Recently, the headlines have been anything but boring. However, you might be surprised by how difficult it has been to come up with interesting topics for this newsletter. After all, while the world may seem like it is falling apart, U.S. economic data has been somewhat ho-hum and the domestic markets have continued to drift slightly higher.
As the late comedian George Gobel was famed for quipping: “Did you ever get the feeling that the world was a tuxedo and you were a brown pair of shoes?” Well, the headlines have been the tuxedo and the economic releases have been the brown shoes.
To that end, this past Tuesday, the Bureau of Labor Statistics (BLS) released the Consumer Price Index (CPI) for June 2025.
- According to the BLS, consumer prices increased in the United States 0.3% last month.
- Factoring out the relatively volatile energy and food components, prices were up only 0.2%.
- As a result, over the last 12 months ending in June, the CPI has been 2.7%.
While that is still higher than perhaps the Federal Reserve might like, it is a significant improvement over the 9.1% observation the BLS reported for June 2022. In essence, over the last 36 months, the stated 12-month CPI has fallen 6.4% to a relatively benign 2.7%.
If 2.7% sounds boring to you, it does to me as well. The only people wringing their hands and gnashing their teeth over such a number would have to be those people who are in the business of wringing their hands and gnashing their teeth.
Or so it would seem.
The weird thing is that it doesn’t feel as though things should be mediocre. They should be worse, right? After all, tariffs are essentially a tax on trade.
In his farewell address to the nation, Ronald Reagan said: “Common sense told us that when you put a big tax on something, the people will produce less of it.” That is intuitive to me as well. After all, taxes effectively increase prices. If basic economics are accurate, demand goes down when prices go up.
As such, if imports cost more due to tariffs, consumers will demand less. Since the U.S. economy is heavily reliant on consumer spending, any potential decrease in consumer activity would/could/should have a negative short-term impact on economic growth. Ergo, the U.S. economy might face some headwinds due to increased tariffs on foreign-made products.
At least that is conventional wisdom. However, as I have stated, the data doesn’t seem to suggest the U.S. economy is falling apart.
- In fact, this past Wednesday, the Census Bureau announced that “advance monthly sales for retail and food services” were up 0.6% in June 2025 from the previous month.
- Further, over the last 12-months, the ‘adjusted’ retail sales number was 3.92% through the end of June 2025.
When you factor out the 2.7% trailing 12-month CPI, it would seem as though U.S. consumer spending has grown around 1.2% in real terms, or adjusted for inflation. While that is far from awesome growth, it is also far from economic Armageddon.
But, what you do think about 1.2% growth in consumer spending over the last year? Forget what I wrote and what you just read, how does 1.2% growth strike you? As a consumer of economic newsletters and other goods & services? Does that sound robust? How about awful? Or perhaps you might call it mediocre?
You know, like a brown pair of shoes.
To be sure, some knucklehead could do something reckless, and the entire global economy could completely fall apart overnight. Unfortunately, there is no shortage of potential knuckleheads and lunatic fringe sorts around the world.
However, between now at the next Fed rate cut, what is the likelihood of a complete economic collapse? I mean, how much would you be willing to bet on one? Would you be willing to bet $1,000, even odds, the U.S. economy is going to veer off into the proverbial ditch between now and, say, the middle of September? If not that, what do you say about $500, $100 or even $50? Less?
If you were willing to bet any sum of money, you would likely have a number of takers for the other side of the bet. After all, the U.S. economy is simply massive. Absent a severe exogenous shock, it is difficult for me to imagine it stopping on the proverbial dime. It is almost like an aircraft carrier in that regard. Would one come to a dead stop in the middle of the ocean if it simply turned off its engines?
Or would it take several miles for it to come to a halt? I think you can imagine the answer.
Now, think about it. Did the President’s so-called Liberation Day cause the U.S. economy to collapse? Some 3-months later, the economic data arguably doesn’t support that contention. Did the war in Ukraine? Well, that has been raging for over 3-years. How about the goings-on in Gaza? Or the Israelis and Americans bombing Iran? The whole mess with DOGE, Elon Musk and the President? The One Big, Beautiful Bill? The U.S. dollar falling apart, and gold soaring? Source: various Bloomberg screens.
With that paragraph in mind, who would have thought all of that stuff would be happening, or would have happened, during the first 6-months of 2025 and the U.S. stock market would be up year-to-date? That’s right. As hard as it may be to believe, the year-to-date total return of the S&P 500 through July 17, 2025, was a very respectable 6.20%. Source: Bloomberg.
While that is arguably better-than-expected, would you call it overly robust? Eye-popping? Holy smokes and all of that? Great question, now let me ask you basically the same thing in a different way.
If you had to choose, in absolute terms, and I am simply talking about black numbers on a white sheet of paper, would you consider a 6.20% return over 6.5 months to be closer-to-average… or exceptional? Again, in absolute cold, hard numbers.
Obviously, there isn’t a definitive answer to this question. It IS very subjective. A lot of people would undoubtedly be very content with an annualized return in excess of 12%, which 6.2% clearly would be. However, what if I were to tell you the10-year annualized total return for the S&P 500 was 13.62% at the end of June 2025? What’s more, the 15-year annual average through the end of last month was 14.84%? Source: Bloomberg.
Would that change your answer— whatever it may be — understanding that 2025’s year-to-date return is below recent long-term averages, even though it’s still been pretty good? Or would you argue the returns this year, on paper, have been rather ordinary — even if the headlines have been anything but ordinary?
Perhaps.
In the end, and if nothing else, when the data has been kind of boring, you can always entertain yourself with a heaping helping of mental gymnastics and conjecture. Clearly, this is what I have done today, and what I might just do again next week.
Have a great weekend.
Chief Investment Officer
Please note, nothing in this newsletter should be considered or otherwise construed as an offer to buy or sell investment services or securities of any type. Any individual action you might take from reading this newsletter is at your own risk. My opinion, as well as those of our Investment Committee, is subject to change without notice. Finally, the opinions expressed herein are not necessarily those of the rest of the associates and/or shareholders of Oakworth Capital Bank or the official position of the company itself.