Dear Clients,
After a very strong rally since early April, we believe the stock market deserves a breather. That does not mean the bull market is over. It simply means that markets need time to digest large gains, especially when a handful of areas have moved very far, very fast.
Several charts from Bespoke Investment Group help explain what is happening. One chart shows that both the S&P 500 and Nasdaq 100 had moved from overbought levels back toward neutral after last week’s pullback. That is a healthy reset. Another Bespoke chart showed a major rotation out of Technology and into Health Care, with Health Care outperforming Technology by one of the widest three-day margins since the early 2000s. In plain English, investors were not selling everything. They were taking profits in the biggest winners and moving money into areas that had lagged.
This is normal after a rally like the one we have seen. From late March into early June, the Nasdaq 100 had rallied more than 30%. Many artificial intelligence, semiconductor, space, and infrastructure-related stocks had risen even more. When stocks move that far in such a short period, air pockets can form. These are sharp, uncomfortable pullbacks that happen when too many investors are crowded into the same trade at the same time.
There is another factor investors should understand: the supply of stock is increasing. The upcoming SpaceX IPO, Google’s roughly $80 billion capital raise, and the recent valuation activity around companies like Anthropic all point to the same thing. Large companies and private AI leaders are taking advantage of strong investor demand by raising capital or preparing to sell shares to the public. That does not mean these businesses are weak. In fact, it confirms that the artificial intelligence buildout remains enormous. But when large amounts of new stock come to market, investors often sell existing holdings to make room. That can create short-term selling pressure.
We have seen this before. Strong markets often attract new issuance. Companies raise money when investor appetite is high. That new supply can temporarily weigh on the stocks that had been leading the market. It is a natural part of the cycle.
Importantly, the underpinnings of the economy remain solid. Job creation remains healthy. Inflation has cooled meaningfully from the highs of the last few years and is not running away. Corporate earnings remain generally strong. Consumers and businesses continue to spend. Credit conditions are not flashing broad distress. None of that suggests a major economic breakdown.
That said, we should expect more volatility. We are heading toward a midterm election later this year, and markets often become more sensitive to headlines as investors think about taxes, regulation, government spending, energy policy, and the direction of the economy. Political uncertainty can create additional air pockets even when the long-term market trend remains positive.
Our view is that the current pullback is more likely a reset than the start of a major bear market. We continue to believe the market can rally over the next several years. The artificial intelligence buildout is real. The demand for power, data centers, semiconductors, cloud infrastructure, software, automation, and productivity tools remains very strong. At the same time, we expect leadership to rotate. Some of the stocks that ran the hardest may need time to cool off, while other areas such as Health Care, Industrials, Utilities, Financials, and select value stocks may begin to participate more.
The key is not to overreact. Our job is not to avoid every short-term pullback. Our job is to stay focused on the long-term opportunity, own strong businesses, manage risk, and use volatility to improve portfolios where we can. To this end, our focus is on finding stocks that are growing more attractive in price as the selloff continue
In short, the market needed a breather. The current air pocket is uncomfortable, but not surprising. We remain constructive on the longer-term outlook and continue to believe the next several years will reward patient investors who stay disciplined.
Sincerely,
Kessler Investment Group, LLC
All information in this presentation is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. All economic performance data is historical and not indicative of future results. The market indices discussed are unmanaged. Investors cannot invest in unmanaged indices. Certain statements contained within are forward looking statements including, but not limited to, statements that are predictions of or indicate future events, trends, plans or objectives. Undue reliance should not be placed on such statements because, by their nature, they are subject to known and unknown risks and uncertainties. Please consult your adviser for further information.
Opinions shared in this presentation are not intended to provide specific advice and should not be construed as recommendations for any individual. Please remember that investment decisions should be based on an individual’s goals, time horizon, and tolerance for risk.