We’ve discussed topics such as change and uncertainty extensively over the past several quarters. These dynamics can be uncomfortable in and of themselves, to say nothing of the volatility that they can inject into financial markets. Some changes are abrupt. Others take time. Some are binary and potentially predictable, while others are far more uncertain and open-ended. We spent much of June sitting on the precipice of change. Where we go from here on several fronts may well dictate what we can expect from financial markets.

Perhaps, the most important change we may be dealing with is taking place in the labor market. There’s no doubt that for the last several years, the US labor market has remained incredibly resilient in the face of numerous challenges and periods of elevated uncertainty. Yet, today, we’re once again starting to see cracks forming. At a very micro level, we’ve seen announcements of layoffs at several tech companies that are at least worth taking note of. At a macro level, continuing claims remain an issue, and initial claims have risen again. This is nothing new that we haven’t seen happen over the last several years, and each time the number has moved lower. But that’s not a reassurance that we will see the same thing happen this time. After all, the economic situation appears somewhat more precarious. Soft data has recovered but remains in the doldrums, and hard data has started to follow it lower. Housing remains stuck in the mud, and new orders data in several data sets has rolled over following a pull-forward ahead of the imposition of tariffs.

This brings us to another potential change - the Federal Reserve. Officials have been cautious on making additional cuts since December, having remained on hold since then. While inflation has generally trended lower since that time, the relative resilience of the US economy, coupled with upside risks to inflation, has kept the Fed on the sidelines. With labor markets softening and economic growth in other key areas looking to be stalled out, it’s possible that the Fed may be increasingly likely to cut rates again. Would the market view this positively, as sending multiples higher? Or would it be viewed negatively, as it would be in response to a weakening economic backdrop? The simple answer is that we don’t know, but the odds of the Fed cutting prior to the September meeting may be changing.

Against this backdrop, equity markets continued to climb. Both the S&P 500 and the Nasdaq hit new all-time highs in June. The US dollar continued to move lower while rates also fell. What remains to be seen is whether this is a sustainable bid into traditionally more risk-on assets, or whether the decline in rates is heralding a weaker economic backdrop in the coming months. The answer to this question will likely impact the equity market's ability to continue pushing higher.

Our Perspective

We continue to find opportunities within our core portfolios to deploy our time-tested investment strategies. We believe that these uncertain times, characterized by change, call for an active approach to seeking out attractive opportunities while also managing risk in investment portfolios.

We have been cognizant of the downside risks to the US economy for some time now. While the US economy has been on a softening trajectory, growth has remained incredibly resilient due in large part to the massive fiscal transfers undertaken in the months and years following the pandemic and elevated household net worth. With the added uncertainty from US trade policy, we see an increase in downside risks. Market expectations have been for a continuation of the strong economic growth we have seen over the last several years, and we believe this may be overly optimistic.

To be clear, this does not mean we are calling for meaningful economic weakness; rather, expectations look elevated relative to reality. With the Federal Reserve having paused its cutting cycle, it remains to be seen how the economy will respond to a prolonged period of elevated rates and uncertainty. Given the varied risks we see in the market today, we are placing an emphasis on risk management.

Our View

Economic Cycle		The US economy has remained resilient despite the aggressive hiking cycle we saw from the Federal Reserve. However, growth is slowing from above-trend levels. Can the US consumer continue to remain resilient? Could policy change be disruptive, or might factors such as deregulation support investment?
Stock Market		The US stock market continues to trade near all-time highs. Earnings expectations reflect a rosy outlook. With the Fed looking more cautious on its rate cutting cycle, can earnings growth support higher prices in the potential absence of multiple expansion?
Bond Market		Risks to the economy and inflation look balanced. While elevated levels of inflation and resilient growth could push yields meaningfully higher, a sudden slowdown in growth could also see cuts priced back into the market and yields fall from their current levels. Corporate spreads remain near their lows.
Important Issues on the Radar		Trade Policy: The new Administration has rolled out an aggressive trade policy at a time when the US economy is already slowing. It’s unclear how the US and its trading partners will navigate this ordeal, and we see the policy at the very least as having injected a great deal of uncertainty into the global economy.
		AI: Booming investment in semiconductors and AI infrastructure has been a feature of markets for years now. Will the release of lower-cost models lead to a reduction in investment or could increased efficiency super-charge these efforts? How may AI begin to have a real impact on businesses and the economy?

Indicates change Indicates no change

Sources: FactSet.

All investments contain risk and may lose value. This material contains the opinions of Manning & Napier, which are subject to change based on evolving market and economic conditions. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.