Contradictions & Crossroads

This past week offered another reminder that markets don’t move in straight lines—even in the face of seemingly clear narratives. What looked like the start of a May rebound quickly turned into a whiplash-inducing mix of optimism and concern. Under the surface, we’re seeing some divergences that hint at deeper investor uncertainty. Advisors and clients of SEM who have been around long enough know: it’s not the headline numbers that matter most—it’s what's happening beneath the surface.

The Big Picture: A Temporary Truce

This morning, markets are reacting positively to a significant development in U.S.-China trade relations. After months of escalating tariffs and strained negotiations, both nations have agreed to a 90-day suspension of recent tariff hikes. The U.S. will reduce tariffs on Chinese goods from 145% to 30%, while China will lower its tariffs on American imports from 125% to 10%.

This agreement marks a temporary de-escalation in the ongoing trade tensions between the world's two largest economies. While it doesn't resolve underlying structural issues, it provides a window for further negotiations and has been welcomed by investors.

Positives

Market Relief: Global markets have responded with optimism. U.S. stock futures surged, and major indices in Asia and Europe experienced substantial gains.
Economic Confidence: The agreement signals a willingness from both sides to engage in constructive dialogue, potentially averting further economic disruptions. (WSJ)

Negatives

Temporary Nature: The 90-day suspension is a short-term measure. Without substantive progress, there's a risk of reverting to heightened tensions. (CBS News)
Unresolved Issues: Key structural concerns, such as intellectual property rights and state subsidies, remain unaddressed. (The Australian)

While the current agreement offers a respite, it's essential to remain vigilant and prepared for various outcomes as the situation evolves.

Since we don't know what will happen next, here's a brief recap of what I saw last week:

The “Good News is Bad News” Loop Returns

After a rough April, markets initially extended their rebound into early May on hopes that the Fed’s rate-hiking campaign had finally done enough damage. But Friday’s hotter-than-expected University of Michigan inflation expectations survey spoiled the mood, reigniting fears that the “last mile” of inflation might be the hardest yet.

This continues the pattern we’ve seen for over a year now: good economic data sends rates higher and stocks lower, while bad data triggers the opposite. The problem is that both bulls and bears can find evidence to support their case—and many advisors are left trying to help clients make sense of the conflicting headlines.

Here’s what spooked the market last week:

Inflation expectations ticked up: The 1-year inflation outlook from the University of Michigan survey jumped to 3.5%, the highest since November. Markets had been hoping for signs that expectations were becoming anchored. They’re not.
Fed Funds expectations recalibrated: Following the Fed's meeting last week, the futures market now reflects barely one full rate cut for 2025—down from nearly three just a few weeks ago. That’s a sharp reset in sentiment and helps explain the late-week weakness.
Bond yields surged: The 10-year Treasury yield jumped back toward 4.5%, driven by inflation data and hawkish Fed speak. That undercuts tech valuations and reignites the “higher for longer” worry.

The University of Michigan's survey indicated that 1-year inflation expectations surged to 6.5% in April 2025, the highest since 1981. This sharp increase underscores consumer concerns about rising prices amid ongoing economic uncertainty. Informational purposes only.

Despite the Federal Reserve's decision to maintain the federal funds rate at 4.25%–4.50%, market participants still anticipate three rate cuts totaling 0.75 percentage points by the end of 2025. However, the probability of a full percentage point cut has decreased slightly, reflecting growing uncertainty about the economic outlook. Informational purposes only.

The 10-year Treasury yield began the week at 4.36% on May 5 and rose to 4.37% by May 9, reflecting market concerns over persistent inflation and the Federal Reserve's cautious stance on rate cuts.

Under the Hood: Market Breadth Improving?

One positive development that might be going underappreciated is the resilience of the average stock. While the S&P 500 (SPY) finished last week slightly lower, the equal-weighted version (RSP) actually posted a gain—continuing a pattern of quiet outperformance in 2025.

RSP outperformed SPY last week by nearly 80 basis points, hinting that investors are starting to look beyond just the mega-cap names.
Year-to-date, the equal-weighted index has now outpaced its cap-weighted counterpart by more than 2 percentage points.
Cyclical sectors like industrials and materials are showing signs of life, and even small caps have stabilized after early-year underperformance.

Informational purposes only | Not investment advice

This broader participation is encouraging. While yields remain a headwind for tech and duration-sensitive assets, the strength in non-tech areas suggests the rally may be more sustainable than many assume.

At SEM, our models are watching for confirmation that this shift has legs. A healthy market isn’t just about what the S&P 500 does—it’s about how many stocks are doing the heavy lifting.

Credit Markets Show Confidence, Not Caution

While equity markets wavered and Treasury yields climbed, credit markets quietly sent a more optimistic signal. Both high yield and investment grade corporate bond spreads narrowed over the week—hardly the sign of rising stress or risk aversion.

