Thursday marked the 39th time that the president has announced a deal with Iran. One of these days, it will come true. Until then, expect continued volatility in the markets.

 

His decision to back off his threat to increase this week's series of military air strikes on Iran triggered yet another rally in the stock market. The fact that the markets all recovered on Thursday what they had lost on Wednesday highlights the heightened volatility in financial markets.

 

For those watching this ceasefire circus, the news from the White House came after markets had already soared on Thursday. It is just another example of how those closest to government decision-makers continue to profit day after day by advance warning of the news. Back when, this would have been considered insider trading. Today, it is simply another way to repay loyalty and favoritism.

 

This time, the deal being discussed is nowhere near a final agreement. The idea would be to extend the non-existent ceasefire by two months. During that time, the two nations would then try to negotiate a more substantive agreement. As usual, interpretations of the supposed terms of the deal widely differ. The Iranians deny that any agreement has been reached or signed.

 

Just hours later, the president once again posted on social media, accusing Iran of leaking the terms of the U.S. deal. He says that their statements "bear no relation to the truth." He concludes by posting, "They better get their act together, and FAST." At this point, my view is that when the world has proof that the Straits of Hormuz are open to traffic on a consistent basis, I will believe real progress has been made.

 

Skipping to more substantive issues, the SpaceX IPO finally arrived today, Friday, June 12. It appears that all systems are go. At 10:30 a.m., SpaceX shares were indicated to open at $150 per share. That is well above the IPO price of $135 per share. The deal was reported to be 4-5 times oversubscribed, as institutions and retail investors sought to get in on the largest initial public offering of the year.

 

The ebullience around the Musk-powered technology company has influenced investors' psyche and should not be underestimated. As for me, I am immune to IPO hype and will watch the action from the sidelines.  I suspect SpaceX may carry the markets for at least a few days. That would give technology and AI stocks time to repair after their recent declines.

 

My previous guesstimate that we would see a 5 percent pullback in the S&P 500 Index came close (4.5 percent as of Thursday). The Tech-heavy NASDAQ did much worse, falling almost 10 percent with some smaller stocks dropping 20 percent or more. A quick bounce back would not surprise me over the next few days. July and August are what concern me.

 

I recognize that the themes that have carried the markets to new highs thus far this year have been twofold. Better-than-expected economic growth and higher earnings. Is there more of the same ahead, or have we seen a peak in these trends, at least in the short term?

 

If I were a betting man, I'd wager on a summer of discontent for investors at least through August. I know betting against the crowd is always dangerous and never popular. And yet it's just what I do on occasion.

 

A look at the bond market, which I believe is where the adults hang out, indicates we have seen a peak in the trend of higher yields. The benchmark U.S. Treasury 10-year bond reached 4.67 percent but has since dropped to 4.5 percent. That is at my level where I worry about further upside in stocks.

 

All along the yield curve from the short to the long end, I am starting to see yields stall out. That's important, especially in the face of inflation and the never-ending need for more money to finance the country's continued spending spree. Credit-sensitive areas are also coming under pressure. What, therefore, would make bond traders slow their selling of U.S. debt?

 

It could be that we are seeing the peak in inflation, at least for now. As readers know, I have been on the side of higher inflation for the entire year. This week's Consumer Price Index and Producer Price Index both justified that position. However, I'm thinking the next month's set of data points might show inflation a bit lower than the increases we have seen thus far.

 

Another sign may be that the prices of inflation hedges like gold, silver, copper, and steel have also peaked and are declining even amid strong inflation numbers. I also noticed that cyclical stocks have been on a decline. Equity areas such as industrials are weak, and emerging markets, including China and especially commodity countries, seem to be experiencing profit-taking.

 

Readers should remember just how serious a continued shutdown of the Straits would be for oil prices if nothing is done to increase supply before July. That's a little over two weeks away. Markets are flirting with all-time highs. From a purely price perspective, volatility in markets always increases when markets are at the bottom or the top. Maybe I am being overly cautious or just tilting at windmills, but if storm clouds gather, you will be first to know.

 

The immigration policies of the Trump administration may have some unexpected consequences in an era when Baby Boomers are leaving the workforce. Couple that with the AI boom, and we may be in for decades of lower productivity and a declining workforce.

 

Illegal immigration has already fallen by over 80 percent since Trump took office, while legal asylum seekers entering the U.S. has dropped by 99.9 percent, according to the Cato Institute. The reduction in legal immigrant entry have also been effective and are 2.5 times lower than illegal entries.

 

Last week the Republican House passed an additional $70 billion in spending for an immigration crackdown bill. They passed their bill by 2 votes. Now the legislation moved on to the Senate. The money will fund immigration enforcement. Clearly, the war on immigration continues.

