“To do the right thing at the right season is a great art.” ~ Helio Gracie

Good evening,

Last week, Fundstrat Head of Research Tom Lee pointed out an analysis of historic market data showing that in non-bear markets, when the first quarter is positive for stocks but April is a down month, June is positive for stocks 11 out of 11 times. This trend took a step closer to continuing this week, with the S&P 500 closing the week up 1.32%. The ^SPX and Nasdaq both set new all-time high closes on Wednesday (5,354.03 and 17,187.90, respectively).

To Lee, there were hints that some of these gains were driven by institutional investors re-risking after May. Writing earlier this week, he observed that “it is notable in each of the last three trading sessions that stocks rallied into the close,” reminding us of the “old trader’s adage that ‘amateurs open the market, professionals close the market’.” This is illustrated in our Chart of the Week:

Macroeconomic data also arguably played its part in driving gains earlier in the week. We saw soft data readings in May ISM Manufacturing, May ISM Services, 1Q labor costs, and April JOLTS job openings. Lee’s perspective: “Viewed collectively, the macroeconomic picture to me is showing softening price pressures and a labor market that is not creating upward wage pressures. That’s a continuation of what we saw in April data, so to me, the ‘inflation’ surge that many saw from January to March now seems increasingly anomalous, possibly worsened by poor seasonal adjustment factors.”

Despite a higher-than-expected jobs report from the Bureau of Labor Statistics (BLS) on Friday, Head of Data Science Ken Xuan pointed out in our weekly research huddle that “a lot of other signs suggest to us that the labor market is cooling.” 

Lee agrees, observing that Friday’s hotter-than-expected headline jobs-added number “contrasts with the fact that the unemployment rate has moved up to +4.0% (+3.9% last month).” In his view, the various recent jobs data show signs of “a strong, but not ‘red hot,’ labor market – and this is what the Fed would like to see.”

Head of Technical Strategy Mark Newton agreed with the Fundstrat macro team’s assessment: “The data in the U.S. has slowly been getting worse, or disinflationary – however you want to say it. That's actually a very positive thing for US markets, because the broader economy is still in good shape. It's just that on the fringes, you’re seeing things weakening ever so slightly.”

“Rates pulled back pretty sharply earlier in the week, and that's been a very good thing. The 10-year showed what I wanted to see, which is 4.30 being broken. Technically, this does change the structure, and it does arguably put in motion an intermediate-term Treasury rally” despite Friday’s bounce. “I don't think any bounce will be long-lived. In my view, we're actually going to start to pull back very sharply and likely test, if not take out, the lows down near 3.80% we saw earlier in the year.” He acknowledged, “That's a big call, but it's something I think will be very supportive of a further risk-on rally.”

Newton remains concerned about stocks outside of big Tech. “We’ve got some wood to chop,” he argued, “We still need to see these sectors like Financials and Industrials really get up and go and show a little bit better strength. To me, the broader-based rally has not really started yet. But I think the things are in place now for that to happen. We are seeing rates and the dollar start to plunge and that is a very good sign.”

On Nvidia

Longtime Granny Shot NVDA hit a new all-time high of 12224.40 on Wednesday, briefly sending its market cap above Apple’s to claim #2 spot on Wednesday. We remain long-term constructive on Nvidia, and Newton provided a nearer-term technical perspective on the stock at our huddle:

“Nvidia is going to split on Monday. My near- to intermediate-term target for Nvidia was 1250 to 1350, and we might be able to hit the higher end of that target. It still looks outstanding, and right now it's just very parabolic. Now we’re hearing a lot of people saying that Nvidia stock is stretched, that it’s time to sell. But based on the methods that I use, it's early to think that Nvidia is going to peak out. It's still very early to sell at least by a week on a daily chart.”

On other central banks this week

The European Central Bank (ECB) cut rates 25 bps, from 4.00% to 3.75%. Commenting on the move, ECB President Christine Lagarde said, “The inflation outlook has improved markedly.” The Bank of Canada also cut rates this week, becoming the first G7 central bank to cut rates for this inflation cycle.

Newton observed, “Today's really the first time that the ECB has cut ahead of the Fed, and it is the first cut since 2019. But it was a hawkish cut. To me, what's interesting is that they actually raised their inflation forecasts even as they cut rates. It appears to me that there really really is no cadence or path ahead for the ECB. Despite the cut – from 4,00 to 3.75, that’s still well above the neutral rate, so they still have a long way to go.” 

Xuan pointed out that one possible reason that the ECB and Bank of Canada both felt comfortable with inflation in their respective jurisdictions is their inflation methodology. “They use something called harmonized CPI, which assigns a much lower weighting for shelter prices. They also don't incorporate estimates for owners' equivalent rent (OER) like we do in the U.S.”

Sector Allocation Strategy 

These are the latest strategic sector ratings from Head of Research Tom Lee and Head of Technical Strategy Mark Newton – part of the June 2024 update to the FSI Sector Allocation Strategy. FS Insight Macro and Pro subscribers can click here for ETF recommendations, precise guidance on strategic and tactical weightings, detailed commentary, and methodology.

Elsewhere 

Mexico has its first female president, as was widely expected since both of the two top candidates for the position were women, with the leading male challenging polling in a distant third place. Claudia Sheinbaum, formerly mayor of Mexico City and a widely respected energy and climate-change scientist, achieved a landslide victory with an estimated 60% of the vote.

The testing scandal that has engulfed Toyota in recent years spread to other major Japanese carmakers when Japanese authorities ordered other carmakers to look into their testing processes as well. Toyota found new testing inadequacy related to pedestrian and occupancy safety, but Honda, Mazda, Suzuki, and Yamaha also disclosed that they had found instances of inadequate testing. Although each of the carmakers asserted that the affected models were nevertheless still safe. All of the affected models were only sold in Japan. 

Nvidia, AMD, and Intel each announced new AI chips this week. Nvidia, which is gearing up for its Blackwell chips in 2025, announced that the following generation of chips would be known as Rubin and feature new GPUs and a new CPU internally known as “Vera.” At the same event, Computex trade show in Taiwan, AMD announced Ryzen AI 300 series of chips, designed for AI-capable laptops. Also at Computex, Intel unveiled its new Xeon 6 processors, designed for to provide high performance and power efficiency for high-intensity data-center workloads.

China successfully landed a spacecraft on the far side of the moon, where it hopes to collect rock and soil samples. The Chang’e-6 lander is China’s second spacecraft to land on the far side of the moon, and no other country has landed a probe on that side. 

Boeing Starliner successfully launched and delivered its astronaut crew to the International Space Station. The Starliner will remain docked at the ISS for about a week. Despite the success, the trip was beset by numerous delays – delays that did not prevent the Starliner from springing multiple leaks on its maiden voyage, during which five of its 28 thrusters also stopped working.

Indian Prime Minister Narendra Modi looks set to retain his seat as his country’s leader, but his Bharatiya Janata Party (BJP) was projected to lose its outright majority in parliament. If so, Modi would need to work more closely with smaller regional parties during his third term in power. BJP’s diminished dominance sent India’s benchmark Nifty 50 index down as much as 8% before it recovered (finishing the week up 0.66%). 

And finally: The U.S. saw about 600,000 new millionaires last year, fueled in large part by gains in AI-related stocks, according to a study by Capgemini. About 7.5 million Americans are now millionaires, according to the study, up 7.5% from a year earlier.