Macro Dashes June 2025: Expect More Downward Volatility Soon
International investors are trickling out of U.S. assets, a debt crunch would add a bearish catalyst.
Macro Dashes compliments our Quarterly Outlook & Game Plan. My goal here is to see if the market is generally behaving the way we expected and whether we need to make any adjustments to our game plan.
Understanding The Stock Market Landscape
Almost 4 years ago, I discussed a new phenomena in the markets. Younger investors, who trade a lot, are whipping stock prices around through sheer force of leverage.
Millennials Are The Market's Most Important Money
After watching for a while, it is really fascinating to see how it works in practice. It goes something like this:
Hedge funds or other bigger bigger investors take a position that they think they can influence the price on, usually knowing from quant analysis what it will take to move price (up or down).
Then, they feed trading rooms, on Discord and via websites, a trade to make with an accompanying narrative to repeat over and over on social media, in blogs, and to the extent they can, on investing websites.
Young investors pick up the trade, use leverage and then start chanting to move price.
Once prices starts to move, momentum begets momentum, especially with more leverage added as people on the other side of the trade exit.
We have seen this not only in FOMO rallies creating extreme valuations in some stocks, but also in the ability of shorts who can overwhelm the float on micro cap stocks, sometimes for a long time.
As I said in chat today, there are only three real ways to play this.
Join the rooms and pile on, knowing what you are doing is unethical, but that you're making money that will help you rationalize the behavior. If I did stuff like that, as a registered guy, I'd get charged under normal circumstances (maybe not by this administration, which has defanged the SEC for their own purposes it would seem).
Use the extreme pricing moves to find pivot points. Generally, we want to wait for short attacks on SMICRO Caps we like to exhaust themselves, avoiding the middle of the market and not catching falling knives, and buy great assets on the cheap. We can also short shit stocks that are dramatically overvalued, but that is much harder as short positions require maintenance or working against the time value of options.
Buy boring stocks that traders ignore when you can get them cheap enough to justify the single stock risk, usually, because you can collect a dividend and/or generate option premium income.
There isn't much else to do on stocks anymore. Most stocks in the S&P 500 Index (SPX) trail the index in total return. In 2023 and 2024, only 27% and 28% of stocks beat the S&P 500. That's low, but not very low.
Between 1998 and 2017, the distribution of S&P 500 stock performance showed that approximately 30% of stocks decreased in value, while 45% increased in value but remained below the market average. Only about 20% of stocks delivered solid returns between 6% and 13% annually, with merely 5% achieving outlier status with returns exceeding 13% per year.
So, when I say focus on great stocks or stocks you think can be great, this is what I mean. There's very little point taking single stock risk unless you can improve somehow versus the index:
higher outright return with similar risk (a couple dozen stocks in the S&P 500, but generally more opportunities in small and midcaps).
higher income and similar total return with similar risk (dividend growth stocks, aka, the boring stocks).
similar total return with lower risk (there's only a few, i.e. Berkshire Hathaway (BRK.B).
Outside of those stock opportunities, good use of ETFs that invest in secular growth or in cyclical opportunities, using a slow handed trading style, is the where most folks should have a good slug of money.
Weirdly, people still buy stocks that can't beat the market and take as much or more risk. And half the folks index which means they have no clue what they are paying for and don't understand the concept of price in measuring risk.
I don't want you to be one "those people." Someday, I'll write "Forget 80% Of What You Think You Know About Investing" (it's outlined), but for now, focus on:
Smart asset allocation.
Great and potentially great stocks.
Risk management and income generation.
Avoiding the middle of the market.
If you just do those things, you'll beat the index with less risk.
A Big Rebound Rally In May
The rebound rally from the February/March stock market correction was just as fast back up as it was down. This is extremely unusual.
Normally, sharp contractions follow a choppy period, this one did, then take some time to move into a new bull market, this one didn't. Broadly speaking, a rebound this fast is usually a sign a of an over exuberant stock market.
BATS:SPY Chart Image by Kirk_Spano
The hasn’t been driven by institutional conviction or central bank liquidity — which are what we look for. Rather, the buyers have been retail investors buying and every bigger trickling out slowly, using clever algos, so as not to create a drop. In other words, it was a FOMO trade.
Volume has been low and liquidity remains constrained. If you’re chasing the market higher here, you’re likely late. The disciplined approach? Sell into this market if you have stocks trading near the high-end of their 5-year P/E ratio and/or weekly RSI around 70 or higher, especially if it's a 2nd or 3rd run to those levels in recent quarters. Covered calls on long-term positions.
When a correction comes, it can be as sharp as the February/March correction. And, it probably goes deeper down if history is a guide.
Volatility A Clue
Watching volatility is a clue to market extremes. It is important to know that VIX is only accurate to about a month or two out based on the options being traded.
In short, when volatility is very high, hold your breath, the correction is coming to an end in the next month or two.
When volatility is very low, batten down the hatches, the correction is starting, though it might not be in the next month or two. Why? Because markets can remain irrational until there's a shock.
When volatility is in the middle, ride the prevailing market trends.
Volatility is low, but since the election, has been setting higher lows, a bearish sign for the stock market.
S&P 500 Valuations Are High
High valuations for stocks mean two things:
Lower intermediate term to longer term returns on the S&P 500 index.
Growing risk that a financial shock or economic disappointment can trigger a correction.
