Investment Outlook, June 2025
June 26, 2025
An Era of Bad Feelings
With the continual stresses and uncertainty in our country and abroad, it is hard to believe that we are about to end a good quarter in the markets. Based on the headlines, it feels like the U.S economy and markets continue to struggle. One place we often turn to for guidance in times like these is the economic data. However, there has been a stubborn divergence between what we refer to as “soft economic data,” such as sentiment surveys and business confidence, and “hard data,” including payrolls, retail sales, corporate earnings, and inflation, which reflect actual economic outcomes. While confidence indicators continue to signal caution or even outright pessimism, the U.S. economy has proven surprisingly resilient. If we are indeed just in the midst of an “Era of Bad Feelings,” we believe it is best to place greater emphasis on hard data and position portfolios to benefit from the current pervasive gloom despite an underlying economy that continues to expand.
Several factors help explain the disconnect between economic conditions and the public mood. The lingering psychological toll of the pandemic, a toxic political arena, rising global geopolitical instability, and the technological disruption of artificial intelligence have all contributed to increased uncertainty and anxiety among consumers and businesses alike. These effects can all be seen in the soft economic data, such as Consumer Sentiment, Small Business Hiring Intentions, and the Purchasing Managers’ Indices. University of Michigan Consumer Sentiment just increased a whopping 16%, but that was off a disturbingly low reading of 60.5 compared to 74.0 in December 2024 and over 100.0 from 2018 to 2020. Similarly, for businesses, the most recent ISM Purchasing Manager’s Index came in at 48.5, below the 50.0 reading that reflects confidence that business is improving. The survey index has been below 50.0 pretty consistently since the fall of 2022. These are just a couple of the “soft data” sentiment readings that keep hovering at levels typically observed during recessions. In short, the surveys tell us that we are in a low-trust, high-anxiety environment where households and businesses feel worse off financially now than in the past, and they expect further deterioration.
Yet these dour perceptions are at odds with the hard data. After a brief lull last summer, monthly payroll growth has accelerated, keeping unemployment at 4.2%, a rate near historic lows last seen in the late 1960s and early 2000s. Consumption remains solid, even as household spending continues to shift toward essentials and discount retailers, and away from larger purchases such as autos and other durables. And Inflation has cooled materially, as both the headline CPI and the Federal Reserve’s preferred measure, PCE, have declined. May’s inflation reading came in at 2.4% in a continued slow march down toward the Federal Reserve’s stated 2% target.
Hard data captures decisions that have already been made and reflects a firm’s real-time hiring decisions, actual consumer spending, and business investment. In contrast, soft data tends to reflect perception, often changing with short-term market volatility or policy headlines, even when respondents haven’t yet altered their actual behavior —as we are seeing today.
Historically, we have looked to soft data as a leading indicator of where the economy is headed and where future hard data will trend. In early recessions, such as those in 2001 and 2008, surveys accurately identified emerging weaknesses. However, in other periods, such as 2012 or 2015, sentiment deteriorated without a corresponding decline in actual activity and rebounded later as worries abated. This is where we believe we are today. We do not ignore the sentiment data that reflects legitimate worries and uncertainties over future tariffs, prices, and tax policy that could push our economy into decline. Still, we believe the current divergence between hard and soft data does not portend significant declines to come, but instead presents an opportunity for patient investors.
We remain anchored in fundamentals. Equities continue to reflect the strength of the hard data, supported by healthy profit margins and visible demand. While valuations today appear full, we added to portfolios in early April, immediately following “Liberation Day.” To us, the persistent decline in sentiment creates opportunities in overlooked areas of the market, particularly more cyclical sectors such as financials and materials. While interest rates remain at high levels, markets continue to shrug this off and we are locking in attractive income for those that need it. We still expect lower interest rates later this year or next year to support the economy and stock market further. For now, we hope for a quiet and enjoyable summer and are prepared for any market disruptions that may occasionally break through the sunshine.
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