence of the daily shifts, the monthly changes in major indexes were muted, with the S&P 500 falling less in April than it did in March. 

The markets have rebounded strongly over the past week-and-a-half (the S&P 500 has been up for nine days in a row through last Friday, which is the longest winning streak in the index's history in more than 20 years), holding ground despite the lingering cloud of uncertainty surrounding tariffs and trade negotiations. While tariffs and dollar weakness are stirring short-term concerns (a “tariff tantrum”), long-term inflation expectations remain firmly anchored, setting a strong case – some economists believe – for the Federal Reserve to begin cutting rates.

Core PCE (Personal Consumption Expenditures) is sitting near a multi-year low of 2% – exactly at the Fed’s target. Despite political rhetoric around tariffs and inflation, the data tells a clear story: long-term inflation expectations are stable.

Earnings reports are a mixed bag but, so far, show surprising resilience. CEOs across industries — from airlines to industrials — are navigating uncertainty by tweaking pricing and diversifying supply chains. The biggest drag on sentiment remains tariffs, which are making forecasting and operations a mess. That said, the hard data hasn’t cracked: jobless claims are still low, and consumer spending isn’t flashing any warning signs.

According to economist and Wharton Professor Jeremy Siegel….“Could it worse? Yeah, it can get worse. We could get a major bear market. I don't think we're going to get there because I think Trump is going to relent, but the longer-term holds and even the shorter-term holds on average have been really good.”

Providing reason for investors to hope – and to Professor Siegel’s point – the Trump administration has taken several steps to soften its trade policies. Those include its 90-day pause of “reciprocal” tariffs and its exemption of tech products from its steep duties on Chinese imports.

Meanwhile, Fed Chairman Jerome Powell has the un-enviable job of making sense of where things are headed – specifically jobs and inflation. Yes, inflation is always lurking in the background, but the bigger question is whether these new tariffs will actually shift long-term expectations – or just cause a temporary bump. And that’s what really matters for Powell and the Fed. They aren’t just watching CPI; they’re watching what we think about CPI five years from now.

Here are some of the data points they are continuing to watch:

• NY Fed 1-Year Inflation Expectations: 3.6% (March 2025). Up from 3.1% in February, marking the highest level since October 2023.
• University of Michigan 5-Year Inflation Expectations: 4.4% (April 2025). Increased from 4.1% in March, reaching the highest level since June 1991.
• 5-Year Breakeven Inflation Rate: 2.29% (April 30, 2025). A market-based measure indicating expected inflation over the next five years.
• Consumer Price Index (CPI): 2.4% YoY (March 2025). Down from 2.8% in February, indicating a cooling in overall inflation.
• Atlanta Fed Wage Growth Tracker: 4.3% (March 2025). Remained steady from February, reflecting consistent wage growth.

These indicators suggest that while short-term inflation expectations are rising, long-term expectations and actual inflation measures remain relatively stable. Wage growth continues at a steady pace, contributing to the overall economic outlook. So short-run inflation may tick up, no doubt. But the long-run data? It’s not showing a lasting effect.

 

What investors need to know about the volatility index (the VIX)

In an investing context, volatility is the frequency and magnitude of price movements. While most investors probably associate volatility with painful market declines, in reality, it’s a two-sided coin, as it’s a function of price gains as well. The more dramatic the market’s price swings are, the higher the level of volatility. Price changes occurring within the span of a trading day reflect what’s known as intraday volatility.

This is where the VIX comes in. The VIX is a barometer of investors’ expectations as to how much market uncertainty lies ahead over the next 30 days as measured by fluctuations in prices for options on the S&P 500 index; put succinctly, it is the most watched measure of U.S. stock market volatility.

As investor concerns about higher tariffs have escalated over the past several weeks, the VIX more than doubled in April, closing on April 4 at its highest level in nearly five years. That was just the start; on April 7, the VIX finished with a 4% rise for the day, after climbing as much as 32% at one point only to briefly drop 15% hours later.

 

Market volatility can test any investor’s fortitude, and many respond by trading in and out of the market amid its gyrations – an absolute faux pas for a long-term investor. The challenges of such an approach are easily observable during periods of turbulence. For instance, in 2020, just before the S&P 500 Index hit a low point on March 23, it may have seemed to many investors to be a good time to sell, as the market then appeared as if it could go nowhere but down. As it turned out, the index surged after reaching that low and had tacked on significant gains since then. And investors who sold at this point lost out on the gains.

It’s important for investors to understand that market volatility comes and goes – this is a feature of functioning markets. The recent instability may ultimately prove to be a mere bump in the road for investors who consider staying in the market for the long haul. And as we know, trying to time it right is not a wise strategy for long-term investors.

 

Now is the Time

A period of heightened uncertainty like the one we’re going through now can be an opportune time to revisit both your overall investment allocation and financial plan. Are you taking on too much risk? Not enough risk? Are there specific investments that are good to be in during times like this?

Meeting with a trusted financial professional to review financial goals and follow a plan can help you make the most of what may continue to be a challenging situation.

 

The Oracle of Omaha

Those who regularly read our newsletter know the affinity we have for Warren Buffett, the CEO of Berkshire Hathaway. Yes, he is arguably the world’s most successful investor, but we love him for his intangibles, such as his humility, quick wit, long-term thinking, and uncanny ability to explain complex financial ideas in plain English. He’s the rare billionaire who still lives in the same house he bought in 1958 and writes annual letters that are more entertaining than most bestsellers.

This past weekend, during Berkshire’s annual meeting, Mr. Buffett announced he will retire as chief executive at the end of the year. After standing applause from the audience of around 40,000, he joked: "The enthusiasm shown by that response could be interpreted in two ways."

At 94, Warren Buffett continues to exemplify humility, long-term thinking, and the ability to distill complex financial concepts into accessible wisdom. During the 2025 Berkshire Hathaway Annual Meeting, Buffett emphasized the importance of remaining rational and avoiding herd mentality, especially amid market volatility. He advised investors to focus on long-term gains and not let fear or greed dictate decisions. (Hmmmm…..sounds like a familiar approach to investing.)

For a more in-depth look at Buffett's remarks and the full meeting, you can watch the complete session here: https://youtu.be/1LWBphTImy4

Wishing you and your families a happy spring!

 

Bill