The stock market gained momentum to the upside in the month of June after trading within a range for almost a year while the Fed raised interest rates. The rate increases will be more incremental now and consensus is that there are two more on tap. Employment is healthy and inflation although too high is abating so the door is opening for risk assets to catch a bid.

The Stock Market

If we look at the chart of the S&P 500 below (SPY ETF), each bar is one week. And the last three bars show a breakout above the high from last August (‘B’) then a re-test lower last week (red bar) and another rebound to close out Q2. This is good price action and keep in mind there are hundreds of stocks that have traded sideways for the most part of two years and I am seeing many stocks begin to get traction over the last two weeks.

There is likely to be more talk about rotation as money is shifted from the large cap technology stocks to smaller caps and growth names in the coming weeks. Not to mention, the momentum indicators at the bottom of this chart (RSI/MACD) are both pointing higher plus seasonality in the first two weeks of July is historically positive. SO, the market may be on the verge of something good here and the odds are rising that we will see new all-time highs in the S&P later this year.

The Bond Market

The overhang of this market has been the yield curve which is deeply inverted and warning of an economic slowdown. However, the apex is at six months and that means a recession is next year’s problem so this will be something to watch but it looks rangebound for now. In the past, it is after the Fed cuts rates that stock markets go haywire and I don’t see that happening anytime soon.

Economic Data

  • The Federal Reserve’s bank stress test released this week focused on commercial real-estate loans as property valuations have plummeted with higher interest rates. The concern by bankers is having the effect of tightening credit standards for the sector as you can see on the chart to the right. Many properties are under duress and liquidation values have caused very high severities in some cases.
  • TheFed’s favored inflation measure, the core Personal Consumption Expenditures (PCE) price index was released on Friday and fell in May to 4.62%, from 4.68% in April. This is the sixth month in a row in the mid 4% so inflation is acting sticky and leaves the Fed in a position to push rates higher in July.
  • Junk bond spreads continue to tighten after the banking sector failures in March. With the Fed pausing and unemployment low, high yield issues may get a window to raise capital in the coming months.
Paul McCarthy, President of Kisco Capital, LLC

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Paul J McCarthy III

President, Kisco Capital

Paul McCarthy

Mr. McCarthy is the President and founder of Kisco Capital.