Economic data highlights last week included a slight decline in ISM services, although the metric stayed in solid expansion, along with a drop in existing home sales. The FOMC meeting minutes continued to show concern over the duration of the recent inflation rise.

Equities were mixed last week, with strength in domestic technology and energy as well as selected emerging markets. Bonds lost ground with inflation fears again rising. Commodities gained broadly, led by crude oil but also agriculture.

U.S. stocks were mixed last week, with few economic data releases, and led by offsetting movement in this year’s key two themes, ultimate optimism in artificial intelligence industries offset by a drop in sentiment around a resolution to the U.S.-Iran Middle East conflict (and military strikes continued over the weekend). Volume was perhaps a bit lighter in keeping with normal summer patterns, as well as a lull prior to the start of Q2 earnings season. By sector, gains were led by technology and energy, each up over 3%, followed by communications. Laggards were materials, health care, and industrials, each of which lost up to a few percent. Real estate declined slightly, with yields moving higher for the week. Large caps outperformed small caps, which had been a source of recent strength, although a bit under-the-radar.

Before the open on Wed., speaking from the NATO summit, the President declared the U.S.-Iran ceasefire “over” and talks being “a waste of time” after a series of strikes on commercial shipping. At the same time, there was a reluctance to escalate to the use of U.S. ground forces, which appears to be politically very unpopular, and also puts a natural cap on how deep the conflict can go. Naturally, markets fell sharply in response, with oil prices rising around 6% immediately.

As noted, markets remain hyper-focused on the AI infrastructure environment. On Friday, interest turned to the U.S IPO for South Korean chip leader SK Hynix, raising money in order to ramp up manufacturing capacity to meet demand, and rose 15% in its debut.

Prior to their recent bout of volatility, semiconductor strength had driven the ‘momentum’ stock market factor sharply higher, but drawdowns in that factor can be quick and sharp. Notably, stocks rated high from the aspect of the ‘quality’ factor have underperformed in relative terms, including many in the Magnificent 7 group. That trend has been frustrating for a variety of managers, who have tended to overweight such quality stocks due to their inherent desirability from a fundamental standpoint (strong profitability, consistent earnings growth, low debt, etc.), and their long-term strong performance tendencies. But, short-term, factor movements can be fickle.

Foreign stocks were mixed, with gains in Japan offsetting declines in Europe and the U.K. In Japan, a decline earlier in the week was reversed when the finance minister called on domestic pension funds to raise allocations to home assets, which helped the yen stabilize as well. Emerging markets were mixed as well, led by Brazil and China for a change, with the former being helped by higher agricultural prices and latter seeing a boost from domestic AI-driven investment and product development, as AI continues along a dual competitive path between the U.S. and China, among perhaps others. South Korean stocks were down -8% along with some uncertainty around SK Hynix’s U.S. Nasdaq debut and a bit of a reversal from recent strong momentum in the space, followed by Taiwan, also down several percent.

Bonds lost ground as yields rose, in keeping with Middle East tensions and oil directly sparking longer-standing inflation fears. As credit spreads widened, U.S. government outperformed investment-grade corporate, with gains in floating rate bank loans. Foreign bonds also fell back due to the interest rate impact and effects of a strengthening U.S. dollar, albeit small.

Commodities largely gained ground across the board last week, led by agriculture (with some drought concerns, affecting anticipated crop sizes) and energy, each up around 5%, while industrial metals rose to a lesser degree. Crude oil prices ended up rising 4% last week to $72/barrel, down a bit from a peak on Wednesday, as the above-mentioned U.S.-Iran conflict flared up again, putting a more sustainable truce at risk.

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Sources:  LSA Portfolio Analytics, American Association for Individual Investors (AAII), Associated Press, Barclays Capital, Bloomberg, Deutsche Bank, FactSet, Financial Times, Goldman Sachs, JPMorgan Asset Management, Kiplinger’s, Marketfield Asset Management, Minyanville, Morgan Stanley, MSCI, Morningstar, Northern Trust, Oppenheimer Funds, Payden & Rygel, PIMCO, Rafferty Capital Markets, LLC, Schroder’s, Standard & Poor’s, The Conference Board, Thomson Reuters, U.S. Bureau of Economic Analysis, U.S. Federal Reserve, Wells Capital Management, Yahoo!, Zacks Investment Research.  Index performance is shown as total return, which includes dividends, with the exception of MSCI-EM, which is quoted as price return/excluding dividends.  Performance for the MSCI-EAFE and MSCI-EM indexes is quoted in U.S. Dollar investor terms.

The information above has been obtained from sources considered reliable, but no representation is made as to its completeness, accuracy or timeliness.  All information and opinions expressed are subject to change without notice.  Information provided in this report is not intended to be, and should not be construed as, investment, legal or tax advice; and does not constitute an offer, or a solicitation of any offer, to buy or sell any security, investment or other product.