Halfway to a “Soft Landing”
The S&P 500 has reclaimed positive territory for 2025 and closed Friday at a more than three-month high, roughly 2% from the February records. (Please note that the managed accounts have not achieved that same high due to 50% of the account in value/fixed). But has this rapid recovery been warranted and is the rally sustainable? That is the most important question to ask right now as the stock market has rallied to a key tipping point just below the record highs where bullish exhaustion and a failed attempt at new highs could result in a resurgence in volatility and ultimately a breakdown potentially severe enough that we could see the 52-week lows from early April revisited.
To answer that question, we must look at the core fundamental factor for markets, the economy. Much of the 2024 stock market advance that carried the major indexes to record highs in Q4 and into early 2025 was founded on the expectation that the Fed was poised to achieve an elusive “soft landing,” in which higher policy rates slow growth and influence inflation to trend back towards target without triggering a recession.
Based on the YTD economic data in 2025, the Fed is halfway there as the labor market has measurably cooled based on non-farm payroll growth declining. Simultaneously, the Core CPI inflation rate has cooled from a peak annual average of 5.9% in 2022, 4.7% in 2023, 3.2% in 2024, and 2.8% YTD in 2025.
So, in regard to the Fed’s dual mandate, policy makers have so far threaded the needle slowing growth but avoiding a recession as inflation cools. This week’s CPI data will be critical to shore up expectations that the Fed is continuing to work towards achieving success with the other half of the dual mandate, returning the rate of inflation to their 2% target.
This is so important and it could literally make or break the prospects for the S&P 500 to rally to new highs, as a “hot” CPI print could reintroduce risks of a higher-for-longer Fed policy rate, or even rate hikes as the Fed seeks to achieve their mandated 2% inflation goal. Such a development would likely severely dampen sentiment amid surging concerns about a higher-for-longer, or even increased Fed policy rate that would all but certainly tip the economy into a recession in the months or quarters ahead.
As such, it would be prudent to refrain from chasing this rally any further and wait for the data to confirm a soft landing is still the most likely path forward for the economy. We will remain in value and fixed income for 50% of our portfolios for the foreseeable future. A breakout to new record highs in the S&P 500 would effectively be an “all-clear” signal that the economic pillar supporting this bull market is still intact and not crumbling amid a sudden policy dilemma facing the Fed.
We will remain conservative until the market sound an all clear going forward. I believe it is prudent not to chase this market even though I am a bull for the long term.