Crosscurrents!

This week's note offers important insight into what's developing at and below the surface... I.e., while our PWA Index shows real, and legitimate, signs of life, there remain underlying crosscurrents that to some extent muddy the overall go-forward macro setup.

As for the equity market, as I emphasized herein during the week, on the surface (the S&P 500) stocks ended up churning out a nice showing:

While, below the surface, not so much!

6 of the 11 sectors are finishing (as I type, 40 minutes before the close on Friday) in the red:

I.e., thanks to Amazon, and Alphabet -- moving the consumer discretionary and communication sectors up a ton -- the headline tape essentially misrepresents the overall message of the market for the week.

Said message being, the late-cycle is a period of heightened uncertainty and speculation, often characterized by aggressive rotations... This particular instance being exacerbated by a seriously-stressed geopolitical backdrop.

Here's this week's PWA Index scoring summary, followed by our latest important macro deep dive (clients, this is a must-read):

The Tape Is Lying To You; Day 2

Now, to be sure, there have been many days of late deserving of a post titled The Tape is Lying, it's just that yesterday's and so far today's unusually so.

As I type, 6:40am PDT, the Dow is clinging to a 90-point gain, while the S&P 500 and the Nasdaq 100 are up by 0.17% and 0.55% respectively, so the market's up, albeit slightly, right?

Well, actually, no... Or, not mostly, I should say.

While, thanks to Amazon, our consumer discretionary position is up a very nice 2.7%, and Microsoft is delivering a second day of gains, up 2% so far this morning, virtually everything else is either essentially flat, or down a little, or a lot... The latter among US sectors being, materials -2.4%, staples -0.81%, healthcare -1.17%, financials -0.26%, industrials -0.76%, tech -0.47%... Even small caps -0.,74%, gold -2%, silver -3.2%, metals miners -1.34% are taking a hit this morning as well.

So, again, while the headline tape reads green (although, as I continue to type, the Dow has given it up, and the S&P is hugging the flatline), the broader complex of risk assets reads red, pretty much across the board.

In a nutshell, today's market is searching for direction amid what would be late-cycle dynamics exacerbated by a geopolitical situation that itself is sorely in need of direction -- or, let's say, in need of a durable solution.

Of course there's lots going on under the surface, described succinctly in the following:

The Tape Is Lying To You -- Or, "World" Being the Key Word

 I opened Tuesday's morning note with the following:

"It's days like today where stock-watchers bemoan diversification... I.e., it's been my observation over the past 40+ years of doing what I do that folks tend to see their long-term portfolios as extensions of the US equity market."

Well if all I did this morning was look at the table below, I might say, dang, another day to bemoan for the diversified investor.

US sectors on the left, the percent move so far this morning on the right:

Here you have the (cap-weighted) S&P 500 up over 1%, yet, remarkably, 8 of the 11 sectors are actually in the red, and save for financials and utilities, by not-small amounts (hence the title of this post).  In fact the S&P 500 Equal Weight Index (all the same stocks, but equal treatment of each) is down 1% as I type.

And while our core strategy indeed has a healthy-enough allocation to tech -- by itself, certainly not enough to meaningfully offset the hits to, say, healthcare and staples, which also (healthcare in particular) represent healthy weightings in our core.

However, somehow, at least as I type, we're actually capturing roughly 90% of the rise in the cap-weighted S&P 500.

So how in the world can that be? Given that I've emphasized the uber-diversification of our current strategy?

Well, key word there being "world."  Remember, we call ourselves a top down global macro money manager (with theses developed around every single position [meaning we absolutely do not use a shotgun to determine our asset mix]), and, this morning, when we look outside the US we're seeing some pretty dramatic (in one-day terms) upside action.

