Price Action Leads – Narrative Follows
Observing financial media pundits spinning their stories during the first half of the year has been really amusing. They were very bullish in January and February as the markets kept moving higher. Presumably, they were optimistic that the new Trump administration would solve the world’s problems in short order. But, while there was a lot of enthusiasm broadcasted about the new possibilities of the US economy under potentially lower taxes and less regulation, the markets strangely started on a steady decline of -7.7% from the peak of February 19th through April 2nd. Then, President Trump announced tariffs on most goods imported in the US from other countries, and during the next four trading days the S&P 500 declined another -12.13%. The financial media pundits were caught on the wrong side of the narrative— being bullish while the market experienced a quick -19.83% correction.
Suddenly, pessimism started pouring out from every corner of the media world: … tariffs would crash the world economy … prices would skyrocket … unemployment will increase to untold levels … stagflation … depression … debt default … end of globalization and of life as we know it … Pundits were panicky back in April, to say the least…
Then, something strange happened again. Despite the pundits peddling Armageddon, following the four-day market decline, markets abruptly started a steady march up from April 9th through the end of June. The S&P 500 returned back to the February highs, with a few more points to spare. The pundits were caught once again on the wrong side of the narrative. They were bearish while the market rebounded +23.88%. Thus, they were forced to change sides again. Their stories turned distinctively more positive: … The FED said the US economy is on solid footing … the resilience of the US economy is so strong not even President Trump’s policies could damage it …
Then in June, the 12-day war in the Middle East broke out and the pundits got their chance to peddle Armageddon again: … Iran would close the Straights of Hormuz … oil would go to $300 … hyper-inflation … stagflation … World War III … radiation leaks … Alas, they were wrong again. The Straights of Hormuz did not close, the price of oil did not rise above $75, inflation’ s latest reading on June 27th was 2.3% (annual PCE), no radiation leaks reported, and at least, as of the time of this writing, World War III has been averted.
There is an adage in financial markets: “Price Action Leads and Narrative Follows”, meaning the media pundits don’t lead markets higher or lower with their insightful analyses and prognostications. They react by adjusting their narratives to match the price action. When markets trend up, they broadcast bullish narratives. When markets trend down, they switch to bearish narratives. They flip-flop without conviction to market direction because they don’t want to risk looking foolish or out of touch with their audience. Pundits hype what is already happening. They don’t lead. They follow. No surprise that with the S&P 500 recovered to the February highs, one after the other “analysts” are predicting new All-Time-Highs this year. How convenient! Extrapolating the current trend to the future. Trailblazers, they are not. Investors need to be aware of this, so that they do not confuse the pundits’ constant blabber for serious economic or market analysis. It is simply hype!
At Fierce Financial we follow the data, not the hype. We are objectively analyzing the economic environment and asset valuations to determine when to buy/sell (tactical allocation) and what to buy/sell (strategic allocation). So, let us objectively analyze the current economic environment and the market.
In last month’s newsletter we listed 5 factors in which we need to see positive developments to have a sustained market rally. These factors were:
1) completion of trade deals with major economies
2) better earnings revisions
3) more dovish FED
4) less than 4% yield on 10-year Treasuries (with no recession)
5) industry deregulation.
So, let’s review the progress made on these key factors since last month:
As of the end of June, we have lots of trade negotiations but no actual trade deals yet. As the self-imposed July 9th deadline is only a few days away, the administration has announced progress in negotiations with several countries, achieving a “framework for implementation” for a deal, which is quite a vague term and certainly not a detailed trade agreement we can analyze. The goal is to reach beneficial trade agreements with our key trade partners, who based on value of imports to the US are: Mexico 16%, China 14%, Canada 13%, Germany 5%, Japan 4.7%, Vietnam 4.4%, S. Korea 4.2%, Ireland 3.2%, India 2.8%, Italy 2.4%, UK 2.1% ...
A sticky point for completing such agreements is the US demand for the trading partners to limit their imports from China, which understandably the Chinese leadership doesn’t take kindly. China has pretty much threatened all countries that their trade agreements with the US better not come at the expense of China. Notice for instance, that while the US and EU trade representatives are currently in negotiations, China’s top diplomat will be visiting EU countries June 30th - July7th undoubtedly tasked with damage control.
At this point, it seems very likely that after all negotiations are concluded and agreements are signed, we will have more trade restrictions than before April 2 (Liberation Day).
