“This is a central idea: Merely practicing is not understanding. Seek to understand human ability. Study diligently for deep ideas. The result after a long time is that one is able to know." ~ Sun Lu Tang 

Good evening,

Friday was the last trading day of the month, quarter, and half. Stocks rose around 3.6% in June, with the S&P 500 ending within view of the 5,500 target that Fundstrat Head of Research Tom Lee envisioned as a solid possibility in late May. To Lee, these gains have been driven by tanking inflation and an improving global economy – “a positive fundamental combination,” as he put it earlier in the week.

Yet skepticism about the market and about inflation remains. For example, this week Fed Governor Michelle Bowman said she continues to see “a number of upside risks” to inflation, while viewing no rate cuts this year as a distinct possibility. 

Market sentiment also remains cautious and skeptical. As Lee pointed out, levels of cash on the sidelines remain high ($6 trillion and growing) amid low levels of leverage, as measured by NYSE Margin Debt. 

Head of Technical Strategy Mark Newton told us his work gives him a similar view of market sentiment. “For the first half of the year, markets are up more than 14 percent. There's really no reason to be upset with that, but yet nobody's happy,” he said during our weekly research huddle. “It's sort of a common theme – and not just in the markets. You know, the economy is still quite strong in many respects. But to me, it seems like people just aren't happy.” 

He continued, “Last week, we saw Nvidia slip three days in a row, but the broader market participated. We saw some great moves out of Financials, and yet it seems like nobody mentioned that.” Newton added, “The Fear and Greed Index is showing pretty subdued investor sentiment – not that bullish. The AAII [Investor Sentiment Survey] is a little more optimistic, but still nowhere near the sort of complacent levels that would make you think markets have peaked.”

Lee agrees that, given the week’s encouraging numbers, markets continue to have upside potential. This was a big week for macroeconomic data, starting with April Case-Shiller home price data, released on Tuesday. Prices came in at +0.38 MoM. “The prints from May through August of 2023 were pretty high,” observed Lee, “and that means, in my view, that the YoY for Case-Shiller in the coming months is going to drop. Case-Shiller leads the shelter component of CPI, so that’s set to fall as well,” he reasoned. This is shown in our Chart of the Week:

Perhaps more importantly, we also saw the latest reading of PCE – the Federal Reserve’s preferred inflation indicator. Core PCE came in at 0.08% MoM – below Street expectations of 0.15%-0.20%. On a YoY basis, Core PCE came in at levels not seen since March 2021.

“Inflation is falling like a rock,” Lee reiterated. “You can even see the signs of this if you just look around,” he said, citing recent news stories about Target cutting prices and McDonald’s offering new, lower-priced value-meal options as just two examples of this trend. 

A number of market skeptics continue to assert that equities as a whole are not doing so well, and that the apparent gains have largely been driven by just seven big Tech stocks. To Newton, this disregards the broader history of U.S. stock markets. “Since the 1930s, the top five holdings of the indices have often accounted for over 20% of the market. General Electric, GM, Exxon, DuPont, AT&T – these were stalwarts and major parts of the market for decades, but that didn't necessarily mean the market was in a bubble per se.”

Separately, Lee pointed out that 8% of the S&P 500 is up by more than 30% YTD. “That is hardly a narrow market,” he said. “With 33% of the S&P 500 up more than 10% YTD, we are arguably in the middle of quite a broad-based rally.”

Elsewhere 

Federal prosecutors have recommended criminal charges against Boeing, ruling that the safety issues that have emerged throughout 2024 constitute a violation of the terms of a non-prosecution agreement reached with the aerospace giant after the fatal crashes of two of its 737 Max jets in 2018 and 2019. The Department of Justice will decide whether to prosecute Boeing by July 7.

The Supreme Court weakened the SEC’s enforcement abilities, ruling that the Commission must cease the use of in-house tribunals and administrative judges to bring enforcement actions against alleged perpetrators of securities fraud. The Justices, in a 6-3 vote, ruled that the practice violates Americans’ Seventh Amendment rights to trial by jury. The ruling has implications for many federal agencies, including the FTC, IRS, EPA, and OSHA as well as their respective enforcement powers. 

SpaceX has won an $843 million NASA contract to destroy the International Space Station when it reaches its end of life. The ISS was launched in 1998 and is scheduled to end operations in 2026, when the station’s orbit will be allowed to naturally decay until sometime in 2031. At that point, SpaceX will send a vehicle to push the station into a fall targeting Point Nemo, a point in the Pacific Ocean that is both remote and largely devoid of marine life.  

The European Union targeted Apple and Microsoft, formally accusing each company of illegal monopolistic practices. The EU alleged that Apple’s App Store practices violate the Digital Markets Act by preventing app developers from informing users about alternative app stores. The EU also filed charges against Microsoft, claiming that the bundling of its Teams video conferencing software with other programs unfairly hurts rival services offered by competitors like Zoom, Salesforce, and Slack.

Germany has revised work visa rules in response to ongoing labor shortages, with a Chancenkarte (“Opportunity Card”) that would allow non-EU citizens the ability to relocate to Germany for up to one year without first securing a permanent full-time job. Expatriates would be allowed to take part-time jobs while looking for a more permanent position. Chancenkarte eligibility will be based on prospective applicants’ academic qualifications, language skills, and professional experience. Applicants will also need to prove that they have financial means to cover living expenses of at least EUR 1,027 (~USD$1,100) per month while looking for work.

The U.S. banking system remains sound, according to the latest Federal Reserve stress test. The Fed reported that all 31 banks passed, showing their ability to maintain minimum required capital levels and continue lending to consumers and businesses even if a severe recession were to materialize. Notably, however, JPMorgan disclosed that, in its view, the bank was not quite as resilient as the Fed’s estimates suggest. JPMorgan asserted that the Fed overestimated the bank’s “other comprehensive income” and that under the scenarios used in the stress test, it would have incurred losses that were “modestly higher” than the Fed calculated.

Wegovy, Novo Nordisk’s semaglutide-based weight-loss drug, has been approved for use in China, where adult obesity rates are skyrocketing. The Danish pharma company has a narrow window to make the most of this approval: the exclusivity rights on semaglutide, the active ingredient in Wegovy, will expire in China in 2026, opening the market up to rivals manufacturing generic versions of the drug.

And finally: Chinese scientists are studying the rock and soil samples from the far side of the moon, brought back by the Chang’e-6 mission. While U.S. and Soviet spacecraft have previously brought back samples from the near side of the moon, these are the first from the moon’s dark side. Experts believe the far side of the moon has a significantly different geological history and thus, possibly different composition compared to the near side. One startling discovery has already been made: The samples contained “few-layer graphene,” a form of carbon. The discovery calls into question a long-held theory that the Moon was created by the impact of a small planet colliding with Earth.

Notice: U.S. markets and Fundstrat offices will be closed on Thursday, July 4, 2024 in observance of Independence Day. There will be no publications from us on that day.