Our Eurozone exposure, for example, is up 2.45%, our Asia-Pac aggregated position is up 3.6%, our Japanese equity exposure by itself is up 3.2%, South Africa, Brazil and Mexico respectively are up 2.4%, 1.5% and 1.9%, yada yada... Then there are the commodity-related exposures: Uranium miners are up 3.8%, diversified miners are up 2.75%, gold up 1.3%, silver (recently added it back) up 2.5%... Among our individual equity positions, the one that really jumps off the page is recent-addition Microsoft, up a whopping 15% as I type... Not to mention, Applied Materials (a bit smaller weighting than MSFT) up 13.5%... Although we're hedging Applied Materials (AMAT) with a put option that is effectively mitigating todays move by ~6%... By the way, the AMAT put itself is nevertheless still up 69.9% since we put it on.

Anyways, let's put today into its proper perspective... For one, my report above simply illustrates, live, the potential virtues of our current strategy, and our longer-term view of the world right here... And, alas, by the end of today's session, or even by the time you receive this note (scheduled to hit your inbox an hour from now), all this happy stuff could very well have turned on its head -- based on the wild intraday action we've witnessed of late!

In the meantime, here's the bigger picture stuff that matters.

Morning Note

Given this week's calendar one might surmise that this morning's notable selloff in equities reflects worries that the Fed will lean hawkish (though they won't raise rates today), and that key tech earnings after the bell perhaps won't live up to historically-high expectations.

Well, sure, no doubt those are doubts worth mulling, but, clearly, the culprit today is yesterday's surprise attacks delivered by Iran, alongside this morning's news that oil inventories took a massive hit the last week of July... Make no mistake, strategic reserves are virtually spent at this point -- oil's up 7% as I type!

We're having a private session this morning with the head of the geopolitical team we consult with, which will likely give us more texture/context to share later in the week.

In the meantime, here's your morning macro rundown*... Clients take note of the final section titled "How We're Positioned."

Morning Note

It's days like today where stock-watchers bemoan diversification... I.e., it's been my observation over the past 40+ years of doing what I do that folks tend to see their long-term portfolios as extensions of the US equity market.

For many, if not most, US investors, I do believe that's a reasonable impulse... But for today's PWA client, well, no... In our view, particularly late in the cycle (i.e., now), broad sector, regional and asset class diversification is the definition of responsible portfolio construction.

Now, of course that's not simply shot-gunning your money across everything that moves, we do have theses that we "work" every day across different time frames... Meaning, we'll have a near-term view that may inspire the hedging of -- or the leaning into -- a position that happens to jibe perfectly with our long-term thesis, yet we see high odds of meaningful short-term turbulence... Consequently, as you clients have noticed, we'll see days, or stretches of days/weeks, where our strategy deviates -- in either direction -- from the moves in the ever-watched US stock market.

Today could be viewed as one of those days, although even the US stock market itself is all over the place.

As I type the S&P 500 is, albeit slightly, red on the session while the Dow is up nearly 400 points... Yet the Nasdaq 100 is getting slammed, down 1.5% (the equivalent of 750 Dow points).

Commodities, including precious metals, are going the way of the Nasdaq, down notably (save for ag) nearly across the board.

Consequently, if your portfolio is the size that gets the full complement of our globally-diversified core allocation, it's basically flat as I type... So I guess you can say it's going the way of the stock market, but only if you're looking at the S&P 500.

There's lots to unpack this week in terms of data, earnings and central bank decisions, so expect to hear from me aplenty as it all unfolds.

In the meantime, here's your morning rundown*... Definitely click the link and take this one in, it's an important read for clients:

Your 'Important' Weekly Rundown

Per your weekly macro roundup below, markets are pricing up the odds of a Fed response to the latest upward pressures on inflation.

Fed funds futures are currently discounting a 100% chance of a hike at the September meeting, and a 76% chance of yet another one by year-end:

While, presumably, the read from CPI swaps reflects belief that near-term Fed tightening will work to subdue go-forward inflation.

2, 5 and 10-year spreads:

Or, one might argue that swaps are reading an oil curve that anticipates notably lower go-forward pricing, as now-depleted strategic petroleum reserves pressure a near-term ceasefire. 

Of course I can push back there as well, as there'll be notable future demand for oil as those reserves (and some, I suspect) will need to be replenished over the next 1-2 years... Add to that the current state of policy affairs (running a large fiscal deficit alongside what I expect will be an accommodative Fed), and you get very little relief by way of a slowing economy, and structurally higher go-forward inflation as a result.

