Wall Street's booming June is big bet against economy doomsayers
[NEW YORK] Wall Street is throwing a summer party with markets just closing out their best cross-asset advance in more than a year on receding fears of a global trade war, igniting a buying frenzy in everything from tech funds to junk bonds.
With the S&P 500 enjoying its first record since February, it's the triumph of investor optimism at a moment of high uncertainty around the economy, valuations and government policy – with the White House delivering a Friday (Jun 27) surprise by threatening to end negotiations with Canada over a digital services tax.
Still, bulls are latching onto signs of cooling inflation and improving consumer sentiment even as jobless claims rise, the housing market stays cool, global trade softens and hopes fade for an imminent Federal Reserve interest-rate cut. Rather than falter, bullish conviction has surged to levels not seen since US President Donald Trump returned to the White House, powering a lockstep rally across stocks, bonds, commodities and credit that rivals the broadest monthly gain since May 2024.
Volatility that shook markets just weeks ago has completely faded, replaced by a headlong rush into risky bets. Retail traders have dived back in as systematic investors have hiked exposure. The exuberance now hinges on the economic backdrop delivering enough good news to justify stretched prices.
'The market is exhibiting signs of complacency,' said Raphael Thuin, head of capital market strategies at Tikehau Capital. 'Across a range of potential risks – be it trade negotiations, a broadening macroeconomic slowdown, geopolitical tensions, growing fiscal deficits or rising interest rates – market participants appear to be pricing in optimistic outcomes.'
Worrywarts on the economy and markets have been famously wrong, month after month. Yet the likes of JPMorgan Chase still put the risk of a recession at 40 per cent, citing tariffs and the prospect of weaker household spending colliding with falling business sentiment. He's among those fretting that global growth will slow in the second half of the year.
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While a report on Friday showed US consumer sentiment hit a four-month high in June as inflation expectations improved, other data this week painted a less encouraging picture. Purchases of new homes fell in May by the most in almost three years. Recurring applications for unemployment benefits are now at the highest level since 2021, aligning with other data pointing to a slowdown in the labor market. Consumer spending declined in May by the most since the start of the year.
Those reports were backdrop to testimony this week by Fed chair Jerome Powell before Congress, where he said interest rates would probably be coming down already if not for uncertainty around Trump's trade policy. He joined a parade of central bank officials who made clear in speeches they'll need a few more months to be sure tariff-driven price hikes won't raise inflation in a persistent way.
None of that derailed the risk rally. The S&P 500 surged 3.4 per cent this week and closed at a record high. Junk bonds extended gains for a fifth week as 10-year Treasury yields fell around 10 basis points. Bitcoin is back above US$100,000 and Coinbase Global hit its first record since 2021. Altogether, the pan-asset tandem rallies in June of US stocks, long-dated Treasuries, junk bonds and the Bloomberg Commodity Index set them for their best monthly performance in 13 months.
Volatility-controlled products have been amping up exposure, with one Nomura Securities International measure showing projections for the biggest buying spree since at least 2004. Quants chasing trends across assets have also bolstered their long exposure to stocks after turning short for a few weeks, according to Barclays.
It's precarious positioning for investors, who just endured one of the more volatile quarters ever recorded, said Julie Biel, portfolio manager and chief market strategist at Kayne Anderson Rudnick.
'People forget that fear of missing out isn't unbridled optimism, it's fear-driven. So if we have weakening margins or earnings or employment data really deteriorates, there isn't a lot supporting the market,' Biel said. 'We learned the lesson earlier this year of why a narrow market isn't a robust one.'
One sign of doubt under the surface: Popular funds tied to speculative bets that led the recent market gains – from tech disrupters and small-cap stocks to gold miners and uranium – are flashing signs of caution. Traders are loading up on protective options, with demand for downside insurance rising. In funds like the Ark Innovation ETF, the iShares Russell 2000 ETF and the VanEck Gold Miners ETF, options markets are pricing in significant downside risk, according to Barclays.
Brent Schutte, chief investment officer of Northwestern Mutual Wealth Management Company, isn't chasing the bounce, citing stretched S&P 500 valuations. He's tilted toward cheaper, small and mid-cap stocks and internationals.
'People have just been conditioned to buy the dip and until it doesn't work, that will continue,' Schutte said. 'Today you see weaker data, but no one pays heed to it just because it hasn't really worked as a signal of impending economic contraction in the past.' BLOOMBERG
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