CWS Market Review – June 17, 2025

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The stock market was shaken a bit on Friday after geo-political events dominated the news. On Monday, the market made back much of what it lost but today was another down day. The S&P 500 closed below 6,000 for the second time in three days.

During these kinds of events, Wall Street tends to be much calmer than the talking heads on TV. The Volatility Index is back over 20 which still isn’t very high. Compare that with April when it got as high as 60.

Over the past two months, overall volatility has decreased markedly. There simply aren’t a lot of intra-day movements. Earlier this year, we saw several big intra-day swings. I’m happy to say that Wall Street has really chilled out from the tariff panic this past spring.

The price for oil spiked, but even that has started to cool off.

This week, Wall Street seems less interested in Iran and more interested in the upcoming Federal Reserve meeting. The Fed will release its policy statement tomorrow at 2 pm ET and it’s very doubtful that we’ll see a rate cut. Traders currently place the odds of a 0.25% cut at 0.2% which, in my opinion, is about 0.199999% too high.

The Fed probably won’t resume cutting rates until after Labor Day, and that’s at the earliest. There’s even a good chance that rate cuts won’t happen until October. Goldman Sachs said the Fed won’t cut until December. Meanwhile, interest rates are having an important impact on retail sales, the housing market and which kinds of stocks are doing well. I’ll explain it all in a minute.

Also with this week’s Fed meeting, the Fed will release its Summer of Economic Projections. Frankly, the Fed has a pretty lousy track record of predicting the economy (remember that “transitory” inflation?), but it’s still interesting to see what the Fed expects. While inflation has been better behaved, it looks like we’re not returning to the pre-Covid world of sub-2% inflation. This is the new reality.

May Retail Sales Fall 0.9%

We’ve had a few disappointing economic reports this week. I’m not worried just yet, but it’s something to be aware of.

For example, this morning, we got the retail sales report for May, and it wasn’t good. Last month, retail sales fell by 0.9%. That was 0.3% worse than expected. Apparently, shoppers weren’t in a spending mood last month. Bear in mind that consumer spending makes up about two-thirds of the economy.

During April, retail sales fell by 0.1%. Over the last year, retail sales are up by 3.3%. That’s pretty weak.

If we don’t include cars, then sales fell by 0.3%, which was also worse than expected. Economists had been looking for an increase of 0.1%.

Building materials and garden stores saw sales fall 2.7%, while sliding energy prices pushed gasoline station receipts down 2%. Motor vehicles and parts retailers were off 3.5%, while bars and restaurants saw sales decline 0.9%.

On the plus side, miscellaneous retailers gained 2.9%, while online sales rose 0.9% and furniture stores increased sales by 1.2%.

The data from the prior months was probably impacted by consumers rushing to get deals before the tariffs went into effect. We recently got the report from the University of Michigan on consumer confidence, and it showed an impressive rebound, but this comes after a few disappointing months.

Another troubling report said that homebuilders are in a terrible mood. This is important because the housing industry drives so much of the economy.

For June, the Homebuilder Sentiment Index fell two points to reach 32. Any number below 50 is bad, and this is very bad. This is the third lowest print in the last 13 years. Wall Street had been expecting an improvement.

The survey showed that 37% of homebuilders said that they had to cut prices. That’s a three-year high. The average price reduction has been 5%. If the housing market isn’t happy, then it’s very hard for the overall economy to be happy.

There’s even a famous academic paper titled “Housing IS the Business Cycle.” I think that’s exactly right. The Federal Reserve also said that industrial production fell 0.2% last month.

I’m looking ahead to the Q3 GDP which is due out late next month. The GDP report for Q1 was a dud. It showed a decline of 0.2%, but Wall Street is expecting a rebound for Q2. The Atlanta Fed’s GDPNow model now sees Q2 growth of 3.5%. (That’s annualized and adjusted for inflation.)

I know the Fed doesn’t want to be the one to rescue the economy. I’m not sure it can, but I think it will give it a shot. I do expect interest rates to be lower by the end of the year.

The Market’s Tilt Away from Defense

One concern I have is that over the last two-and-a-half months, the market’s gains have been heavily concentrated in growth stocks. That’s to be expected at the start of a rally, but I’m skeptical that growth will continue to leave value in the dust.

Here’s a chart that I think shows a lot. This is the relative strength of consumer staples and healthcare stocks. I ran the chart on healthcare recently, but this week I want to show how it stacks up against consumer staples.

As you can see, the two lines are like waltzing partners.

Let me take a step back and explain this for a moment because it’s a subtle point that investors should understand. I call it “The Elfenbein Theory to Explain the Entire Stock Market.”

Broadly speaking, stocks tend to fall into one of four groups. The groups are value, growth, defensive and cyclical. The relative strength of value and growth sectors tend to move in opposite directions (but not always!). Likewise, the relative strength of defensive and cyclical sectors also tend to move in opposite directions. The cyclicals move in cycles. The defensives don’t (but not always!).

The value-growth dimension tends to align with short-term interest rates. Rates go down, value leads. Rates go up, growth leads (but not always!).

The cyclical-defensive dimension tends to align with long-term interest rates. Long-term rates go down, defensive stocks lead. Long rates go up, and cyclicals lead. (But not always!).

I’m sure the super-smart kids out there picked up on something: “Hey Eddy, can’t you make a quadrant of those groups?” Yes, you can! There are also periods when short-term and long-term interest rates move in opposite directions. In simple terms, this is when the yield curve gets wider or narrower, and it impacts financial stocks.

This brings me back to the graph. The key defensive sectors are consumer staples and healthcare. Investors tend to like these stocks because their business tends to be more stable. You may not think a consumer staple like Hershey (HSY) or Colgate-Palmolive (CL) is similar to a healthcare name like Abbott Labs (ABT) or Stryker (SYK), but the stock charts certainly think they’re similar.

Lately, however, these stocks have been in Wall Street’s doghouse. The defensive sectors have lagged the market for two-and-a-half years. I don’t think this can last much longer. If the economy gets weaker, investors will lean towards these areas of the market, and there will be a lot of bargains. The rotation probably is not far away.

That’s all for now. I’ll have more for you in the next issue of CWS Market Review.

– Eddy