Newsletter

The war in Iran began on February 28th, approximately 90 days ago. Since that time, we have had
increased volatility in both rates and equity markets, although a bull market in stocks remains strong
to all outward appearances.

The S&P 500 has been achieving new highs consistently since mid-April, which has investors excited.
Under the hood, conditions are building for a volatile fall. When the sectors are examined, Technology
has been the overwhelming market leader, despite tightening pressure on margins due to rising input
costs alongside rising concerns that AI will alter the landscape and a costly arms race among firms to
compete in the area. The sector is currently 36% of the S&P and the next largest sector is
Communications, at 16% with Financials 11% to round out the top 3 sectors. This is a very high
concentration in Tech and tech-heavy sectors, which could be a source of vulnerability.

Rates are up substantially, with 10-year Treasury Notes yielding 4.48%, a rise of 54 basis points since
the beginning of the war. The 10-year note is priced by inflation estimates, and many other key rates,
such as mortgages, are linked to this. High grade corporate bonds of the same maturity are up ~40
basis points and yielding ~5.17%. This is good for bond investors. With that said, there is another
challenge to corporations coming as debt issued in a near zero rate environment has begun to come
due and much of that will be refinanced at today’s rates, which at a minimum, is likely to crimp income
statements.

The reference above to a period of volatility that is expected later in the year is based on intermarket
analysis. This is the study of macro conditions and the normal interplay of related markets. We
currently have a commodity index that is spiking and shows persistent strength, rates that are climbing
and already much higher than in the prior globalist era, and a dollar that is basically stagnant.
Generally, when a bull market is healthy, interest rates (reflecting inflation expectations and credit risk)
should be going down and not up, commodities (which represent inflation) should be going down or
flat, and the dollar should be strong. In effect, the current configuration suggests that the bull market
in stocks is no longer healthy, although it can continue to climb for some time. In the event of a
correction later in the year, it is important to take a long-term view and continue to stick to a well-formulated strategy.