 

In retrospect, today's anti-immigration policies collides with one of the enduring American myths; that of the "melting pot." It was a cornerstone of American identity for decades. Without immigrants, so the story goes, there would be no United States. In one sense that is true, since the only inhabitants of North America in the time of the colonies were native Americans.

 

Although America's population makes up about 4 percent of the world's total, it accounts for 17 percent of all international migrants. As of 2023, more than 47.8 million immigrants lived in the U.S. That was the largest absolute number in the nation's history. This foreign-born population accounted for 14.3 percent of the total population, almost as high as its 1890 peak of 14.8 percent. Historically, when immigration numbers have reached this level, there has been a backlash in attitudes towards immigrants.

 

In past columns, I have delved into America's love/hate relationship with immigrants. As early as 1751, Benjamin Franklin worried about the number of Germans "swarming" into the colony of Pennsylvania. Suffice it to say that in the most recent presidential election, the majority of voters approved of Donald Trump's anti-immigration rhetoric.

 

One result of these efforts has been a steep decline in U.S. population growth. One of the steepest in many years. Why does that matter? For one thing, lower population growth equates to a smaller workforce over time. The Congressional Budget Office had projected that higher-than-expected immigration levels between 2024 and 2034 would have increased U.S. GDP by an estimated $7 trillion to $8.9 trillion.

 

Their analysis, along with that of many economists, argues that immigration was vital to economic growth. It does so by expanding the labor force and boosting consumer demand. Today, as the number of new immigrants decline precipitously that rosy view of economic growth and productivity is no longer a sure thing.

 

The analysts at the Federal Reserve Bank closely monitor employment, since full employment is one of its most important objectives. This year, they found that the monthly job gains required to keep unemployment steady (the breakeven rate) have now dwindled to near zero. Few economists expected to see the results of this drop off crop up so soon in the monthly employment figures. The immigration slowdown seems to be having an outsized impact on labor force growth.

 

Normally, a decline in job growth would signal an economic slowdown, but not this time. Employment growth has been anemic, and yet GDP growth has forged ahead. The combination of lower immigration, retiring Baby Boomers, and the advent of labor-saving AI is impacting job growth but not GDP growth, or at least not yet.

 

As for the labor market overall and its impact on the economy, both the retiring Baby Boomer workforce and declining immigration do not bode well for productivity growth. There is a hope that artificial intelligence will reverse the hit to productivity, but others argue that it will only do so at the expense of labor.

 

In my next column, I will expand on the benefits of immigration and exactly how the lack of it can hurt U.S. productivity.

 

The non-farm payroll numbers for May, announced on Friday, were met with dismay by the market. The consensus forecast was for a gain of 89,000 jobs. Instead, the Bureau of Labor Statistics announced 172,000 and revised the last two months of jobs data upward. Together, that amounted to the strongest three-month stretch of job growth in two years.

 

You might think the stock market would celebrate such good news, but all three averages declined more than one percent on the news. This was a classic case of what is good news for Main Street may not be the same for Wall Street.

 

It comes down to interest rate expectations. Investors had already reduced their expectations for any interest rate cuts this year. This is despite a new Fed president whom many believe is beholden to the president's easy-money demands. The reasons are obvious.

 

Inflation continues to climb, helped by oil prices that hover above $90 a barrel. On June 10th, another Consumer Price Index reading will be released. Readers already know I expect that number to show inflation climbing even higher. And now, the last hope of interest rate bulls has been dashed with the jobs report.

 

The Fed's mandate is to keep employment buoyant and inflation at 2 percent. Stronger labor gains leave the Fed on the sidelines, but it is worried about rising inflation. Some members of the FOMC committee, which meets June 16-17, are already contemplating a possible rate hike sometime in the future. That is not good news for stocks, bonds, commodities, and much else.

 

In the meantime, the financial media has been hyping SpaceX's pending IPO all week. Evidently, the price has been set at $135 a share, which values the company at $1.77 trillion. It would make the rocket/AI/Bitcoin firm the seventh-largest company in the U.S. Pricing the offering prior to the scheduled launch date was unorthodox and "not how it's done," according to the traditional underwriting community. However, given that Elon Musk is in charge, one should expect some unorthodoxy.

 

As for the market's pullback this week, it should come as no surprise. It was about time. Nine straight weeks of gains had to come to an end at some point. Profit-taking began midweek and continued through Friday. Most of it was centered on the technology area.

 

Broadcom, one of the largest semiconductor companies, disappointed investors earlier this week when its AI chip forecast fell short of expectations. That seems to be the straw that broke the market's back. That may be so, but I believe traders were looking for any excuse to take profits.

