Hey everyone, Hedgie here! Welcome to this week's market breakdown. I'm going to walk you through everything that happened in the markets this week and explain what it means for regular investors like you. This was a week of significant recovery as markets rallied strongly following the announcement of a 90-day tariff truce between the US and China, while economic data provided a mixed picture of the economy.

All three major indices finished the week with impressive gains, with the S&P 500 up 5.3%, the Dow up 3.4%, and the Nasdaq up a remarkable 7.2%. This powerful rally has pushed the S&P 500 back into positive territory for 2025, up 1.3% year-to-date. As of Sunday evening when this newsletter was prepared, stock futures were pointing to a slightly lower open on Monday (S&P 500 futures -0.2%, Nasdaq futures -0.3%, Dow futures -0.1%) as traders digest the week's dramatic moves and look ahead to upcoming economic data.

Note: This newsletter was prepared on Sunday evening for Monday morning release. Market conditions may have changed by the time you're reading this.

The S&P 500 has surged back into positive territory for 2025, with last week's 5.3% gain representing one of the strongest weekly performances in recent years. The index has now fully recovered from the April tariff announcement.

This week brought several significant developments that reshaped market dynamics:

The biggest market catalyst came early in the week when the US and China announced a 90-day tariff reduction agreement following weekend negotiations in Switzerland. Under the deal, the US will reduce tariffs on most Chinese imports from 145% to 30%, while China will cut its tariffs on US goods from 125% to 10%. The agreement also includes China easing some non-tariff trade restrictions, such as those on rare-earth minerals.

This temporary truce represents a significant de-escalation in trade tensions that had been building since President Trump's April 2 "Liberation Day" tariff announcement. Markets responded enthusiastically to the news, with the Nasdaq Composite leading the charge as technology stocks, which are particularly sensitive to trade issues, surged higher.

In addition to the China agreement, the US administration announced plans to ease trade restrictions related to artificial intelligence chips, which helped enable trade agreements between US tech companies and other countries. This news, alongside the announced deal between NVIDIA and Saudi Arabia for AI chip sales, provided an extra boost to tech-oriented segments of the market.

While the 90-day window is just a temporary reprieve as negotiations continue toward a more permanent arrangement, it signals that both sides recognize the impracticality of extreme tariffs and are willing to work toward a more sustainable trade relationship.

Tuesday brought welcome news on the inflation front, with the Consumer Price Index (CPI) rising just 2.3% year-over-year in April, below expectations and the slowest annual pace since early 2021. On a month-over-month basis, both headline and core CPI (excluding food and energy) rose 0.2%, also below estimates.

Even more surprising was Thursday's Producer Price Index (PPI) report, which showed wholesale prices unexpectedly dropped 0.5% in April compared to March, versus expectations for a 0.2% increase. The report revealed that a significant portion of the decline was attributable to falling margins, suggesting companies have been absorbing some of the costs of higher tariffs rather than passing them on to consumers.

These inflation readings provide further evidence that price pressures continue to moderate, potentially giving the Federal Reserve more flexibility to consider rate cuts later this year if economic conditions warrant.

This chart shows the year-over-year change in U.S. core CPI and the three-month annualized change in U.S. core CPI. U.S. core CPI has moderated in recent months.

Retail sales grew just 0.1% in April, a notable deceleration from March's upwardly revised 1.7% gain. The modest growth suggests consumers may be becoming more cautious with their spending, possibly due to uncertainty around trade policies and their potential impact on prices and the broader economy.

This caution was further reflected in the University of Michigan's preliminary consumer sentiment reading for May, which declined for a fifth consecutive month to 50.8, down from 52.2 in April. According to the survey, nearly three-quarters of consumers spontaneously mentioned tariffs, up from 60% in April, indicating that trade policy uncertainty continues to weigh heavily on consumer minds. Inflation expectations for the year ahead jumped to 7.3%, up from 6.5% in April, suggesting consumers remain concerned about future price increases despite the recent moderation in actual inflation data.

This chart shows the year-over-year and monthly change in U.S. retail sales and the level of the University of Michigan Consumer Sentiment Index. Retail sales growth has been positive on a monthly basis in three consecutive months despite a decline in consumer sentiment.

Treasury yields rose across most maturities during the week, with the 10-year Treasury yield climbing to 4.44%, up about 10 basis points from the previous week. The 10-year/2-year spread widened to approximately 50 basis points, the widest since February 2022, creating a steeper yield curve that could signal improving economic growth expectations.

Investment-grade and high-yield corporate bonds outperformed Treasuries in the risk-on environment, as the positive trade news boosted investor confidence and appetite for riskier assets.