The current Shiller CAPE Ratio (Cyclically Adjusted Price-to-Earnings) is over 36. That is roughly double its historical mean of 17ish. Since the Financial Crisis, which ushered in the QE era, this ratio has been a bit higher normally.
This is not a timing indicator for short-term, but rather a look at the longer term time frame expectations. A ratio this high though implies returns over the next decade about half normal on large cap stocks.
The S&P 500’s forward P/E of 21.3 (as of June 6, 2025) exceeds both its 5-year average (19.9) and 10-year average (18.3). This is high, but not egregious if earnings estimates and growth hold up.
According to FactSet Earnings Insight (bookmark this page) "the estimated (year-over-year) earnings growth rate for Q2 2025 is lower today relative to the start of the quarter. As of today, the S&P 500 is expected to report (year-over-year) earnings growth of 4.9%, compared to the estimated (year-over-year) earnings growth rate of 9.3% on March 31." - A substantial drop.
"If 4.9% is the actual growth rate for the quarter, it will mark the lowest earnings growth reported by the index since Q4 2023 (4.0%). However, it will also mark the eighth consecutive quarter of year-over-year earnings growth for the index." - A slowing earnings growth trend needs to reverse to support stocks.
What Can Trigger A Correction
I have suggested a few things can cause a correction. The most immediate is the potential for international investment into U.S. assets to slow, taking away support for rising prices.
Jamie Dimon, CEO of JP Morgan (JPM), again warned about a potential debt crisis.
“You are going to see a crack in the bond market — OK... It is going to happen.” - Jamie Dimon
Of course, I synthesized my concerns about debt here in this Editor's Pick:
A Credit Crunch Is Coming Soon
As we covered in our monthly macro call, if long duration U.S. Treasury rates rise much more, that's not just bad for bonds, it's bad for everything. We are watching the iShares 20+ Year Treasury Bond ETF (TLT) intently again.
In a world where international demand for U.S. assets was strong, we would normally see long rates hold the 5% line. We've already discussed (in the credit crunch article) the uneven international demand for U.S. Treasuries in recent auctions.
Jeffrey Gundlach has warned we could see 6-7% soon. If that happens, then TLT heads to the bottom institutional fair value gap area, i.e. bottom orange line. We are not sure which way things go, though our bias is towards rates at least scaring the market by rising past 5%.
It is expected that U.S. banks will buy more treasuries soon. U.S. Treasury Secretary Scott Bessent has indicated that Covid style easing of the SLR (Supplementary Leverage Ratio) will happen soon. That means banks Tier 1 capital requirements would fall.
In addition, Bessent has suggested that U.S. Treasuries would once again use the Covid era rule of being exempted from mark to market requirements.
The likely result is that banks buy more U.S. Treasuries. However, I am concerned that would lead to "crowding out."
"Crowding out" is when government uses up too much of the capital to service debt and the money from banks does not flow into business activities that can grow the economy.
The only solution is collect more in taxes to not need to issue so much debt, or do more quantitative easing and grow the Fed balance sheet as the lender to the U.S. Treasury.
On cue, the Fed recently announced "plans to adjust the Standing Repo Facility (SRF) to conduct a daily morning overnight SRF operation on each business day beginning Thursday, June 26, 2025."
This is what they did when the repo market broke in late summer 2019. They ended up putting nearly a trillion dollars into the financial system leading into Covid, during which they pumped in trillions.
As I've teased, "it's a facility, not QE." But, really, it's QE. We know Jerome Powell is sensitive to inflation reigniting and that is why I do not expect him to aggressively lower rates into "QE, but don't call it QE" starting in late June.
The big question is, will a "facility" and banks being pushed into Treasuries, be enough to offset the nation's debt problems if international bond buyers continue to slink away? I have my doubts, but, it is nearly impossible to time.
Another thing to watch is the Bank Of Japan which is likely to raise rates. This past week they raised their provisions for losses, which foreshadows rate hikes.
That threatens to further unwind carry trades by making borrowing in Yen less attractive. We have seen carry trades unwind before, it's typically pretty ugly.
Closing Investment Thoughts
As I opened the year with, I expect a lot of volatility this year. Even if liquidity is added to the system, it might not matter much if it is soaked up by interest on the debt and banks are constrained from lending.
Overvaluation And Uncertainty Is A Path To Correction In 2025
Expect A Roller Coaster Stock Market In 2025
The next few weeks could once again be volatile before the repo "facility" is expanded to add more liquidity. Again, will it be enough? I don't know and neither do cheerleading, narrative reciting, bulls.
I continue to be very selective in my sector and industry allocations, looking for growth at value prices, that have decent to improving momentum characteristics.
I am not particularly fond of most large caps right now as I am concerned earnings get revised downward again. Any tick up in the tariff war likely leads to that by July.
There are some good opportunities in small and mid caps due to pricing that allows investors to get parts of companies "for free" in my opinion. Very in line with Charlie Munger's thoughts on finding companies with pieces the market does not value.
The risks in small caps persist though, as traders from trading rooms continue to gang up on overwhelming the volume. Naked shorting rules enforcement mechanisms, which were delayed a year until next February, won't be of any help for a while there.
There are a handful of catalyst driven small caps that can beat the market trends and short sellers with increasing institutional interest. There aren't many, but the winners will be big. The trick is finding them. We think we have several.
I think the sweet spot is midcaps in secularly strong industries. Midcap stocks that are growing and have share price being attracted to the S&P 500 like a magnet are historically good bets. There are several dozen we find interesting.