The stock market experienced a significant rally in June, leading to substantial gains in the first half of the year. However, there are concerns about the underlying factors driving this rally and whether it is justified by economic fundamentals. In a recent podcast, Peter discusses his analysis and suggests that this may be what is known as a bear market rally.
June was particularly impressive for the stock market, with the NASDAQ leading the way with a 12.8% increase. The S&P 500 also experienced an 8.3% rise, while the Dow Jones finished the month with a 3.4% gain. This strong performance throughout June contributed to the overall positive trend seen in the first half of the year. The S&P 500 was up 15.9% during this period, marking the best start to a year since 2019, when the Federal Reserve was cutting rates.
Interestingly, this rally has happened despite the fact that the Fed has not yet started cutting rates. In fact, the central bank has been signaling its intention to continue hiking rates. Peter suggests that the market’s lack of belief in the Fed’s statements is what is driving this rally. Investors anticipate that the Fed may be near the end of its tightening cycle, leading to a sense of relief in the market.
However, Peter argues that the market is missing an important point – inflation is expected to worsen. He believes that although the Fed has not yet acknowledged it, the central bank has essentially lost the battle against rising inflation. The market has yet to fully grasp this reality.
Looking at the performance of different stocks, it becomes apparent that more speculative stocks have seen the biggest gains in the first half of the year. The NASDAQ recorded a remarkable 31.7% increase, its best performance in the first half since 1983. The NASDAQ 100 also had its best start to a year ever. Despite this, the Cathie Wood Ark Innovation ETF, while experiencing a 42% gain, is still down 72.4% from its peak.
Peter believes that these gains are characteristic of bear market rallies. He points out that many short positions in the market have been covered, and an unforeseen artificial intelligence (AI) narrative has gained momentum, further fueling the rally in big-cap tech stocks. Essentially, the market has gotten ahead of the Fed, pricing in rate cuts that haven’t even been announced yet.
While the mainstream media touts “strong” economic data as justification for this rally, Peter disagrees. He argues that the economic news has been predominantly negative, with only a few superficial positive indicators, such as surprising upside employment numbers. In reality, weak economic data continues to emerge.
Furthermore, price inflation remains a pressing concern. The core PCE Price Index, an important measure of inflation, rose 4.6% year-on-year, significantly surpassing the Fed’s 2% target. Federal Reserve Chairman Jerome Powell himself admitted that it is unlikely for inflation to reach the target until 2025. Peter criticizes this prediction, asserting that it lacks confidence and overlooks the potential for a big recession and subsequent money printing, which could lead to a surge in inflation.
Considering the prospect of persistently high inflation, weakening economic data, and concerns about the impact of higher interest rates, the justification for the stock market rally becomes questionable.
In addition to analyzing the stock market, Peter also discusses recent Supreme Court decisions on affirmative action and student loan forgiveness in this podcast.