A resilient economy makes a resilient market

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Good morning. New home sales in the US were 14 per cent lower in May than in April. Sales undershot already low expectations and sit at a seven-month low. This sends unsold new housing inventory even higher. How much worse can the housing market get before the rest of the economy is affected? Email us: unhedged@ft.com. 

American economic resilience

There was a war, and US markets didn’t care. Here, for example, is a chart of the S&P 500:

There were moves, but they were restrained. There were only two days that the S&P 500 moved more than 1 per cent (and then it was just barely more than 1 per cent): the day after Israel’s war started (June 13) and when the ceasefire took hold (June 24). Zooming out to the year so far, the past two weeks barely register as a break in the momentum. While most of us have been thinking about the Middle East, markets have been thinking about other things. What, exactly? What sort of market regime are we in?

There is a sense in which the current rally began in the first half of April — when tariff fears peaked and then started to subside. But to our eye, the current market regime started sometime in mid-May. Treasury yields peaked on May 21 and have been falling since, which is to say bond prices have been rising. At the same time, equities have churned higher. It is the first sustained period of positive stock-bond correlation since February.  

At the same time, the dollar, which had rallied after the sharp declines in the winter and spring, started to slip again in May. This is a resumption of the normal relationship — yields down, dollar down — that prevailed before “American exceptionalism” fell into doubt, sending dollars down as yields rose. 

We are not sure why the change came in May. The US-China trade truce happened in the middle of the month. Talk about amending the supplementary leverage ratio, which might increase banks’ demand for Treasuries, started to gain traction at around this time, as well. The 30-year Treasury yield, which had been the focus of fears about fiscal incontinence of the big, beautiful budget, started to fall around May 21st, too. 

But the specific catalyst is probably not too important. Instead, we think what we are seeing is the result of the US economy and American companies repeatedly demonstrating resilience in the face of shocks. 

Everyone was waiting for the sharp increase in interest rates in 2022-23 to cause a slowdown. It never came. As Scott Chronert of Citigroup pointed out to us, the AI boom, engine of the tech economy and the equity rally, was shocked by the efficiency of the DeepSeek model this past January. But first-quarter results from Big Tech showed that the AI data centre investment boom was still very much on. Then came Donald Trump’s farcical “liberation day” tariff announcement; a collapse in consumer, investor and corporate sentiment; and fears of capital outflows from the US. The housing market, which caused the last major recession, has been getting weaker and weaker. But, through it all, the US economy has kept on rolling.

Equity investors have responded by returning to the trade that worked before those shocks set in — buying Big Tech. Since May 21, info tech and communications have been the best-performing sectors, with defensive consumer staples and utilities the only two sectors posting negative price returns. The S&P is up a bit more than 4 per cent for the period, and more than half of that gain is down to six companies (Nvidia, Microsoft, Meta, Oracle, Broadcom and Amazon).

The narrowness of the market will worry some people, but the sense that this is a hated bull market is starting to fade. The American Association of Individual Investors survey has reverted from its deep lows of April. Here is the AAII bull-bear spread: 

There are two ways to read all this. There is a traditional, pessimistic reading that says markets “climb a wall of worry”. Now that the wall has been climbed, the risks are more to the downside. You want to buy worried markets, not sanguine ones. But a more optimistic, longer-term reading is that we have learned something encouraging this year, which helps to justify the high prices we pay for US risk assets: you can throw quite a lot at this economy before it falters.

One good read

Tea crimes.

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