What a month June was! So much has happened around the globe that the biggest challenge in writing this month’s Market Insights is picking what to focus on. Technically, the “Big Beautiful Bill” did not pass the Senate until July 1st and still needs to be reconciled with the House version before a final vote. We expect a compromise to be reached that will result in lower tax rates partially offsetting any negative impact on consumer spending, so enough about that for now. The riots in Los Angeles over ICE immigration enforcement, and the president’s subsequent mobilization of the National Guard, shone a light on the challenges associated with the administration’s aggressive approach. Recent court decisions, particularly at the Supreme Court, appear to reaffirm the federal government’s jurisdiction over immigration and support the president’s executive authority to set policy so we expect those efforts to continue.
Where enforcement would be expected to impact economic data is in the employment numbers. Anecdotally, there have been reports of huge lines of people applying for jobs at company’s where ICE has cracked down on undocumented workers. Although the latest release of the JOLTS (Job Openings and Labor Turnover Survey) report showed a notable jump in job openings, it is unclear if there is a relationship between the two, but we may get further insight in the coming months.
The biggest event was the 12-Day Israel-Iran war and the U.S. bombing of Iran’s nuclear facilities under operation “Midnight Hammer.” Neither the administration’s victory lap nor the media’s denial of success in the immediate aftermath were helpful and only sowed confusion. While it is true that questions of the whereabouts of enriched uranium remain, there is no convincing evidence to the contrary. Given that planning and preparation for such a strike was a long time coming (some 15 years), we should operate on the premise that the mission accomplished its objective and that the ceasefire immediately negotiated by President Trump will hold. As things currently stand, the outcome can only be viewed as unequivocally bullish for global economic activity and risk assets. Financial markets quickly discounted as much, with stocks rising, oil falling and bond yields retreating as fears of a wider regional escalation faded.
Bonds had a generally pedestrian month in June. After rising 10 basis points in the first week, the 10-Year treasury note yield fell steadily to finish the month at 4.23%, basically unchanged from where it closed the 1st quarter[1]. The Bloomberg US Treasury Index returned 3.79% year-to-date through June[1]. The Bloomberg Aggregate Bond Index returned 1.54% in June, 1.21% in the 2nd quarter and 4.02% year-to-date through June[1]. Corporate credit spreads narrowed further and are incredibly tight, hovering near the lowest level since before the 1999-2000 Tech bubble. Spreads have been lower (barely and briefly) only once since then; in 2021 during Covid.
Consistent with the lack of risk reflected in corporate credit spreads, equities enjoyed a strong month led by US large cap growth stocks. Mostly steady economic data, including another largely benign inflation report that kept Fed rate cut hopes alive, helped drive equities (excluding small caps) to new all-time highs in June. The Bloomberg 1000 Index (B1000) returned 5.15% in June and 11.31% in the 2nd quarter, while the Bloomberg 1000 Growth Index (B1000G) returned 5.69% in June and finished the 2nd quarter up an impressive 15.24%[1]. That compares to just a 1.99% return in the 2nd quarter for the Bloomberg 1000 Value Index (B1000V)[1].
The Bloomberg World Ex-US Index (WORLDXU) returned 3.16% in June and 11.32% in the 2nd quarter, matching the US large cap performance[1]. Non-US stocks remain well ahead on a year-to-date basis with WORLDXU trouncing the B1000 Index 17.13% versus 6.17%, while the small cap Bloomberg 2000 Index (B2000) continues to lag badly, down -3.04% on an absolute basis[1]. Dollar weakness helps unhedged non-US returns but interest rate cuts and fiscal tailwinds in Europe, as NATO members step up military spending, are more important fundamental drivers favoring non-US equities.
While the rally is certainly encouraging, under the surface the push to new all-time highs looks a bit suspect as we saw a return to the narrowness and concentration that characterized much of last year, reversing the broadening trend we saw in the first quarter. Emphasizing the point, Bank of America Global released a report in which they showed that only 22 stocks were at all-time highs, the fewest of any market breakout going back to 1991[1]. On the other hand, July is historically a strong month for stocks, and the S&P 500 was positive in each of the last 10 years.
Turning to the economy, The Conference Board’s Leading Economic Indicator (LEI) fell again in May, pushing the 6-Month annualized change into recession territory at -5.2% but most other data continues to paint a more mixed picture[1]. The June S&P Global US Manufacturing Index came in at 52.9, up from 52 in May[1]. Importantly, growth in Real Hourly Earnings is positive. Consumer spending continues to hold up notwithstanding a somewhat softer employment backdrop. The Personal Consumption Expenditures (PCE) Index fell in May but is still up 4.5% YoY[1]. Tariffs have yet to show up in the aggregate inflation data, although the just reported June Prices Paid component of the ISM Manufacturing PMI came in at 69, up from 52 at the start of the year[1]. Looking at the CRB Raw Industrials and Producer Price Index, we do see pressure potentially building in the pipeline.
Finally, in June the Trump administration announced trade deals with the U.K. and China, the latter being more significant. Reportedly, a deal with India is close. The President recently indicated that he was not inclined to extend the July 9th deadline when punitive reciprocal tariffs kick in. We will see.
Wishing everyone a fantastic Fourth filled with family, faith, friends and fun.
[1] Source: Bloomberg