 

As for the ongoing embarrassment in the Middle East, even Trump's congress seems to have had enough. The Republican-controlled House passed a continuing resolution this week directing Trump to end the war in Iran. The extended ceasefire continues to play out and oil remains above $90 a barrel.

 

I expect we will continue to see selling next week as markets work off their overbought and extended condition. Is this simply another buying opportunity, or is it the beginning of something more serious? I wish I knew.

 

 At this juncture, I'm betting on a quick 5 percent pullback. That's something we see three or four times a year. The decline has been largely led by semiconductor and AI stocks. That makes sense given those are the areas that have seen the greatest price appreciation. Who knows, the pullback may set us up for next Friday's SpaceX IPO and reinvigorate the tech trade.

 

The U.S.-Mexico-Canada Agreement (USMCA) is up for review on July 1, 2026. If all three countries agree, the present deal could be extended for another 16 years. If not, the agreement can continue or not.

 

The amount of trade involved is significant. Last year, because of the agreement, Mexico became the U.S.'s top trading partner, with total bilateral trade totaling $873 billion (15.6 percent of all goods exported and imported by the U.S.). Canada comes in second place with $719 billion worth of trade (12.8 percent of goods).

 

Both countries have surpassed China, which fell to third place. Both countries are America's largest sources of imports and account for one-third of U.S. goods exports. The USMCA is the world's most integrated manufacturing bloc.

 

Old timers may remember the North American Free Trade Agreement, which went into effect on Jan. 1, 1994. Prior to that, Canada and the U.S. had hammered out a free trade agreement in 1988. Things appeared to be going quite well until Donald Trump hit the scene. During the 2016 presidential campaign, Trump blamed NAFTA for the country's trade deficit with Mexico and for the loss of American jobs.

 

As was his way, Trump demanded NAFTA be renegotiated, or he would walk away from the pact. Negotiation began in August 2017 and took more than a year before all parties agreed to a deal. It was less an overhaul of NAFTA than a modest adjustment despite the president's demands and later claims. The name was changed to the United States-Mexico-Canada Agreement and was ratified on July 1, 2020.

 

The required review of the pact was expected to be a formality and, at worst, a technical review, but nothing that has to do with trade under Trump's second term is anything but. This time, it is Canada, not Mexico, that is at loggerheads with American officials. Readers may recall that when Trump launched his global trade war last year, many economists had predicted enormous damage.

 

It didn't happen for one important reason — USMCA. Much of American trade is protected under the trade pact. Autos, natural gas, crude oil, lumber, and much of the manufacturing base were sheltered thanks to the extended supply chains that encompass North America. This pipeline of goods required time, effort, and enormous investments that required decades to build.

 

Trump's tariff wars have ignited deep tensions between all three countries. Trump has blamed America's fentanyl addiction on both countries. Tariffs on both trading partners on steel, aluminum, autos, lumber, and more have been met by retaliation. Prime Minister Mark Carney has said these tariffs violate their trade agreement. Canadian provinces agree. As a result, they have banned U.S. wine and liquor imports. Canadians, in general, are more than irritated with Trump's policies and trashing of their country in comments and on social media. Many have crossed off the U.S. for vacation rentals and second homes as a result.

 

A major sticking point is the back-door policies of China and other foreign countries to use both Mexico and Canada to avoid tariffs by funneling goods into the North American market under the free trade agreement. That does not sit well with Canada, which has recently established new trade agreements with China.

 

Recently, United Auto Workers' President Shawn Fain spoke out against the renewal of USMCA unless big changes were negotiated. The head of the 400,000-member union, like Trump before him, blames the trade agreement and NAFTA before it for the loss of millions of American auto manufacturing jobs.

 

He wants to set a North American minimum wage that would guarantee Mexican auto workers would receive equal pay with their American counterparts. He would also like to see tougher penalties for violations of workers' rights and quotas requiring more vehicles to be manufactured in the countries where they are sold.

 

Fain is one of the few voices in the auto industry that supports higher tariffs on autos. In reply, auto company executives argue that Fain's recommendations would only increase car prices at a time when few Americans can afford them, while destroying a supply chain system that took decades to build.

 

Negotiations on the pact have thus far only included Mexico. The UAW's recent stance may complicate negotiations with Mexican officials. As for Canada, Carney has told U.S. officials that Canada is not interested in making further concessions to join the discussions. However, this week, Dominic LeBlanc, Canada's Minister of Trade, and Janice Charette, the country's chief trade negotiator, met with U.S. Trade Representative Jamieson Greer.

 

Canada presented specific, detailed trade proposals, though the meeting did not mark the start of formal negotiations. LeBlanc admitted that "This trip has not been without some turbulence." The delay in starting discussions, with a deadline less than a month away, led some to believe that there is a possibility that two separate trade agreements may be required, one for the south and another for the north.