As I type, weekend headlines are hinting:

Morning Note: Repricing Present Risk

 In Tuesday's morning note I wrote:

"As you've noticed, the Middle East conflict has heated back up markedly of late; interesting that risk assets, while taking somewhat of a hit last week (which may have been more about AI concerns than it was about Iran worries), have overall been holding up, I'd say remarkably well.

We can speculate whether, as is often the case, that's due to the sense that, as scary as they often seem, markets conclude that modern-day geopolitical frictions (even when they're kinetic) don't end up moving the needle as one might expect -- or is it that, in this instance, as long as the price of oil stays, say, sub-100ish, current general conditions are sufficiently positive to absorb the cost? Or is it the legitimate belief/understanding that the US administration will aggressively calm the waters if/when markets begin to crack -- thus leaving investors sanguine, and unwilling to capitulate to scary headlines?"

Well, while there were a couple of heavyweight outlook concerns expressed last evening, the market action this morning is hinting that oil "sub-100ish" may indeed go some distance in terms of explaining the relative sanguineness we've noticed in markets of late... I.e., as I type, global equities, save for those energy and healthcare (a presently meaningful weight in our core allocation)-related, along with precious metals and bonds are getting pretty well-hammered, as Brent crude is fetching $100.16/barrel (+6.1% on the morning), while WTI is trading at $91.40 (+4.6%).. Those are big one-day % moves, and, clearly, markets have noticed.

Morning Note

As I've maintained since the beginning of the year, even throughout the Middle East conflict, we remain (for the moment) constructive on global equities. 

Although that sentiment is on a pretty short leash... I've also maintained that we see not-small headwinds developing (per the 3rd paragraph in your morning wrap below) as we meander into the end of this year and on into next.

As for this morning, markets, save for bonds, are catching a bit of a bid... In terms of equities, this morning's bump embodies the selective character we've been noting of late.

Per Bloomberg's IMAP screen below, just roughly 40% of S&P 500 constituents are in the green thus far, while 4 sectors are either flat or in the red:

While the laggards, save for utilities, are meaningful weights in our core strategy, our commodity and non-US exposures are more than making up the difference thus far.

Bigger picture: As you've noticed, the Middle East conflict has heated back up markedly of late; interesting that risk assets, while taking somewhat of a hit last week (which may have been more about AI concerns than it was about Iran worries), have overall been holding up, I'd say remarkably well.

Offsetting Forces, and a Reprieve That (for now) Looks Short-Lived

The last line in our weekly macro note below captures how to be thinking about the immediate-term setup for markets:

"...the forces at work are large, and, for now, offsetting."

The short-lived reprieve I alluded to in the title is all about the latest inflation print and go-forward sentiment... The inflation print captured the US/Iran memo-of-understanding-inspired comedown in energy prices, while improved sentiment I suspect was largely inspired by the same... But, as I type, alas, the war is back on in notable force and energy prices are consequently back up, big!

Gasoline (the X marks July 1):

And, as you've likely noticed -- while other forces are in play as well (see yesterday's note) -- the stock market has taken notice.

The S&P 500 last week: 

Next week is relatively calm on the data front (although likely to be very volatile on the Hormuz front)... The following week features the Fed and the Bank of Japan respective meetings... While both are of course key to the ongoing assessment of go-forward probabilities, at this juncture markets will be hyper-focused on the latter... More on that to come herein.

In the meantime, here's your summary of our weekly PWA Index scoring, followed by this week's macro note* to clients:

Wildcards

Per the below, the tech space continues to suffer amid worries over the odds that the trillions being spent on AI will equate to sufficient future profits for those doing the spending, exacerbated overnight by competing developments out of China... While the Iran conflict remains a wildcard with political ramifications sufficient to keep the market anticipating compensating de-escalatory headlines every time things heat up (like the present). 

I'll circle back over the weekend with a macro deep dive.

