Active Imaginations

Sometimes investors have active imaginations or they just try to will their ideas into the market. A data-driven approach helps keep investors objective when

making decisions. This week's musings is inspired by the 1971 hit, "Just My Imagination" by The Temptations. Here’s some trivia about the song:

• This song reached number 1 on the Billboard charts and stayed there for at least two weeks in 1971. More than 1 million copies were sold in the U.S. alone, which was a solid number at the time.

• The song was written by Motown writers Norman Whifield and Barret Strong in the late 1960s, but psychedelic songs were popular at the time, so they decided to wait before releasing it. The Temptations had run into a losing streak with a few socially relevant songs, so Whitfield decided to pull the song out of mothballs and let the Temptations record it.

• Eddie Kendricks took the lead vocals on this hit and it would be the last with the band. He launched a solo career soon after this song was released.

• When the band performed this song on the Ed Sullivan Show on January 31, 1971, they sat on steps to evoke a smooth mood in stark contrast to their typical up-beat choreography sets.

"Each day through my window

I watch her as she passes by

I say to myself

You're such a lucky guy

To have a girl like her

Is truly a dream come true

Out of all the fellas in the world

She belongs to you

But it was just my imagination

Runnin' away with me-once again

Seems it was just my imagination

Runnin' away with me"

Here's what we've seen so far this week..

Active Imaginations? The running assumption has been that tariffs will naturally lead to more inflation. However, tariffs mean that some products may be higher

in cost, while other products are cheaper. For example, at least 20 companies have announced plans or are putting together plans to move manufacturing back to the U.S. Among them includes Apple, Nvidia, Samsung, LG, and host of automobile companies. In addition, the consumer is smart and will likely make spending decisions that could keep inflation stable. The PCE Price Index, the preferred measure of inflation by the Fed, declined last month for the 2nd time in four months and remains below the historical average.

This week, we have heard rumblings that there are several trade deals on the verge of being announced and China is offering olive branches in the first signs a deal between the U.S. & China is achievable. In addition, according to Bloomberg, China has quietly exempted $40 billion worth of U.S. imports from tariffs. Currently, the Cleveland Fed's forecast for inflation in April and May shows little inflation, in fact, perhaps declining inflation.

The market is now pricing in at least 3 rate cuts in 2025. The number was as high as four cuts, until today's stellar Jobs Report showing 177,000 jobs added in April versus only 138,000 expected. The Unemployment Rate was unchanged, as well. The bond market is also suggesting a rate cut is in order as the middle of the Yield Curve is still lower than 3-month T-bills. If unemployment is stable, and inflation is flat-to-lower, there should be no expectation for "stagflation" - meaning the Fed is running out of reasons to leave rates unchanged.

Imagined Recession? The data painted one picture this week, but there were factors that affected the data that needed to be parsed before seeing the clearer

picture. First quarter GDP came in slightly worse than expected at -0.3%. The largest contributor to the negative number was Net Exports. This was due to companies front-running expected tariffs and importing goods at cheaper prices before tariffs kick in. It's likely that in either 1st or 2nd revision of GDP it could turn positive. The NY Fed and Atlanta Fed are already showing between 1-2% positive GDP growth for the 2nd quarter. Consumer spending, nearly two-thirds of GDP, remains resilient.

Initial Claims moved higher this week by almost 20,000. While this number is still no where close to the claims typically seen near recessions, the change in the data can be explained. New York saw a doubling of the claims for that state due to the New York public schools. During the spring recess, closures often lead to temporary layoffs of non-teaching staff, which inflates the claims. We'll be watching the claims moving forward, but we expect this to be a temporary situation.

Finally, the price of oil has been dropping, causing some to forecast a coming recession. However, if we look deeper, we see another cause. Since Inauguration Day, oil began sliding on the hopes that the new administration would usher in oil-friendly initiatives. However, the correlation between oil and freight seemed to be in lockstep since "Liberation Day" when tariffs were announced. As the trade war between the U.S. & China heated up, fewer shipments from China to the U.S. have led to less oil being consumed. Depending upon the seriousness of the negotiations on tariffs, this too, could be a temporary situation. We would, however, caution that while the worst may be over, there's still likely to be more choppy trading ahead with the release of each tariff-related headline.

Just our imagination...

__________________________________________________________________________________________

Disclosures

The information contained herein is for informational purposes only and is developed from sources believed to be providing accurate information. The opinions expressed are those of the author, are for general information, and should not be considered a solicitation for the purchase or sale of any security. The decision to review or consider the purchase or sell of any security should not be undertaken without consideration of your personal financial information, investment objectives and risk tolerance with your financial professional.

Forecasts or forward-looking statements are based on assumptions, may not materialize, and are subject to revision without notice.

Any market indexes discussed are unmanaged, and generally, considered representative of their respective markets. Index performance is not indicative of the past performance of a particular investment. Indexes do not incur management fees, costs, and expenses. Individuals cannot directly invest in unmanaged indexes. The S&P 500 Composite Index is an unmanaged group of securities that are considered to be representative of the stock market in general.

Past Performance does not guarantee future results.