The Market Outlook for the Week Ahead, or Welcome to Groundhog Day

The market has to go down before it goes up. That is the short answer to your first question of the day.

How much down is anyone’s guess.

Lots of pain, no gain. That pretty much describes the stock market this year.

I’m sure you all remember the classic comedy Groundhog Day. In it, a hapless Bill Murray is forced to live the same day over and over again.

Well, here we are again. It’s February 18, one more time. The S&P 500 is back at $6,050. Stocks are just as expensive at a price earnings multiple of 23X. The market focus on AI is just as narrow as ever. Ten-year US Treasury yields are dead unchanged at 4.35%. Only gold (GLD) and silver (SLV) are higher. And the economic outlook is lower.

So will this Groundhog Day yield the same results as the last one?

The trade war 90-day delay ends on July 9, opening the way for the biggest tariff increases in 95 years. So far, we only have one promised agreement with the UK, where we already have a trade surplus. The budget bill is stalled in Congress but promises to add $3.5 to $5 trillion to the National Debt. Oh, and we may be about to enter a new war in the Middle East, sending oil prices, and therefore inflation, soaring.

And traders want to pay the highest prices in history for the riskiest asset classes? They say that markets climb a wall of worry. This market has climbed a Mount Everest of worry.

Personally, I’m going on a buyer’s strike, refusing to enter any new trades unless the Volatility Index ($VIX) tops $20 again, and preferably $30. I’ll just quietly grow older until the next trade comes to me and fade the next big move, whether it is up or down.

The good news is that in 2026, the outlook should improve. The US has suffered from a restrictive monetary policy since 2022, when inflation took off like a scalded chimp.

The Federal Reserve has since shrunk its balance sheet from $9.6 trillion to $6.7 trillion. That is why the bulk of the stock market performed poorly during this time.

Next year, US fiscal and monetary policy will both become accommodative at the same time for the first time in four years. That will be the result of record government deficit spending and the Fed finally lowering interest rates. This will be a boon for risk of all types, especially for equity investors. International stocks will be the big winner, thanks to a weak dollar, followed by technology growth stocks and cyclicals.

It all perfectly sets up a trading range for the S&P 500 for the rest of this year of 5,500-6,500, with most of the gains taking place in the final four months of the year.

Which brings us to the US dollar (UUP).

The S&P 500 ($SPX) has seen 12 corrections of 10% or more over the last 13 years. The US dollar appreciated in every single one, except for this year. That means the greenback’s flight to safety qualities are gone, possibly for good.

What can pee on the Goldilocks parade for 2026? There are two big ones.

Oil rises above $100, which could happen tomorrow if Israel attacks Iran’s Kharg Island, the country’s main export terminal. China gets 1.6 million barrels of oil a day from this facility, built back in my day by America’s Amoco. Its loss would force China into the oil spot market. At that point, $100 a barrel would look like a bargain.

The other big worry is that the bond market could collapse, thanks to a 7% debt-to-GDP ratio and rising, the highest in history. Everyone agrees that the world was more willing to lend to Joe Biden than to Donald Trump. How that anomaly manifests itself in the interest rate markets remains to be seen.

What if we get a new Fed governor in a year who immediately cuts interest rates by 200 basis points while inflation is high and accelerating, as has already been promised? The resulting bond market crash would make previous ones pale in comparison. All the market would see is the double-digit inflation this would guarantee, putting 10% plus yields for 10- and 30-year bonds in range.

Fed governor Jay Powell pretty much tipped his hand with the first sentence of his June 18 press conference: “On achieving our dual mandate goals of maintaining maximum employment and stable prices.” That’s what’s important to the Fed.

The Fed’s GDP expectations for 2025 were cut from 1.7% to 1.4%, while inflation and unemployment expectations are rising. This is Jay Powell’s way of saying there will be no interest rate cuts in 2025, and possibly none for an entire year, without actually saying so. It will be up to the next Fed governor to cut interest rates in the face of rising inflation, whoever that is.

