This Week in Review | Regional Conflicts, Tariffs, US Inflation, Beyond Breakeven (June 13, 2025)

This week's review covers US-China trade talks, inflation, and market recovery. While a US appeals court upheld Trump-era tariffs, markets appear unfazed, and a new US-China framework offers a potential boost to non-US stocks. May's CPI data came in cooler than expected, suggesting inflation is calmer than feared. Investors are cautioned against "breakevenitis," as historical data indicates strong returns after stocks recover from downturns, suggesting a bullish outlook for the remainder of the year.

Analysis

The current market environment, while presenting some geopolitical anxieties with renewed Israel-Iran tensions, is viewed with cautious optimism, as historical precedents suggest such regional conflicts have not derailed prior bull markets, leading to only temporary volatility. On the trade front, while a US federal appeals court has allowed Trump-era tariffs to persist pending further legal review in late July, the immediate market impact appears muted as many tariffs were already paused. The World Bank's downward revision of its 2025 global growth forecast to 2.3% (and US growth to 1.4%), largely attributed to tariff uncertainties, seems to have been pre-emptively priced in by markets. A notable development is the new US-China framework aimed at restoring their May trade truce, involving China's supply of rare earth materials and continued US academic access for Chinese students; although a comprehensive deal remains elusive, this progress could provide an upside surprise, particularly for non-US equities, in the second half of the year. US inflation data for May offered reassurance, with headline CPI at 2.4% year-over-year and core CPI stable at 2.8%, both cooler than anticipated and with monthly increases slowing to just 0.1%. Concerns that tariffs might fuel significant inflation are mitigated by modest money supply growth, with current inflation levels remaining below the long-term US average of 3.2% and indicative of a growing economy. As global and US stocks, including the S&P 500, approach or reach breakeven levels post-correction, investors are cautioned against the "breakevenitis" impulse to sell, as historical data shows average annualized returns of approximately 20% following similar market recoveries from declines of 15-25%.

Key Decisions for Investors

• Investors should consider maintaining equity exposure and resist selling at breakeven, as historical data suggests significant upside potential typically follows market recoveries from substantial corrections.
• Closely monitor US-China trade talks and tariff-related legal outcomes, as favorable developments could present opportunities, particularly in non-US equities.
• Regard current US inflation data as supportive rather than a headwind for markets, and factor in the low probability of tariffs causing runaway inflation when making asset allocation decisions.
• Evaluate geopolitical events like the Israel-Iran conflict with a long-term perspective, understanding that while they can cause short-term volatility, they have historically not derailed sustained bull markets.