Market Morning: The Tug of War

Fresh news and strategies for traders. SPY Trader episode #1257. What's up, Spy Traders! This is your host, Chip Dip, coming at you live with your early morning market brief. It's 6 am on Monday, June 23rd, 2025, Pacific time, and we're diving into what's moving the markets today. Let's get right into it!The US stock market is navigating a truly complex landscape right now. Last week saw major indices largely mixed. The Dow Jones Industrial Average finished up slightly on Thursday, closing at 42,206.82, but was down 0.88% for the week. The S&P 500 saw a slight weekly decline of 0.15% but did rebound 0.32% on Thursday to close at 6,000.30. The Nasdaq Composite, which includes many of our favorite tech and growth stocks, managed a modest 0.21% gain for the week, closing at 19,617.70 on Thursday, up 0.37%. As we kick off this Monday morning, US stock futures are inching higher, with Nasdaq futures leading the charge, up 0.28%, suggesting continued strength in the tech sector.Now, let's talk about the big news items. Geopolitical events are definitely driving uncertainty. The escalating conflict between Israel and Iran, coupled with recent US airstrikes on Iranian nuclear sites, has created a real 'riskoff' sentiment. This has sent oil prices surging, naturally raising concerns about supply disruptions and renewed inflationary pressures.Domestically, the Federal Reserve's Open Market Committee held its interest rates steady at 4.25%4.50% at their June meeting, which was largely expected. Fed Chair Jerome Powell seemed comfortable with this, given the economy's resilience. Interestingly, the Fed's updated projections still anticipate two rate cuts by the end of 2025, though their forecasts for 2026 were reduced to just one cut. Some Fed officials have even hinted at a potential rate cut as early as July, which has given market sentiment a bit of a boost. Investors are keenly awaiting the Global flash PMIs today, and then the Personal Consumption Expenditures, or PCE data, next Friday. Chairman Powell's testimony before Congress will also be a key event, and don't forget about the upcoming Russell Reconstitution next Friday, which could create some significant closing auction activity.On the macroeconomic front, inflation remains a key focus. The annual inflation rate for the US was 2.4% for the 12 months ending May 2025, a slight uptick from April's 2.3%, and still above the Fed's 2% target. Core inflation, which excludes food and energy, held steady at 2.8% for the third straight month, with shelter costs being the main driver. The unemployment rate stayed flat at 4.2% in May, hovering in a narrow range since May of last year. Nonfarm payroll employment increased by 139,000 in May, exceeding estimates, with gains in healthcare, leisure and hospitality, and social assistance. However, the firstquarter 2025 real Gross Domestic Product actually decreased at an annual rate of 0.2%, and May retail sales printed below expectations, showing some softness in spending on building materials and motor vehicles.Looking at sector performance, last week saw financial services leading the pack, up 0.89%, followed closely by energy, up 0.87%. On the flip side, healthcare was the worst performer, down 2.43%, with basic materials also struggling, falling 1.33%. As for individual companies, top performers for the week ending June 20 included EchoStar, Coinbase Global, which saw an impressive 27.14% return, Reddit, Bath & Body Works, and Estée Lauder. Keep an eye out for upcoming earnings reports from big names like Nike, FedEx, and Micron next week.Alright, let's get into the nittygritty of what all this means for your portfolio. The current state of the US stock market is truly a tugofwar between resilient economic fundamentals and elevated geopolitical risks. Our primary immediate concern is that escalating Middle East conflict and its potential ripple effect on global oil supplies. While the market has shown some resilience, the situation is fluid, and any further escalation could lead to increased volatility and inflationary pressures from higher energy costs. This definitely creates a 'waitandsee' environment for us investors.The Federal Reserve's stance is interesting. Holding rates steady, but projecting two cuts later in 2025, signals a belief in the economy's underlying strength while acknowledging the need for potential easing. However, that slight increase in inflation and unemployment expectations in their updated outlook suggests a cautious approach. That 'dot plot' showing fewer cuts in 2026 compared to prior forecasts also hints at a shallower easing path ahead.On inflation, even though the May rate is slightly above the Fed's target, it does indicate sticky price pressures. The Fed is also considering the impact of potential new tariffs here.Economically, we have a mixed picture. A low and steady unemployment rate at 4.2% and continued job gains suggest a healthy labor market. But that contraction in Q1 GDP and weaker retail sales data points to a moderation in economic growth. This mixed bag aligns with the Fed's assessment of a 'resilient' economy that might just be slowing down a bit.The sectoral rotation we're seeing, with financial services and energy outperforming, suggests investors might be favoring sectors that benefit from a stable economy and potentially higher commodity prices due to those geopolitical risks. The underperformance of healthcare and materials could indicate a shortterm shift away from more defensive or commoditydependent sectors. Technology, despite some daily fluctuations, continues to show underlying strength, as evidenced by those Nasdaq futures.So, what's our game plan? Given this analysis, here are some concrete recommendations. First, maintain diversification but consider a slight tilt towards value and energy. With the current geopolitical backdrop and potential for sustained energy prices, an overweight position in the Energy sector makes sense. The Financial Services sector also appears resilient. While technology has shown strength, a balanced approach with some exposure to valueoriented stocks could provide stability in this mixed market, especially as small and midcap indices have shown modest outperformance.Second, you absolutely must monitor geopolitical developments closely. Stay informed about the IsraelIran conflict and any further US involvement, as these events can trigger sudden market shifts and directly impact oil prices. Be prepared for potential volatility.Third, keep a close eye on key economic data. The upcoming PCE data and Federal Reserve officials' commentary will be crucial. A significant deviation in inflation figures or a clearer signal from the Fed regarding the timing and magnitude of future rate cuts could really influence market direction.Fourth, consider companies with strong fundamentals and pricing power. In an environment of persistent inflation, companies with strong balance sheets and the ability to pass on higher costs to consumers are simply better positioned to weather economic shifts.Fifth, reevaluate your fixed income allocation. With the Fed holding rates steady and projecting cuts later in the year, bond yields may see some fluctuations. Assess your bond portfolio's duration and consider laddering strategies to take advantage of potential yield changes.Sixth, review your individual stock holdings. While top gainers like Coinbase showed impressive returns, their valuations should always be carefully scrutinized. Pay attention to companyspecific news, especially upcoming earnings reports from major companies like Nike, FedEx, and Micron, as these can impact not only individual stocks but also their entire sectors.And finally, always, always practice risk management. Given the current uncertainties, employing strategies such as setting stoploss orders or gradually scaling into positions rather than making large, lumpsum investments could be a very prudent approach.That's it for your Monday morning Spy Trader briefing! Stay sharp, stay informed, and I'll catch you next time. Happy trading!