Weekly Commentary

Despite market reaction to Nvidia's quarterly earnings report, stocks in the US remained firing on all cylinders, and are close to another all-time high, due to hopeful geopolitical prospects resulting in the negotiations with the US and Iran.  In recent days, bond yields have risen mostly due to the Fed's change in posturing—saying that there is more reason to be concerned with inflation than with growth-- which also affected stock markets around the world.  However, these inflation concerns are more to do with rising oil prices (a supply shock) than being demand-driven, so it is logical to see how a thaw in tensions in the Middle East would be a relief for bulls.  A more-permanent cease fire would also potentially help on the fiscal side, which would bring down treasury issuance.

In many of our weekly commentaries, we have signaled a trading range on the US 10-year to be between 3.80-4.50%, and that was broken last week, and while rates have stabilized, they have not gone back to below 4.5%.  We would err on the side of caution here, especially given what is happening in the bond market globally (especially in Japan).  But as higher rates affect many things in the real economy, especially real estate, the "higher for longer" scenario is likely to put pressure on the economy overall.  This pressure is also likely to steer Trump to the negotiating table quicker, but this is also an unkown, as recent primary elections have resulted in the purge of non-MAGA aligned Republicans, which could make his willingness to back down shrink even more.  We would therefore view current yields in a "wait and see" situation, but we do see more of a likelihood of higher yields than lower yields, and just as importantly,  the shape of the yield curve also being a concern.

Gold has continued to underperform, but we view any weakness as a buying opportunity for long-term investors.  The underlying fundamentals in precious metals are still solid, especially deteriorating fiscal problems globally, persistent inflation, and geopolitical uncertainty.

Finally, as we enter into the last week of May, equities have seen an impressive two-month rally, and given the end of earnings season (which was the main driver of the rally), there are only macro and geopolitical drivers for the upcoming weeks (until mid-July).  Therefore, we would take a more cautious approach to risk assets, including rebalancing into lower beta sectors and stocks, buying protective puts, and/or covered calls on existing positions.  We would see a pullback as a healthy event, but timing and duration are difficult to predict.

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