International markets also benefited from the improved trade outlook. European stocks posted solid gains, with the pan-European STOXX Europe 600 Index rising 2.1%. Japan's Nikkei 225 Index advanced 0.7%, while China's CSI 300 Index gained 1.1% as investors welcomed the trade truce but tempered their expectations for additional stimulus measures from Beijing now that trade tensions have eased.

These market developments have several practical implications for regular investors:

If you're just starting your investing journey, this market environment presents both opportunities and challenges. The recent volatility has created more attractive entry points in quality companies, particularly in technology and other sectors that benefit from improved trade relations. However, it's important to maintain diversification and not overcommit to any single sector, as policy uncertainty could lead to more volatility ahead.

For those in the middle of your career, this is an excellent time to review your asset allocation. The steepening yield curve creates opportunities in intermediate-term bonds, while the strong performance of US stocks relative to international markets might have pushed your portfolio out of balance. Consider rebalancing to maintain your target allocations and ensure you're not taking on more risk than intended.

For investors nearing or in retirement, the potential easing of trade tensions could reduce inflation pressures over time, which would be positive for fixed income. However, the Fed's cautious approach means interest rates may remain higher for longer than previously expected. Consider maintaining some inflation protection through TIPS or I-Bonds, while also taking advantage of the attractive yields currently available in short and intermediate-term bonds.

The 90-day trade truce between the US and China deserves special attention because it represents a critical juncture in the evolving trade relationship between the world's two largest economies.

What makes this temporary agreement particularly significant is that it involves China, which accounts for approximately 13% of US imports and 7% of US exports. This is a much larger trading relationship than the one with the UK (which represents about 2% of US imports and 4% of exports), with which the US reached a trade deal earlier this month.

This chart breaks down the share of 2024 U.S. goods exports and imports by its largest trading partners.

The 90-day window serves several important purposes:

For investors, this 90-day window creates an interesting dynamic. On one hand, the reduced tariffs and possibility of a more permanent agreement are clearly positive for market sentiment, as evidenced by last week's rally. On the other hand, the temporary nature of the agreement means uncertainty will likely increase again as we approach the end of the 90-day period if no permanent deal is reached.

The key question is whether this temporary truce will lead to a more sustainable trade relationship or simply delay an eventual escalation. The answer will depend on how negotiations progress over the coming months and whether both sides can find common ground on issues beyond tariff rates, such as intellectual property protection, market access, and technology transfer.

The market is gearing up for another important week with several key events to monitor:

The market's powerful response to the US-China trade truce highlights how central trade policy has become to the economic and market outlook. The 5.3% weekly gain in the S&P 500 represents one of the strongest weekly performances in recent years and has pushed the index back into positive territory for 2025.

What makes this environment particularly interesting is the contrast between improving market sentiment and still-cautious consumer and business confidence. The University of Michigan consumer sentiment index remains near multi-year lows despite the positive developments on trade, suggesting that Americans remain concerned about the economic outlook even as investors bid up stock prices.

This divergence creates both opportunities and risks. On one hand, if consumer sentiment eventually improves and spending accelerates, it could provide further fuel for the market rally. On the other hand, if sentiment remains depressed and begins to more significantly impact spending and investment decisions, economic growth could slow more than expected.

The 90-day trade truce also creates a timeline that investors will be watching closely. As we approach the end of this period in early August, market volatility could increase if a more permanent agreement doesn't appear to be taking shape.

For long-term investors, these cross-currents reinforce the importance of diversification and a disciplined approach. Trying to time the market based on trade headlines or economic data points is likely to lead to poor results. Instead, focus on building a portfolio that can weather various economic scenarios.

The best approach during times like these is to maintain global diversification across asset classes and regions to reduce portfolio volatility and capture opportunities wherever they arise. Consider how the steepening yield curve affects fixed income allocations, as intermediate-term bonds now offer attractive yields with less interest rate risk than longer-term bonds. Use the current market strength as an opportunity to rebalance your portfolio if recent performance has pushed your allocations away from your targets. Stay focused on your long-term investment goals rather than short-term market movements or policy developments. Remember that economic and market cycles are normal, and patient, disciplined investors have historically been rewarded over time.

The trade truce rally is certainly welcome news after the volatility we experienced in April, but the path forward is unlikely to be smooth or straightforward. As always, the wisest hedgehogs don't panic during downturns or get overly excited during rallies. They prepare for various scenarios and maintain a long-term perspective.

That does it for me! I hope this was helpful. If you haven't followed me on X, you can find the link below where I'll be updating you daily on what is happening in the financial world. Thank you for reading!

Hedgie

_{DISCLAIMER: For educational purposes only. I'm a hedgehog who types with tiny paws, not a licensed financial advisor (my only certifications are in "Burrow Construction" and "Quill Maintenance"). Investments involve risk, sometimes as prickly as my back. Do your own research or consult with a human financial professional, as taking investment advice from woodland creatures, no matter how financially literate, is generally not recommended by the SEC.}

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