 

Foreign car companies have threatened to pull their cheapest models out of the U.S. market if the three-country trade deal isn't renewed or if it is renegotiated along the lines of the UAW's wishes. Nissan, Hyundai, and Toyota are part of only a handful of car manufacturers offering small, more affordable cars for U.S. consumers.

 

Given what is at stake, the odds of the trade pact surviving July are high. Looking at past treaties, negotiations always took longer than the allotted time before a deal was struck. In this case, if no agreement is reached by the deadline, the deal continues under Article 34.7 of the USMCA but shifts to annual reviews rather than the 16-year period ending in 2042. If that were the case, investment in supply chains, the broadening of cooperation to include areas such as digital trade, IP, and regulatory cooperation would likely erode due to the uncertainty involved in annual reviews versus a 16-year time horizon.

 

Momentum traders can't get enough of all things AI. The entire technology sector is on fire. Other areas of the market are struggling. Concentration risk is rising, but that's nothing new, and most traders are optimistic.

 

That doesn't mean all is well. On the geopolitical front, the U.S. and Iran are still not playing nice. This week, missiles were exchanged. The present arrangement is almost comical. The definition of ceasefire is a "temporary halt to active fighting between opposing forces in an armed conflict." That is not what is happening, but the Trump White House and evidently the majority in Congress insist that this fictional ceasefire is in place.

 

Amidst these tensions, some well-placed cabinet members, such as Treasury Secretary Scott Bessent, are claiming that a 60-day ceasefire is in the works. But he hedged his bets, claiming the president must agree to it, and it may not hold in any case. Supposedly, it's an agreement to allow Iranian oil to ship in exchange for the opening of the Straits. Iran's non-existent navy would also remove the mines they planted.

 

But what about the nuclear issue? Oh, that both sides agree to negotiate over the next 60 days and come to a solution. Of course, Iran has already said that it is not up for discussion, but what the heck, the administration gets more time and hopefully a little lower oil prices in exchange for Iran's ability to profit from its oil sales.

 

Building on last week's discussion, remember I explained that we were approaching a critical line in the sand in the next few weeks on global oil supplies. A 60-day ceasefire kicks the can down the road for two more months. In any case, oil prices have subsided, trading around $88.37 a barrel on Friday, which is an improvement of sorts. It is enough to relieve investors' fears that we are on the brink of oil Armageddon.

 

With that reprieve in oil markets, investors can turn their attention to other things, like the knock-your-socks-off results of first-quarter earnings. Analysts entered the season predicting an average earnings growth rate of 13 percent. That was more than respectable, but that is not what happened. Instead, companies' earnings results doubled that estimate, chalking up 28.4 percent overall.

 

I had to look back to the second quarter of 2021 to find a comparable period where earnings were as good. More than 84 percent of companies beat Wall Street's earnings projections — and not by a little. The usual quarterly beat rate is about 7 percent. This time, the average beat was by 18 percent!

 

Some analysts are questioning whether, in some cases, these earnings were inflated by the AI boom. Meta, Alphabet, and Amazon were the largest contributors to the S&P 500's surging earnings growth. All three reported unusually large contributions from outside their core business. Their private equity investments in Anthropic, for example, threw off billions in profit for the quarter.

 

While sales were higher than expected, 9.7 percent gains versus 8.2 percent forecasted, it was profit margins that astounded the equity market. They came in at 14.8 percent. This has never happened before and was the highest in history. Given these results, is it any wonder that analysts are now projecting 18 percent earnings growth for the S&P 500 for the full year?

 

Meanwhile, the Fed's preferred inflation gauge, the PCE for April, came in at 3.8 percent, almost double the Fed's 2 percent inflation target. First-quarter GDP was also revised downward to 1.6 percent due to weaker investment and lower consumer spending. You can forget about an interest rate cut this year, in my opinion.

 

Looking at market movement in May, all the worries about how long it would take companies to begin showing profits from AI spending have fallen by the wayside. Tech was up 13.25 percent, led by semiconductors. Beyond tech, consumer discretionary gained 5 percent, and everything else gained by less than that, with materials and energy. Financials and utilities are down.

 

As I wrote last week, inflation remains a problem for the economy. As a result, investors are seeking stocks and sectors where price appreciation keeps pace with, or even beats, inflation. Obviously, tech was where investors flocked to in this kind of environment.

 

The euphoria over the upcoming IPOs of three mega tech companies — SpaceX, OpenAI, and Anthropic — is feeding market participants' animal spirits and helping drive stocks higher. That said, markets remain overbought and are due for a pullback. Exactly when that happens is anyone's guess. My guess is that sometime after the SpaceX offering in two weeks, we might see some profit-taking.