It’s a perfect stagflationary forecast. The number of Fed voters opposed to a rate cut rose from 4 to 7 last week, dashing any rate cut hopes. Monster tariffs will deep-six that outcome.

A real buyer’s strike for 30-year US Treasury bonds is just a matter of time. This has already happened in Japan, where yields are at 50-year highs.

Usually, when there is a new war in the Middle East, you can count on a headlong flight to safety as investors pour into US Treasury bonds.

Not this time.

Israel’s attack on Iran has instead prompted a substantial selloff in the bond market, taking the (TLT) down a welcome $3.00 (I was short). It is further evidence that the “Sell America” trade is still on, that American exceptionalism is over, and that foreigners are using every opportunity to withdraw money from the US. The US dollar hitting a new three-year low last week is further confirmation of this.

The zero return for stocks this year, compared to two back-to-back 20% gains for the last two years, was no surprise to me. In fact, I expected it. Not because I am a biased, left-leaning, Birkenstock-wearing hippie from the 1960s, but because I am an avid market historian.

To give you some idea of how politicized the market has become, some 58% of Republicans expect government policies to take stocks to new all-time highs this year, while only 12% of Democrats believe so.

According to Bespoke Research, an independent firm, if you had invested $1,000 only with every Republican president since 1953, your return would be $27,400. If you had invested $1,000 only with every Democratic president since 1953, your return would be $$61,800. However, if you remained fully invested the entire time through the presidents of both parties, your profit would be a staggering $1.69 million.

Invest according to your own political persuasion at your own peril.

Fed Leaves Interest Rates Unchanged. GDP expectations were cut from 1.7% to 1.4% for 2025, while inflation and unemployment expectations rose. It’s a perfect stagflationary forecast. I don’t expect any rate cuts this year because of tariff-driven inflation, as Jay Powell believes.

The Economy is Sinking, according to Fed Governor Jay Powell. Uncertainty about tariffs and inflation appears to be taking its toll on the economy. Members of the Federal Reserve’s monetary-policy committee lowered their projections for annualized growth in America’s gross domestic product to just 1.4% for 2025 on Wednesday.

More AI Cuts Hit the Jobs Market. Microsoft plans to lay off several thousand employees within weeks. It’s the latest knock-on effect of investment in artificial intelligence, where efficiencies come from increased AI capabilities, and there is a need to offset spending on the technology. Microsoft will cut thousands of jobs in its sales department and other teams from July. Microsoft plans to invest $80 billion in its current fiscal year to build out data centers that train models and run AI applications. The latest cuts come on top of a reduction of around 6,000 jobs in May across product and software developer roles. Microsoft had around 228,000 full-time employees at the end of June last year.

New Export Restriction on China Slaps Chip Stocks. A US official told top global semiconductor makers that he wanted to revoke waivers they have used to access American equipment in China. Such a move is expected to escalate trade tensions. The Philadelphia Stock Exchange Semiconductor Index, a closely watched benchmark, fell as much as 2% after the report was published.

Housing Starts Hit 5-Year Low. Multifamily apartments dropped 30% MOM as a record supply hits the market. Single-family home starts fell 7% YOY. All housing-related stats are falling off a cliff.

Weekly Jobless Claims Fall, down 5,000 to 245,000. The report from the Labor Department on Wednesday showed widespread layoffs in the prior week, which had boosted claims to an eight-month high. Though some technical factors accounted for the elevation in claims, layoffs have risen this year, with economists saying President Donald Trump’s broad tariffs had created a challenging economic environment for businesses.

US Crude Inventories Hit One-Year Low. Crude inventories fell by 11.5 million barrels to 420.9 million barrels in the week ending June 13, the EIA said. The rise in exports came even as the price differential between Brent and WTI futures narrowed in recent weeks, a move that typically discourages exports. Companies are attempting to shrink inventories of an asset whose price is falling.

Retail Sales Dive, declining 0.9% MOM, even more than the 0.6% drop expected from the Dow Jones consensus. The decline followed a 0.1% loss in April and came at a time of unease over tariffs and geopolitical tensions. Sales rose 3.3% from a year ago. One more recession indicator.