The corporate earnings reporting season for the (just completed) second quarter is upon us. We will have clear evidence of the direction of earnings in a few short weeks. No reason to speculate. We will get actual earnings data in July.
The Federal Reserve (FED) chairman Jerome Powell during his recent Congressional testimony, as well as his post Federal Open Market Committee (FOMC) meeting comments did not seem to be more dovish in terms of lowering the Federal Funds interest rates. He insists that two rate cuts in 2025 and 4-5 rate cuts in 2026 is the appropriate policy. The FED has a history of late responses to changing economic conditions, followed by drastic (catch up) moves once it decides to act. This means that the 2 rate cuts of 0.25% each may end up becoming 2 rate cuts of 0.50% each or 4 rate cuts of 0.25% each. However, up to this point only 3 out of the 12 FOMC voting members have expressed a preference for starting rate cuts in July. Maybe the 3 members’ (Bowman, Waller, Goolsby) willingness to be more dovish than the rest could have something to do with President Trump’s search for the next FED Chair. With Powell’s 2nd term coming to an end in about 10 months, self-identifying themselves as doves could increase their chances of becoming the next FED chair.
The 10-year Treasury interest rate remained above 4% (4.24% at month’s end) throughout June. It would be cheaper to borrow for the US Treasury, businesses, and consumers if the 10-year rate was lower. The US Treasury would be able to spend less to service the debt, thus potentially lowering the budget deficit. Cash strapped businesses or those needing to refinance large portions of their debt would be bailed out. Consumers would get cheaper mortgages and auto loans since such interest rates are closely tied to the Treasury interest rates. All of these would be considered pro-growth developments.
A positive development could arise in the following months, as the FED is contemplating a policy change to reduce or eliminate paying interest on banks excess reserves. This loss of risk-free income would force banks to seek to replace it with other risk-free income. Treasury securities seem like the perfect match. This new demand for Treasury securities could push bond prices higher and bond rates lower.
Industry deregulation is not yet tackled by the administration, as the priorities remain to finalize the budget negotiations in the Senate and the House in July, as well as, completing some trade agreements. No progress should be expected on this front before the end of summer.
So, we can say objectively that while there may be progress towards positive developments in some of these 5 key factors, nothing specific has transpired yet. Furthermore, with the occurrence of the 12-day Middle East war in June, we need to add a 6th key factor to our watch list: Peace in the Middle East.
Meanwhile, the latest economic data point to a weakened US economy:
Output: 1st Quarter GDP final revision came at -0.5% (previous revision at —0.2%)
Employment: Jobless Claims weekly at 233,000 (consistently high for several weeks), Continuing Unemployment Claims at 1,904,000 (can’t find another job), Job Openings at 1.7 million (fewer than the 2.1 million last year)
Inflation: CPI at 2.4% annually (lower than 2.5% expected)
Personal Income: —0.4% monthly (lower than +0.3% expected)
Personal Spending: —0.1% monthly (lower than +0.1% expected)
Retail Sales: —0.9% monthly (lower than -0.5% expected)
It seems therefore that the market rising to its previous highs is merely running on hope that:
Key trade agreements will be signed
The FED will lower interest rates before the labor market implodes
Tariffs will not cause stagflation
Tariffs will not compress corporate earnings
Earnings on the technology sector will continue at the same pace
Congress will pass a Goldilocks budget (not raising deficit yet, not cutting spending)
Iran and Israel will sign a peace treaty
Ukraine and Russia will stop the slaughter (yes, this one is still ongoing but gets much less media coverage)
As you can see, there are a lot of things that must go right (and happen soon), for the stock market to maintain its lofty valuation. If they do, the market could move higher. If they don’t, we can expect air pockets and turbulence along the way, possibly much more volatility to come…
Historically, it has not been wise to bet against America, particularly during the US Independence Day celebration. We certainly don’t intend to bet against the US market, however, our thinking always revolves around risk management— when to add/reduce market exposure and with which assets. Typically, we prefer adding exposure during market corrections when prices are cheaper (buy low), rather than chasing markets at all-time highs. We also prefer assets with strong cash flows and reasonable valuations, rather than chasing over-hyped AI unicorns with negative cash flows and lofty valuations.
During this period of increased uncertainty, we advise investors to be light on their feet as there are lots of major structural economic issues unresolved. In our opinion, it’s all right to be somewhat conservative until there’s more clarity about these issues, before adding more risk exposure. Better entry points could always be around the corner.
Stay Fierce!
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