FINANCIAL MARKET INSIGHT

HIGHLIGHTS

• Initial Thoughts on the Iranian Strikes on Israel
• Weekly Market Preview: How Bad Was Last Week for the Rally
• Special Reports and Editorial:
  • The Most Important Long-Term Indicator for Markets
  • What Does CPI Mean for Markets?

STOCKS

✓ What's Outperforming: Growth factors, tech, consumer discretionary and communication services have outperformed thanks to strong earnings and continued "AI" enthusiasm.

✓ What's Underperforming: Defensive sectors and value have underperformed recently mostly as Treasury yields have risen, although they are poised to rebound substantially if there is a surprise slowing of growth.

Geopolitics & Market Reaction

Initial Thoughts on the Iranian Strikes on Israel?

Geopolitical tensions rose even further over the weekend as Iran launched several hundred missiles and drones at Israel... However, there is reason to believe that geopolitical tensions will not become a material negative for markets... Bottom line: This is clearly a further deterioration in the geopolitical landscape, and it will increase market volatility... a pullback towards 5,000 in the S&P 500 more likely but does not view it as a fundamental negative shift.

How Bad Was Last Week for the Rally?

The S&P 500 dropped to a one-month low as inflation ran hot and markets abandoned the idea of a June rate cut... Nevertheless, were these events material negatives that should make us suspect of this rally? No, not at this point... There is a difference between not perfect and bad. Inflation has stopped falling (not perfect) but it is not rebounding (that would be very bad). The Fed will not cut in June (not perfect), but the Fed is not thinking about hiking rates (that would be very bad).

Bottom line: The market was priced for perfection at 5,200 but was forcefully reminded this week that the environment is not perfect. A continued decline towards 5,000 should not shock anyone and is likely an opportunity to add long exposure at more reasonable valuations.

Economic Data (What You Need to Know in Plain English)

Inflation for the month was the focus and the data sent a clear message: The decline in inflation has stalled. The key report was Wednesday's CPI, and it came in hotter than expected... The biggest practical impact was the drastically reduced June rate cut chances, which ended the week at just 25%.

However, importantly, the CPI number did not imply that inflation was bouncing back. Instead, it just implied the decline in inflation had stalled...

The other notable inflation report for the month was the PPI and the headline was encouraging as the PPI rose just 0.2% vs. (E) 0.3%... the market gave back those initial gains as PPI showed sticky services inflation.

Bottom line: Last week's inflation data pointed to a stall in the decline in inflation and while that will not undo the five-month-long rally in stocks, it will increase near-term volatility. The focus of economic data for the rest of the month turns to economic growth; growth is now more important than ever.

COMMODITIES, CURRENCIES & BONDS

SPECIAL REPORTS AND EDITORIAL

The Most Important Long-Term Indicator for Markets

What is the single most important long-term indicator in the markets right now? The unemployment rate. Our investment team has maintained that the one "rally killer" event we all need to be watching for is an economic slowdown... That would put the S&P 500 under 4,000.

It is very unlikely that we will get an economic slowdown as long as the unemployment rate stays near 4%... unless the unemployment rate rises into the mid-4% towards 5%, then the likelihood of a rally-killing slowdown will remain low.

What Does CPI Mean for Markets?

CPI ran hotter than expected and resulted in a moderate decline in stocks... First, CPI did not imply inflation was rebounding... Second, CPI is a short-term negative for this market... Third, while markets are vulnerable to a pullback, they can still rally. The keys are growth and earnings... Fourth, higher-for-longer sector positioning likely works near-term but defensive and slower growth remains our investment team's preference over the medium and longer term.