Homebuilder Sentiment Hits Pandemic Low. Higher mortgage rates and uncertainty in the broader economy continue to weigh on consumers — and consequently on the nation’s homebuilders. Builder sentiment in June dropped 2 points from May to 32 on the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI). Anything below 50 is considered negative.

Solar Stocks Crash, because the Senate spending bill accelerates the phase-out of subsidies. The oil industry gets to keep all of its subsidies. The lack of tax credits will make the solar panels less cost-competitive against other sources of power. A homeowner installing a $20,000 system today could qualify for a $6,000 credit on their taxes; the legislation would change that, making the homeowner take on the entire $20,000 cost.

Long-term U.S. bonds have Become Pariahs. Bond investors, anticipating the Federal Reserve will hold interest rates unchanged again this week, are moving away from longer-dated Treasuries as they temper expectations for an aggressive easing given the lower chance of a U.S. recession. Their flight away from the long end of the curve also reflects worries about the House tax and spending bill, which will take the National Debt up by $3 trillion or more.

My June performance rocketed up +12.10%, taking us to new all-time highs on all metrics. That takes us to a year-to-date profit of +42.59%. My trailing one-year return exploded to a record +97.88%. That takes my average annualized return to +51.26%, the first time I‘ve hit the $51 handle, and my performance since inception to +794.48%.

It has been another busy week in an otherwise dead market. The June 20 option expiration brought us expirations at max profit of positions in (TSLA), (WPM), and (MSTR). With the expiration, I have shrunk my book to 80% cash, 10% “RISK OFF,” and 10% “RISK ON.”

Some 63 of my 70 round trips in 2023, or 90%, were profitable. Some 74 of 94 trades were profitable in 2024, and several of those losses were really break-even. That is a success rate of +78.72%.

Try beating that anywhere.

My Ten-Year View – A Reassessment

We have to substantially downsize our expectations of equity returns in view of the election outcome. My new American Golden Age, or the next Roaring Twenties, is now looking at multiple gale-force headwinds. The economy will completely stop decarbonizing. Technology innovation will slow. Trade wars will exact a high price. Inflation will return. The Dow Average will rise by 600% to 240,000 or more in the coming decade. The new America will be far more efficient and profitable than the old. My Dow 240,000 target has been pushed back to 2035.

On Monday, June 23, at 8:30 AM, the Existing Home Sales are printed.

On Tuesday, June 24, at 7:30 AM, the S&P Case Shiller National Home Price Index is announced.

On Wednesday, June 25, at 1:00 PM, we get the New Home Sales.

On Thursday, June 26, we get Weekly Jobless Claims. We also get the final report for Q1 GDP.

On Friday, June 27, at 7:30 AM, we get the Core PCE Price Index, an inflation read. At 1:00 PM, the Baker Hughes Rig Count is published.

As for me, it was in 1986 when the call went out at the London office of Morgan Stanley for someone to undertake an unusual task. They needed someone who knew the Middle East well, spoke some Arabic, was comfortable in the desert, and was a good rider.

The higher-ups had obtained an impossible-to-get invitation from the Kuwaiti Royal family to take part in a camel caravan into the Dibdibah Desert. It was the social event of the year.

More importantly, the event was to be attended by the head of the Kuwait Investment Authority, who managed over $100 billion in assets. Kuwait had immense oil revenues, but almost no people, so the bulk of its oil revenues were invested in Western stock markets. An investment of goodwill here could pay off big time down the road.

The problem was that the US had just launched air strikes against Libya, destroying the dictator, Muammar Gaddafi’s royal palace, our response to the bombing of a disco in West Berlin frequented by US soldiers. Terrorist attacks were imminently expected throughout Europe.

Of course, I was the only one who volunteered.

My managing director didn’t want me to go, as they couldn’t afford to lose me. I explained that in reviewing the range of risks I had taken in my life, this one didn’t even register. The following week found me in a first-class seat on Kuwait Airways headed for the Middle East in turmoil.