In the meantime:

Under a Few Surfaces: Stocks, Gold, Silver, etc (video)

Once playing, click the icon in the lower right corner for full screen. Focus should occur after a few seconds; if not, click the wheel to the left of the YouTube icon to adjust:

Attention Non-Client subscribers: Nothing in this video should be construed as investment advice. The examples expressed relate to portfolio management we perform on behalf of our clients, and, again, under no circumstances are they to be considered recommendations to the viewer.

Lots On Our Radar

The equity market continues to trade, let's say, all over the place... The S&P 500 Dispersion Index (measures how differently the members of the index are moving from one another) sits at a level we haven't seen since the Covid panic... The shaded area denotes levels where the index itself (blue line) tends to struggle:

Of course this doesn't mean that serious pain is imminent, it's just one indicator that says, despite the title of last week's macro note below, turbulence exists below the market's calm (or perhaps complacent) surface.

Per the macro summary below*, there's presently lots to monitor showing up on our radar:

Important Morning Note

I'll be away from my desk this weekend, so look for the usual weekly wrap on Monday morning.

For today, we'll jump to the morning wrap, which is fairly robust and captures some of the essence of our go-forward thesis*:

No Smooth Paths From Here

Per the below, we maintain that it does not serve the overall interests of either side of the Iran conflict to resume all out war at this juncture... That said, the geopolitical experts whom we contract with are noticing that Iran seems to aggravate tensions pretty much whenever the price of oil dips below ~$70/barrel, suggesting that Iran's incentives (somewhat, if not largely political relative to the timing of the US election cycle) has them willing to push the needle to keep the stress on the US electorate elevated. 

Hence, the reason for this morning's broad global selloff outlined below.

When Headlines Move Markets: A Word on This Morning's Action*

A Rising Bar

Per the note below, tech stocks (with the exception of Microsoft, which we recently added to) are getting hammered today despite some remarkable, nearly breathtaking, good news from the world's largest memory-chip maker overnight.

Stocks falling on good news is, let's say, not a good sign... That said, chip stocks, that one in particular, have gone so far, so fast, that the proverbial "buy-the-rumor-sell-the-news" event was for certain priced into the cards.

The "healthy" news is that some rotation continues... I.e., while the global tech sector gets hammered, our healthcare, staples and communication exposures are up solidly, financials are up marginally.

The other issue rocking global markets today is the resumption of kinetic action in the Strait of Hormuz (details below) which is adding to the pain in virtually all things, save for the positives mentioned above.

Here's your morning macro rundown*:

Bad News/Good News

The latest labor data did a slight number on this week's PWA Index score... Although, overall, we continue to see very low recession risk for the foreseeable future.

And while the latter, all else equal, paints a favorable picture for equities, all else, alas, is never equal.

Note that the equity market popped higher on Thursday's release of the weaker than expected June payrolls data and the -74k prior months' revision... I.e., for that moment bad news (being disinflationary) was good news for stocks... However, while the Dow held up nicely, by the end of the session the S&P 500 finished dead even, and the Nasdaq was down nearly 1% -- reflecting continued angst over the ramifications (sustainability, debt financing, profitability, valuations, ancillary players, etc.) of the continued massive AI-buildout.

Not to say that we're not in the near-term bullish camp -- we actually (cautiously) are -- however, as I keep expressing, the setup gets sketchy later this year/into next... More on that herein to come.

In the meantime, here's your summary of this week's PWA Index scoring, followed by a succinct macro note*:

Searching for Signal

I'm feeling compelled to take you into the short-term weeds with me a bit this morning, but first note that we definitely do not react to noise... However, we do forever look for potential signal within said noise.

Today, like many other days of late, is particularly noisy, and I do believe there is some signal, or perhaps some harbinger of potential things to come within.

In a nutshell, while, as I continue to point out, we're generally constructive on risk assets at the moment, we do see potentially serious headwinds developing late this year and into next... I'll be putting the whys (it's multi-faceted) into narrative that I'll share in the coming days.

In the meantime, here's the gist on today's action and how we're viewing it... This expresses our view of the moment -- we're relatively sanguine -- and hints at where we think some of the future pressure will come from (read mega-cap tech):