@theMarket: Summer of Slower Growth & Lower Inflation Could Be Waiting in Wings

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.