Market Update – June returns (including dividends)

June Returns (including dividends):

S&P 500: -1.0%

S&P 500 Equal-Weight: 2.4%

Dow Jones:  2.7%

Nasdaq: -2.8%

MSCI EAFE:  0.1%

MSCI Emerging Markets: -1.4%

Bonds (US Aggregate):  0.2%

 Economic & Policy Highlights

Interest Rates & Fed Outlook

• The US Federal Reserve kept rates unchanged at 3.5% to 3.75%, but leaned towards a rate hike in the future
• The Bank of England kept rates unchanged
• The ECB raised rates by 25 basis points to 2.25%, as worries over inflation grew
• Bank of Canada kept rates unchanged

Trade & Tariffs

• The US targeted Brazil with new tariffs of 25%
• President Trump refused to renew the USMCA trade agreement

Employment & Growth

• The top 20% of income earners now account for almost 60% of all spending in the US – a new record
• US Capital spending x-technology turned negative
• The US housing market continued to stagnate
• The US employment situation showed moderate improvement
• Domestic China remained mired in recession as exports carried the whole economy

Consumer spending & sentiment

• US gasoline price fell below $4/gallon nationally
• US oil inventories approached record lows just before a ceasefire was announced
• The number of student loan defaults continued to rise

Geopolitical Volatility & Energy

• Short positions in Brent Crude Oil hit the highest levels in history
• Oil fell 20.4% as the US Gov’t announced a ceasefire and an agreement to negotiate a peace deal with Iran
• The UAE announced they would cut dependency on the Strait of Hormuz to zero over time
• 45% of global central banks said they plan to buy more gold in the next 12 months
• Gold fell 11.7%, as the risk of rising interest rates pushed the price down

Summary Impact

• The US and Iran announced a Memorandum of Understanding (MOU) involving a ceasefire and opening of the Strait of Hormuz
• Despite the MOU, Israel continued to clash with Hezbollah in Lebanon, angering Iran
• Volatility surged in semiconductor stocks globally
• SpaceX went public with record demand from investors

Commentary:

Global equities provided a mixed performance result in June with technology companies pulling back and being offset with mild strength in cyclical and more value-oriented investments.  Regionally, Europe and parts of Asia led, as the rapid decline in oil prices provided a stronger tailwind to their economies.  The drop in energy prices came about as the long-promised Memorandum of Understanding (MOU) was finally signed on June 18.  The agreement helped push oil prices back to near pre-conflict levels.  Despite the agreement, both sides engaged in military skirmishes later in the month.  June also witnessed the continued bifurcation of the AI trade as suppliers of AI technology components posted gains while the buyers of this equipment saw their shares come under pressure as investors worried about cost escalation and uncertain returns on this massive spending.  Breadth improved somewhat as sectors such as Healthcare, Financials and Industrials advanced.  The crowning moment of the month came as Elon Musk’s SpaceX completed the largest initial public offering (IPO) in history, a deal that was substantially oversubscribed.

Bonds delivered modest returns in June.  Government bond yields declined in most developed markets as inflation worries abated with the drop in oil prices.  Interestingly, shorter maturity bond yields in the US actually rose, while longer dated bond yields declined.  This was likely a result of the hawkish leanings of Kevin Warsh the new Fed Chairman and some residual concerns about imbedded inflation in the US economy.   The bond market continued to price in one rate hike in 2026.  Credit spreads widened modestly in sympathy with the higher volatility across risk assets.  Private credit funds continued to receive heavy scrutiny and were met with outsized redemption request.

Markets cheered the Memorandum of Understanding (MOU) but we don’t share the belief that this will result in a lasting peace, nor cap Iran’s nuclear ambitions.  The MOU is really a deal to negotiate the harder issues later and just get oil flowing in the short-term.  We believe Iran has been dragging its feet all along with the intention of playing for time and resuming hostilities as we move closer to the mid-term elections, unless all their demands are met.  Iran has learned their “nuclear bomb “ in the short-term is the Strait of Hormuz and they will never relinquish control of it.

We believe many of the risks in the market remain unanswered and several new ones have grown in importance, specifically the growing margin debt and insatiable demand for single stock levered ETFs.  In addition, we believe investors are being lulled into the belief that risks are low as exemplified by the low level of the VIX (volatility index for the S&P500) despite not realizing individual stock volatility is extremely elevated.  Finally, investors appear to be taking too much comfort from the fall in oil prices.  Our research points to global crude and refined product inventories (gasoline and diesel) that are at critically low levels.  The world could easily suffer serious price spikes should renewed kinetic action return to the Straits of Hormuz.  Valuations remain high by historical standards and the market can no longer depend on rate cuts to prop up the market.  We continue to remain vigilant by emphasizing diversification, managing correlations between assets and locking in big gains in individual stocks.