Market Comment - June

The past month was dominated once again by a stellar performance of the technology sector, driven by a 16.62% rise in the semiconductor index. This led to a déjà vu event, where the Nasdaq (6.34%) accounted for most of the gains in the S&P 500 (5.04%).

The weak performance of the consumer staples sector (XLP -1.59%) is a clear indication that the market is back in a risk-on mood, which is also confirmed by our confidence indicators. The most important one, the high-yield indicator, is making new highs - meaning the S&P 500 will post a new high without a doubt as well. Confidence Indicator 1 posted a new high on the 19th of May; the S&P 500 achieved a new high on the 26th of June.

The good mood in financial markets was only briefly interrupted by a geopolitical interlude, where the US entered the Iran-Israel conflict with a quick bombing. However, most of our astute analysts of the Middle East knew that neither the US nor Iran were interested in a large-scale conflict. The US President believes he is a candidate for the Nobel Peace Prize, while Iran wants to maintain its ability to export oil.

In this context, it was stunning to see how professional traders saw their faces ripped off in a highly volatile crude oil market, also called the “widow maker.” After a 23.00% roundtrip, US crude oil closed up 7.11% by the end of the month. Obviously, the media was filled with geopolitical reports, claiming that the Middle East was about to blow up and that the biggest conflict once again lies in that region.

In our view, the biggest geopolitical conflict is the relationship between the US and China. For now, it remains calm as the US has realized that it needs China more than it previously thought.

Looking at the oil market, according to our research, none of the important players currently want a high oil price. OPEC+ is increasing its output, while the new US administration promises lower inflation. It could be that the Saudis are pursuing an evil plan - accelerating a drop in US oil production. Since 2022, the number of active oil rigs in the US has dropped from 626 to 424. Especially US fracking is in sharp decline.

Another factor for non-US oil exporters to increase output is the weak US Dollar. Measured by the US Dollar Cash Index, it lost another 2.54% in June, increasing its year-to-date loss to 9.76%. This also had an implication on EU stocks, which, measured in US Dollars, are up 20.15% year-to-date. For US investors, US stocks are starting to look cheap, while European stocks are starting to look expensive. This led to profit-taking in Europe, with the Stoxx 600 losing 1.33% in June.

Looking at seasonality, it has not worked well this year. The second half of June should have been weak, and the market did the exact opposite. With geopolitics and tariffs dominating the media, this has been a surprise for investors who have been underweight risk. In July, seasonality may have better odds of being accurate. We expect the S&P 500 to reach a range between 6280 and 6350 - at best, another 2.50% up from current levels. From there, the market should start to consolidate gains for a small pullback. Until then, most investors who have been underweight risk will likely adjust their portfolios.

From a purely seasonal perspective, the S&P 500 currently tracks the four-year presidential cycle closely. If historical patterns hold, further upside may be expected into an August peak, followed by lackluster performance through the remainder of the year.

Finally, a thought from Joseph Joubert: The goal of a conflict or dispute should not be victory, but progress. Unfortunately, the US administration views this exactly the opposite. Besides geopolitics and tariffs, there is another conflict brewing between the new US administration and the Federal Reserve. Jerome Powell is not only relentlessly criticized for his policy (although decisions are made by a board of 13), the US central bank is also attacked for the cost of the renovation of its building. According to White House economic advisor Kevin Hassett, the US President Donald Trump has the authority to fire Federal Reserve Chair Jerome Powell for cause - if evidence supports that. The new US administration leaves little hope that progress will come from conflict.