Euphoria or Delusion? Markets Charge Ahead
Through Red Flags
By the Curmudgeon
Overview:
The S&P 500 and NASDAQ rose to new all-time closing highs on
Friday, June 27th, completing a remarkable, swift recovery from the
April 3rd “Liberation Day”
waterfall decline that took both indexes down more than 20% from their highs
set earlier this year.
The on-again, off-again U.S. trade tariff talk continues to whipsaw the
markets. On Friday, the markets initially rallied as the Trump administration
said it was willing to give countries more time to reach deals, instead of
re-imposing tariffs in July. Later in the day (~3pm EDT), the market briefly
dipped into negative territory after President Trump said he had called off
trade talks with Canada over a new tax that it will impose on digital services.
The S&P and NASDAQ bounced back in the last hour
of trading to close ~ 0.5% higher. The Russell
2000 small-cap index was virtually unchanged.
Negatives Abound (but are ignored):
Friday’s record highs
came despite a 3-year low in the U.S.
dollar index on Thursday, continued declines
in U.S. bond prices (yield rise as
prices decline), and huge drops
in both consumer confidence and sentiment.
The Conference
Board Consumer Confidence Index® deteriorated by 5.4 points in
June, falling to 93.0 (1985=100) from 98.4 in May. The Present Situation
Index—based on consumers’ assessment of current business and labor market
conditions—fell 6.4 points to 129.1. The Future
Expectations Index—based on consumers’ short-term outlook for income,
business, and labor market conditions—fell 4.6 points to 69.0, substantially below the threshold of 80
that typically signals a recession ahead.
“Consumer confidence
weakened in June, erasing almost half of May’s sharp gains,” said Stephanie
Guichard, Senior Economist, Global Indicators at The Conference Board.
“The decline was
broad-based across components, with consumers’ assessments of the present
situation and their expectations for the future both contributing to the
deterioration. Consumers were less positive about current business conditions
than May. Their appraisal of current job availability weakened for the sixth
consecutive month but remained in positive territory, in line with the
still-solid labor market. The three components of the Expectations
Index—business conditions, employment prospects, and future income—all
weakened. Consumers were more pessimistic about business conditions and job
availability over the next six months, and optimism about future income
prospects eroded slightly.”
àThe cutoff
date for preliminary results was June 18, 2025.
Consumer Confidence retreated
in June, falling 5.4 points to 93. Consumer perceptions of the present fell the
most, dropping 6.4 points to 129.1 while the Future Expectations index
slid 4.6 points to 69, remaining below the Conference
Board’s recession warning threshold of 80.
The chart below shows
the University of Michigan Consumer
Sentiment Index. Consumers are now even more pessimistic than they were in
the early 1980s.
Source: Federal Reserve of St. Louis
InvesTech’s “Housing [Bubble] Bellwether Barometer” (subscribers only), introduce in May 2005, reflects negative developments in the
housing data this week. It remains stuck
in warning territory as per the
graph below.
[This leading housing
indicator was designed to track the stocks with the greatest sensitivity to the
housing market, such as homebuilders and mortgage financing companies.]
……………………………………………………………………………………………………………
Stocks vs. Bonds (during the rally from April 9 to June 27,
2025):
To dramatically
illustrate the unbelievably huge
dichotomy between U.S. stocks and bonds consider this:
From the
April 9th S&P 500
open at 4,953.8, to Friday’s close of 6,173.07 is a +24.6% price increase.
Compare that to the iShares 20+
Year Treasury Bond ETF (TLT) April 9th open at 87.27, to
Friday’s close of 87.61 which is ~flat (< 0.4%).
We noted in a recent
Curmudgeon post that the market price of TLT has declined by ~50% since the bond bear market started August 4, 2020. The S&P 500 closed at
3306.51 that day. Therefore, the S&P
500 price as of Friday’s close of 6,173.07 is up +86.7% since the bond bear market commenced. Note that the returns above do not include
dividends.
àIn all of
history, has there ever been such a huge divergence between U.S. stocks and
bonds?
Victor believes Gold (which pays no interest) is being
substituted for U.S. bonds as a safety investment, as it has only had a few 5%
corrections since its August 2023 lows and has a 0.33 beta to the S&P
500.
Mega-Tech Stock Concentration:
Much of the rally in the
S&P has come from a handful of mega-cap technology companies that have an
outsize impact on the index. Without the performance of just seven stocks —
Microsoft, Apple, Amazon, Nvidia, Meta, Alphabet and Tesla, known as the Magnificent 7 — the S&P 500 would
still be roughly 10% below its peak, according to data from Howard Silverblatt, senior index
analysts at S&P Dow Jones Indices. The average move higher for the 493
other stocks in the S&P is just a little over 2%, according to Mr.
Silverblatt, far less than the more than 30% gain for the Magnificent 7 stocks.
According to a Global Markets Investor tweet, the market cap
weight of the top 10% largest US stocks hit ~76%, the biggest share EVER. Not
even the 1930s saw such a big concentration.
……………………………………………………………………………………………………………
Closing Quotes:
“It is incomprehensible
that markets are so buoyant,” said Kristina Hooper, chief market strategist at Man Group, a global investment manager,
pointing to tariff uncertainty and slowly worsening economic indicators. “Yet
stocks keep climbing higher. It seems to be a recipe for disappointment,” she
added.
“What we are going to get is more warnings and more
uncertainty from corporations, in my opinion, and I think that is going to
bring a dose of reality to investors,” Ms. Hooper concluded.
…………………………………………………………………………….
Stay healthy, wishing
you success and good luck. Till next time……
The Curmudgeon
ajwdct@gmail.com
Follow the Curmudgeon on Twitter @ajwdct247
Curmudgeon is a retired investment professional. He has been involved in financial markets since 1968 (yes, he cut his teeth on the 1968-1974 bear market), became an SEC Registered Investment Advisor in 1995, and received the Chartered Financial Analyst designation from AIMR (now CFA Institute) in 1996. He managed hedged equity and alternative (non-correlated) investment accounts for clients from 1992-2005.
Victor Sperandeo is a historian, economist and financial innovator who has re-invented himself and the companies he's owned (since 1971) to profit in the ever-changing and arcane world of markets, economies, and government policies. Victor started his Wall Street career in 1966 and began trading for a living in 1968. As President and CEO of Alpha Financial Technologies LLC, Sperandeo oversees the firm's research and development platform, which is used to create innovative solutions for different futures markets, risk parameters and other factors.
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