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):