Morning Note: Very Messy Under the Surface -- And -- On Stocks and Interest Rates

What was looking like a decent start to the month for global equities in the premarket, got sideswiped by newsflashes like the following:

"Iran Halts Indirect Talks With U.S. Over Lebanon and Gaza Ceasefire Violations - Tasnim News

• Iranian negotiation team to stop dialogue and text exchanges through intermediaries
•  Move follows alleged violations of ceasefire conditions, including in Lebanon
•  Iranian officials demand immediate halt to Israeli operations in Gaza and Lebanon
•  Iran also demands full Israeli withdrawal from occupied areas in Lebanon before talks resume
•  Iran and resistance front reportedly resolved to fully block the Strait of Hormuz
•  Other fronts, including the Bab al-Mandeb Strait, could also be activated in response"

Yes, markets remain focused on the Iran conflict, despite the major indices floating around their all-time highs... Like I said yesterday (below), the underlying dynamic suggests the market has grown skeptical of resolution prospects:

Not What You'd Expect

Back from a brief getaway, although I stayed somewhat abreast of market and economic happenings while I was away.

Just a quick observation on the US equity market... While it seems intuitive to credit the ascent to all-time highs for the S&P 500 to optimism that an Iran resolution is close at hand, the underneath action of late pours a little cold water on that assumption.

For starters, a solid, durable resolution would initially be bullish for virtually all things equities, save, initially, for the energy related.

Thing is, while the S&P had an impressive May (+5%), 7 of 11 key US equity sectors actually lost money during the month... And, of the 4 that were positive, tech (top green line below) -- on earnings and hype -- did 80% of the lifting... I.e., without its heavy concentration in the tech sector, the S&P would've lost money in May!  That's not the broad-based rip-your-face-off-rally you'd expect in an all's clear scenario:

Weekly Rundown -- And -- Perhaps Some FOMO To Come, But Then What?

Per the synopsis below, our general conditions assessment was less bad week-over-week... Although there's nothing therein thus far that suggests to us that conditions are about to turn robustly positive.

That said, we do remain overall constructive, particularly on equity markets, over the next several months -- assuming present geopolitical angst begins to abate sooner than later -- the market action/reaction on the related headlines and associated commentary make that an easy call.

As for the latter part of the year, and beyond, however, we have to consider what happens if suddenly we get to move on without the proverbial "wall of worry" that typically accompanies sustainable bull markets... I.e., without some worry -- that inspires holding cash, shorting stocks, staying underweight, etc. -- where's the juice to come from to keep the market buoyant after everybody FOMOs, or YOLOs, in?

Quote of the Day: "Second-Round Inflation Risk"

While at first blush today's US PMI release reads positive, particularly for manufacturing, the weeds essentially support the stagflationary story we've been telling.

How Markets Digest "Good News"

I concur with the below from BCA… And I’ll add that the setup described leads to a surprisingly broad misunderstanding among market participants about the interaction between economic conditions and markets… I.e., good economic news can be (often is) bad news for stocks based on what it portends for market-based interest rates and for go-forward monetary policy – particularly in an "inflation focused" environment. 

On the flipside, good news is good news typically when we’re earlier in the cycle -- when earnings expectations are less-robust and rates are not near cycle highs; which is clearly not today.

Notwithstanding -- per the last paragraph from me below -- the likely good-news-boost we'd see were the strait to open tomorrow (since, for the moment, geopolitics utterly dominates market sentiment)... Case in point the market bump that just occurred, literally a I type, on the following headline:   stocks middle panel

Evening Note: Never a Dull Moment!

 "Never a dull moment" is an understatement these days!

In our weekend rundown I hinted that we're exploring hedging some our non-US exposure based on the prospects for central banks tightening policy and the attendant market implications of such a move.

Here's that paragraph:

The Economy Is Growing. Prices Are Growing Faster...

Per the following synopsis, we maintain our view that recession risk remains low, despite a negative PWA Index print.

As you'll note below, there are real positives in spots among the data, while the inflation picture is nothing but negative... On net, this is that stagflationary risk we've been signaling for months.

As I've mentioned in virtually every client review of late, if we're having the same geopolitical conversation six months from now, we will likely have made notable adjustments along the way... Thus far, as you've gleaned from the volume of transaction confirmations of late, we're already actively adjusting at the margin.

While we're sitting right near our year-to-date peak, representing a very nice four-month gain in our core portfolio -- validating our overall strategy thus far -- Friday was nevertheless a rough day, as global equity, currency, and commodity markets suddenly cared about rising yields (read inflation risk), and are, thus, legitimately beginning to wonder if indeed a Hormuz resolution is at hand.

Here's your thorough weekly rundown: