June continued a stock market rally that produced big gains through the first half of the year. But what exactly is driving this rally and is it really justified by the economic fundamentals? Peter breaks it down in a recent podcast and concludes that this is likely a bear market rally.

Video Length: 01:02:55

June was a fantastic month for the stock market, particularly the Nasdaq, which was up 12.8%. The S&P 500 charted an 8.3% increase. The Dow Jones finished up 3.4%.

The strong June helped power stocks higher through the first half of 2022. The S&P 500 was up 15.9% through the first six months of 2023. That was the best start to a year since 2019, during a period when the Federal Reserve was cutting rates.

Now we’ve had a bigger rally even though the Fed hasn’t even started cutting rates yet. It’s still hiking rates and indicating it’s going to hike some more — we still got this big rally. And I think it’s because the markets don’t really believe the Fed. They know the Fed is likely near the end or done hiking, and so that is the relief rally.”

Peter said in all of this, the markets are missing a key point – inflation is going to get worse.

The Fed hasn’t won. The Fed has lost. The markets just haven’t figured that out yet.”

More speculative stocks saw the biggest gains through the first half of 2023. The NASDAQ was up 31.7%. That is the best H1 for the NASDAQ since 1983. The NASDAQ 100 had its best first half ever. The Cathie Wood Ark Innovation ETF gained 42% (although it is still down 72.4% from its peak).

Peter said he thinks these are all bear market rallies.

I think that yes, there were a lot of shorts in the market that got caught, that have been covering. I think this AI narrative kind of came out of left field. Nobody was really talking about this at the end of 2022. It kind of gathered a lot of momentum in the second half of this year. That kind of lit a fire under a lot of these big-cap tech names that were already going up because of short-covering and the fact that the markets were starting to price in the rate cuts, even though we haven’t had the Fed concede them. The markets have gotten ahead of the Fed. But we’ve had a lot of acceleration.”

Is this rally justified given the economic news? It is according to the mainstream, who keeps trumpeting “strong” economic data. But in fact, the economic data isn’t as strong as the headlines claim. Peter said all the economic news has basically been bad.

We’ve had a little bit of good news. The employment numbers continue to surprise on the upside. But again, I think this is all very superficial. We continue to get a lot of weak economic data.”

Meanwhile, price inflation continues to run hot. The core PCE Price Index was up 4.6% year-on-year. As Peter noted, these numbers remain significantly higher than the Fed’s 2% target.

In fact, Federal Reserve Chairman Jerome Powell conceded that price inflation wasn’t likely to hit that target until 2025.

That’s another two more years. And of course, he’s still wrong. We’re still not going to get down to 2%. But for Powell to say we’re still going to have to wait another two years? A lot can happen in the next two years, including a big recession, which means lots of money printing, which means inflation could take off. If you’ve got to look forward two years in order to forecast 2% inflation, you have no confidence whatsoever in the accuracy of that forecast. So, in other words, Powell has no idea when, if ever, inflation is going to get down to 2%. That is a big admission.”

Given the prospect of continued price inflation coupled with increasingly weak economic data and the fact that even Federal Reserve economists believe something else is going to break in the economy with higher interest rates, the stock market rally doesn’t seem justified.

In this podcast, Peter also dives into the recent Supreme Court decisions on affirmative action and student loan forgiveness.

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