As summer begins, the investment backdrop remains constructive but more demanding. The economy is still growing, corporate results have generally been better than feared, and equity markets have shown resilience, yet inflation remains elevated, long-term interest rates have moved higher, and the Gulf conflict continues to matter mainly because of its influence on energy prices and inflation.
Economic backdrop
The most current inflation report available ahead of June 1 is the April CPI release published in May, and it confirmed that inflation is still running too hot. Headline CPI rose 0.6% in April and 3.8% over the prior 12 months, up from 3.3% in March, while core CPI rose 2.8% year over year.
Energy was again the key driver. The energy index rose 3.8% in April after a 10.9% increase in March, and gasoline prices were up 28.4% over the prior year, a reminder that oil-related shocks can quickly spill into broader inflation readings and consumer sentiment.
The broader economy has still held together reasonably well. Treasury reported that average hourly earnings were up 3.5% over the year through March and that real average hourly earnings remained modestly positive, suggesting that household income trends have not fully rolled over even in a higher-cost environment.
Interest rates
One of the more important developments in recent weeks has been the move higher in Treasury yields. On May 13, the 10-year Treasury yield was reported around 4.46% to 4.49%, near its highest level of the year, while the 30-year Treasury yield moved above 5%, reflecting persistent inflation concerns and reduced expectations for Fed easing.
That move matters because higher long-term rates tighten financial conditions even without an official Fed rate hike. They raise borrowing costs for businesses and households, pressure commercial real estate and other rate-sensitive sectors, make refinancing more expensive, and can weigh on stock valuations by increasing the discount rate investors apply to future earnings.
Higher yields also create more competition for equities. When investors can earn materially better income from bonds, especially at the long end of the curve, stock prices often have to work harder to justify premium valuations. This does not end the equity rally, but it can narrow leadership, increase volatility, and make markets more sensitive to disappointments in inflation, earnings, or economic growth.
Federal Reserve
The Federal Reserve held the federal funds target range at 3.5% to 3.75% at its April 29 meeting and said inflation remained elevated, in part because of higher global energy prices. The Fed also said economic activity was expanding at a solid pace and that developments in the Middle East were contributing to a high level of uncertainty about the outlook.
Against that backdrop, near-term rate cuts appear off the table. Sticky inflation, firmer energy costs, and a backup in long-term yields all argue for a higher-for-longer policy posture unless incoming data soften meaningfully.
Markets and geopolitics
For investors heading into June, the more important question is not what markets did in one particular month, but what could shape returns from here. Higher yields may become a larger obstacle if bond markets continue to demand more compensation for inflation and policy uncertainty, particularly if earnings expectations do not improve fast enough to offset that pressure.
Geopolitically, the main market concern is not a broad comparison of global conflicts but the specific effect the Gulf conflict can have on oil flows, shipping routes, and inflation. Reuters reported that constrained traffic through the Strait of Hormuz and stalled diplomacy with Iran kept supplies tight, with Brent crude above $108 and analysts warning that millions of barrels per day were not reaching international markets.
The recent U.S.-China summit may also prove meaningful if it leads to additional trade stabilization in the weeks ahead. Reporting after the meeting indicated preliminary discussion of tariff reductions on selected goods, expanded agricultural trade, and new trade and investment channels, which may not change the investment outlook immediately but could become an important offset if tensions ease further.
Portfolio perspective
This remains a market that rewards balance, patience, and selectivity. Growth has not broken down, but the combination of elevated inflation and higher long-term
yields means investors should be prepared for a more uneven path and for a wider range of outcomes across asset classes and sectors.
For long-term investors, diversification still matters, but so does an honest appraisal of rate sensitivity. In equities, quality, pricing power, and durable cash flow remain especially important, while in fixed income, today’s yields offer better income opportunities than investors had for much of the last decade.
Closing thoughts
Markets rarely move forward under perfect conditions, and this period is no exception. Even so, investors are not facing an economy in retreat; they are facing one that is adapting to a world of somewhat higher inflation, higher rates, and more frequent external shocks.
That may call for a steadier hand, but it can also create opportunity. Portfolios built around strong allocations, sensible diversification, and realistic expectations are still well positioned to make progress, and patient investors are often rewarded most when the environment feels a little less comfortable than usual.
Thank you, as always, for your continued confidence and the opportunity to serve you.
Sincerely,
Eric Boyce, CFA
President & CEO
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