High Yield spreads fell 9 basis points to 3.51%, suggesting investors are still comfortable taking credit risk despite macro uncertainty.
Investment Grade spreads also declined, slipping 3 basis points to 1.02%, the lowest level in several weeks.

In short, the bond market isn’t flashing warning signs—at least not in credit. That’s notable given the recent volatility in rates. It implies investors see inflation and Fed policy as concerns, but not enough to derail the fundamental economic backdrop just yet.

For advisors, this is a good reminder that all risk isn’t created equal. Credit risk and interest rate risk are pulling in different directions right now, and that dynamic can offer planning opportunities—particularly in diversified income strategies.

What’s Next: CPI, Retail Sales, and Fed Clarity (We Hope)

Looking ahead to next week, the focus shifts squarely to two key data points:

Wednesday’s CPI report is expected to show a modest decline in the year-over-year core inflation rate. But any upside surprise—especially in shelter or services—could quickly unwind the recent rally in risk assets.
Retail Sales (Thursday) will offer a window into how consumers are handling tighter credit and sticky inflation. Given how much of the U.S. economy is consumption-driven, this may be just as important as CPI. This will be a piece of "hard" data which will either contradict or confirm the very weak "soft" data we've seen from Consumer Sentiment.

The Fed has made it clear they’re in no rush to cut rates. But if we get one more sticky inflation print, markets may begin pricing in the unthinkable: no rate cuts at all in 2025. That would be a significant shift from where expectations stood just six weeks ago.

Bottom Line for Advisors

At SEM, we’re watching the data, not the headlines. This is a market trying to balance economic resilience with policy risk, and that’s a hard needle to thread. We’re in an environment where both caution and flexibility are necessary. For advisors, the challenge is helping clients stick to a plan that can adapt when the narrative suddenly shifts.

This week reminded us that the market’s mood can change in a flash—and that’s exactly why our models are designed to follow the evidence, not emotion.

Market Charts

Stocks have fully recovered the sell-off from the "Liberation Day" announcement. They still remain below the election day closing level, but that may be crossed today if the rally can hold.

From a bigger picture perspective, we are still down just under 8% from the highs in February. The "resistance" levels around 5700 & the 200-day moving average at 5750 will be taken out at the open, so it will be important for the market to stay above those. Above that, the only area which may be another stopping point is around 5860.

All of this will be based on the news flow (and social media posts). So long as there is not any backtracking, the easiest path for now is up.

I think what will be more important for the intermediate-term will be how small caps perform relative to large caps. They've been hurt the most by the "trade war" and if the "worst" is over, they should see a sizeable rally back.

We also need to keep an eye on bond yields for a measure of sentiment. It was the spike in bond yields that led the President to backtrack on all the other countries and likely what caused him to backtrack on China.

SEM Model Positioning

Tactical Bond, Cornerstone Bond, and Income Allocator jumped back to buy signals on 4/24. At least according to the data, we are in a "wait and see" mode.

-Tactical High Yield sold high yield bonds on 4/3/25 after 9 weeks in these funds. These models bought back in on 4/24. All proceeds were moved to money market or short-term bonds, with a yield around 4.1% in money markets.

-Dynamic Models are 'neutral' as of 6/7/24, reversing the half 'bearish' signal from 5/3/2024. The interest rate model remains partially 'bullish' (long Treasuries).

-Strategic Trend Models received 1/2 of the trend sell signal on 4/5/25

SEM deploys 3 distinct approaches – Tactical, Dynamic, and Strategic. These systems have been described as 'daily, monthly, quarterly' given how often they may make adjustments. Here is where they each stand.

Tactical (daily): On 4/3/2025 our tactical high yield model sold out of high yield bond into money market.

Dynamic (monthly): The economic model was 'neutral' since February. In early May 2023 the model moved slightly negative, but reversed back to 'neutral' in June. This means 'benchmark' positions – 20% dividend stocks in Dynamic Income and 20% small cap stocks in Dynamic Aggressive Growth. The interest rate model is slightly 'bullish'.

Strategic (quarterly)*: One Trend System sold on 4/4/2025

The core rotation is adjusted quarterly. On August 17 it rotated out of mid-cap growth and into small cap value. It also sold some large cap value to buy some large cap blend and growth. The large cap purchases were in actively managed funds with more diversification than the S&P 500 (banking on the market broadening out beyond the top 5-10 stocks.) On January 8 it rotated completely out of small cap value and mid-cap growth to purchase another broad (more diversified) large cap blend fund along with a Dividend Growth fund.

The * in quarterly is for the trend models. These models are watched daily but they trade infrequently based on readings of where each believe we are in the cycle. The trend systems can be susceptible to "whipsaws" as we saw with the recent sell and buy signals at the end of October and November. The goal of the systems is to miss major downturns in the market. Risks are high when the market has been stampeding higher as it has for most of 2023. This means sometimes selling too soon. As we saw with the recent trade, the systems can quickly reverse if they are wrong.

Overall, this is how our various models stack up based on the last allocation change: