June 26, 2023
Good morning,
The last week of the first half of the year begins on a quiet note this morning. Futures are virtually unchanged, following a week of profit-taking last week – the S&P 500 Index (SPX) was down -1.38% last week, breaking a streak of 5-consecutive up weeks with a cumulative gain of +6.67% for SPX. Is the rally over, and was last week’s profit taking the beginning of a larger second-half correction that erases some of the dizzying first half gains for some U.S. stocks? Probably not. While that narrative may unfold in the second half, it is unlikely that it began last week. It is a rare development where the top of a cyclical rally is marked by the very first bout of profit-taking. That notwithstanding, quarter-end portfolio rebalancing this week does lean toward fixed income and away from stocks.
As the second half approaches, it appears that investors are finally conceding that the Federal Reserve is now intensely focused on fighting inflation and less concerned about higher interest rates breaking the U.S. economy. Fixed Income markets are currently pricing in a 70% probability of a July rate hike at the next Fed meeting (7/26). That’s 30 days from now. The 2nd-half may start with a month of summer doldrums.
See you Wednesday, when we’ll probably talk about what the pre-Covid low in the VIX might mean, and what the almost record yield curve inversion may be messaging from the bond market. I know, I know … I can’t wait either.
Be well,
Mike