Liquidity > Uncertainty

Despite numerous events that should have caused both stocks and interest rates to fall over the past quarter, stock markets roared back to new highs, just as the data suggested during the crash.

NOTE: We will have a Mid-Year Outlook Report and Webinar on Tuesday, July 29th. We will send details as the event draws closer.

What a strange quarter.

It started with pandemonium in April as Trump's tariffs shook the psyche of the market. Then, geopolitical uncertainty dominated the narrative with Ukraine, Russia, Iran, Israel and China all ratcheting up antagonistic rhetoric.

The quarter finished with a short, but active war between Israel and Iran.

If you would have told us in isolation that war would break out between Israel and Iran, we would assume the markets would fall, oil prices would spike higher, and bond yields would fall in a flight to safety trade.

What actually happened?

Markets went up. Oil fell 15%. Bond yields rose.

Not exactly part of the playbook.

We'll dig into more details on tariffs, earnings and inflation in our Mid-Year Outlook report and webinar later in July.

For today, let's just look at the S&P 500, geopolitics and liquidity.

S&P 500 Index

Ending the quarter on a quiet note while at all-time highs was not necessarily the expected outcome by many market participants a few months ago.

Yes, Trump's approach to tariff negotiation shook the confidence of many, at least temporarily.

But the data consistently told us that the selloff was an emotional one. Not rooted in a negative economic reality.

We said so much in our report on April 7th, titled "Selloff Over or Just Getting Started".

In it, we said:

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There are a number of signs pointing to this being a near-term low in markets either today or tomorrow:

• Sentiment at extremes

• VIX spike higher

• Treasury yields reversing higher

• Option flow data is bullish

• Capitulation signals

• Broad, indiscriminate selling

• Bullish divergences

• Panicky conversations with clients

These data points are all quite bullish. And while they don't guarantee that the overall pullback is over, it does increase the likelihood that we have seen an interim low in prices.

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The market bottomed the next day.

It was difficult, but our rules kept us from selling because the data told us not to.

In fact, the data was so lopsided in one direction, we used the pullback to accumulate new positions and put cash to work for most clients.

Back to the market.

The selloff stalled EXACTLY where it would make sense to do so.

In our first chart below, we see a market that is stair-stepping higher.

Since COVID, the S&P 500 Index has rallied, peaked, then pulled back to the previous highs.

This is textbook technical analysis behavior, and suggests a higher market over the next 12-18 months.

We have consistently been saying we expect another 1-2 years of a bull market before higher interest rates slow down the rally. That can always change, but that is our top scenario at this point.

Near-Term Pause to Refresh?

Now that the recovery is complete, what should we expect next?

Near-term, we do expect markets to pause for a consolidation.

While we don't expect things to get out of hand like they did in March and April, the market is suggesting we are at a level where we should see a pause that refreshes.

Our next chart of the S&P 500 Index shows the consolidation "hook" that has happened after the last two times markets pushed back to new highs.

The gold lines on the chart above show the hook pattern.

After a move of greater than 20% off the lows with no real pause, we should expect a bit of consolidation over the next 1-2 months.

Geopolitics

One of the many surprises this quarter for us was the market ignoring the Israel/Iran conflict.

The first chart below, from Deutsche Bank, shows what happened after various geopolitical events over time. Highlighted rows occurred during recessions.

As one would logically expect, stocks tend to fall on the news of major, unexpected geopolitical events. As shown in the bottom on the chart above, stocks tend to fall 7.5% on average over the first few weeks after an event.

This time, markets rose.

Is this a sign that the Middle East isn't as important to global events as they once were? Maybe.

Does it signal a change in how military operations will be done in the future? Probably.

Is it a sign of market weakness? Absolutely not.

Markets not responding negatively to negative news is a sign of underlying market strength.

With all the uncertainty this year, markets being higher at the mid-point of the year is also a very good sign.

But why the strength in the face of all the unknowns?

All About Liquidity

The most important driver of market prices over the past decade has been global liquidity.

When we refer to liquidity, we are primarily referring to what is called "M2". Learn more HERE.

Looking at the past two years, stocks have consistently followed the expansion and reduction of global money supply.

Our next chart from the Syz Group shows Global M2 versus the S&P 500 with an 11 week lag.

If the market continues to correlate with the money supply as it has for the past few years, we should expect a strong second-half of the year. This correlation suggest that the S&P 500 should target 6800-7000 by the end of next year.

Other Random Charts

Other charts are bullish as well.

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Breadth Expansion is Good for Stocks

Following a correction, once at least 58% of stocks make a 20-day new high, future returns a skewed to the upside.

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Strength Begets Strength

The S&P 500 returned 10.94% in the second quarter of 2025.

After a quarter where returns were greater than 10%, positive performance continued, as shown on the next chart below.

Bottom Line

Once again, markets have calmed down substantially, despite there being no real progress on tariff agreements.

Economic data is good, and markets are holding up nicely.

While we do expect further political turmoil with regards to theft and corruption at the national level, we have seen that strong liquidity across the globe can help markets get through volatility associated with uncertainty.

We hope you enjoy your July 4th weekend, and watch for an invitation to our webinar in late July.

Invest wisely!

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