A limo picked me up at the Kuwait Hilton, just across the street from the US embassy, where I occupied the presidential suite. We headed west into the desert.

In an hour, I came across the most amazing sight – a collection of large tents accompanied by about 100 camels. Everyone was wearing traditional Arab dress with a ceremonial dagger. I had been riding horses all my life, camels not so much. So, I asked for the gentlest camel they had.

The camel wranglers gave me a tall female, which is more docile and obedient than the males. Imagine that! Getting on a camel is weird, as you mount them while they are sitting down. My camel had no problem lifting my 180 pounds.

They were beautiful animals, highly groomed, and in the pink of health. Some were worth millions of dollars. A handler asked me if I had ever drunk fresh camel milk, and I answered no. They didn’t offer it at Safeway. He picked up a metal bowl, cleaned it out with his hand, and milked a nearby camel.

He then handed me the bowl with a big smile on his face. There were definitely green flecks of manure floating on the top, but I drank it anyway. I had to, lest my host lose face. At least it was white. Its body temperature was warm and much richer than cow’s milk.

The motion of a camel is completely different from that of a horse. You ride back and forth in a rocking motion. I hoped the trip was short, as this ride had repetitive motion injuries written all over it. I was using muscles I had never used before. Hit your camel with a stick and they takes off at 40 miles per hour.

I learned that a camel is a super animal ideally suited for the desert. It can ride 100 miles a day, and 150 miles in emergencies, according to TE Lawrence, who made the epic 600-mile trek to Aqaba in only four weeks in the height of summer. A camel can live 15 days without water, converting the fat in its hump.

In ten miles, we reached our destination. The tents went up, clouds of dust rose, the camels were corralled, and the cooking began for an epic feast that night.

It was a sight to behold. Elaborately decorated huge three-by-five wide bronze plates were brought overflowing with rice and vegetables, and every part of a sheep you can imagine, none of which was wasted. In the center was a cooked sheep’s head with the top of the skull removed so the brains were easily accessible. We all ate with our right hands only. I won’t tell you what the left hand is used for.

I learned that I was the first foreigner ever invited to such an event, and the Arabs delighted in feeding me every part of the sheep, the eyes, the brains, the intestines, and the gristle. I pretended to love everything, and lay back and thought of England. When they asked how it tasted, I said it was great. I lied.

As the evening progressed, the Johnny Walker Red came out of hiding. Alcohol is illegal in Kuwait, and formal events are marked by copious amounts of elaborate fruit juices. I was told that someone with a royal connection had smuggled in an entire container of whiskey, and I could drink all I wanted.

The next morning, I was awoken by a bellowing camel and the worst headache in the world. I threw a rock at him to get him to shut up, and he sauntered over and peed all over me.

The things I did for Morgan Stanley!

Four years later, Iraq invaded Kuwait. Some of my friends were kidnapped and held for ransom, while others were never heard from again.

The Kuwait government said it would pay for the war if we provided the troops, tanks, and planes. So they sold their entire $100 million investment portfolio and gave the money to the US.

Morgan Stanley got the mandate to handle the liquidation, earning the biggest commission in the firm’s history. No doubt, the salesman who got the order was considered a genius, earned a promotion, and was paid a huge bonus.

I spent the year as a Marine Corps captain, flying around assorted American generals and doing the odd special op. I got shot down and still set off airport metal detectors. No bonus here. But at least I gained an insight and an experience into a medieval Bedouin lifestyle that is long gone.

They say success has many fathers. This is a classic example.

You can’t just ride out into the Kuwait desert anymore. It is still filled with mines planted by the Iraqis. There are almost no camels left in the Middle East, long ago replaced by trucks. When I was in Egypt in 2019, I rode a few mangy, pitiful animals held over for the tourists.

When I passed through my London Club last summer, the Naval and Military Club on St. James Square, whose portrait was right at the front entrance? None other than that of Lawrence of Arabia.

It turns out we were members of the same club in more ways than one.

Stay healthy,

John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader