Tanks for the Memory

Since the middle of May, the overall stock market has been relatively calm, but there have been several pockets of turbulence below the surface. The market shot higher beginning in early April. It rallied steeply through the first half of the second quarter, then went flat through the second half. From March 30, 2026, through May 14, the S&P 500 Index (SPX) rallied a little more than 18%; it’s up a bit less than 1% since that mid-May high. The NASDAQ Composite Index (COMP) gained 28% through the first half of the quarter, but it ended last week about 1.5% below its May 14 high. Meanwhile, rip currents in pockets of the market including the Magnificent 7 stocks and stocks of software and semiconductor companies, have been anything but calm.

Symptomatic of the overall market’s calm is the CBOE Volatility Index (VIX). The index is a measure of the market’s expectation for future (next 90 days) volatility. As a frame of reference, VIX spent nearly all of the second half of 2025 between 15 and 20 with two brief spikes into the mid-20s. Volatility increased in March as the war progressed, with VIX topping out just above 30 in late March. That was easily its highest reading since the Liberation Day market sell-off 15 months ago. Then, as the “peace trade” rallied the market, VIX declined. It spent all of May and most of June back below 20. It ended last week at 15.03, its lowest level since very early January. That’s not just calm, it’s almost comatose. VXN is a similar volatility index for the NASDAQ 100, an index of the 100 largest non-financial stocks on the NASDAQ. The top 10 component stocks are all tech stocks, including the Magnificent 7. Symptomatic of the roil in many of those names, VXN recently rose to levels near its late March peak and ended last week well above its early January level.

Following the holiday weekend, the market had its own fireworks early last week. The averages rocketed higher on Monday, but news of the resumption of missile strikes in Iran saw them give back the early gains and more over the next two sessions. Then, not too surprisingly, following President Trump’s comments on Wednesday that Iran was seeking a deal to end hostilities, the peace trade once again dominated market activity, and both SPX and COMP rallied back to gains for the week over the final two sessions. For the week, SPX gained 1.23% and COMP added 1.74%.

The strongest of the U.S. equity sectors last week was energy. Again, not too surprisingly, the ups and downs in the sector have pretty much parallelled those of the price of crude oil. As West Texas Intermediate (WTI) crude oil futures  rallied from below $70 per barrel in late February to near $113 per barrel in early April, the S&P Energy Select Sector Index (XLE) broke out over multi-year highs, peaking near $63 as the price of crude topped out. Over the next three months, as hopes for increasing tanker traffic in the Strait of Hormuz brightened, WTI trended lower. By the holiday weekend, WTI had fallen back below $69 per barrel, and XLE had fallen back below pre-war levels. Last week, hostilities in and around the strait inspired a rally in WTI to over $75 by midweek, before ending the week at $71.51 per barrel. XLE was up as much as 4.5% midweek and ended the week with a 3.5% gain.

One aspect of the energy trade that has caught the attention of traders recently is the “crack spread.” It’s the price difference between the cost of crude oil and the prices of the refined products (gasoline, diesel, jet fuel, etc.) that can be produced from it. That spread spiked higher when the war began, initially peaking in late March. It hit a slightly higher high in mid-May even as the price of WTI trended lower. The spread ended last week at an even higher high. The fact that the crack spread has not only held its early-war gains, but also grew to an even larger spread, has fueled strength in the stocks of companies that derive a large percentage of their revenues from refining.

Only two other U.S. equity sectors produced significant gains last week. The S&P Technology Select Sector Index (XLK) jumped 2.87% thanks to gains of 8% to 11% in several of the sector’s largest component stocks (Advanced Micro Devices, Broadcom, Cisco Systems and NVIDIA). The S&P Select Communication Services Index (XLC), in which its largest component stock is META Platforms (META), gained almost 2% last week. META gained nearly 15% for the week. Six of the other eight sectors had losses for the week, with healthcare (-1.77%) and basic materials (-2.15%) bring up the rear.

One factor that weighed on some of the sectors in recent weeks, and which may impact more sectors if it persists, is the recent increase in interest rates as measured by the yield on 10-year Treasury notes. That yield initially broke out above the 4.40% level in May as signs of rekindling inflation became evident. It briefly traded above 4.60% before drifting lower. Think of it as the peace trade for bonds. In late June, the yield was back testing the 4.40% breakout level. Since the end of June, it has risen from 4.38% to 4.57%. If that trend continues it will become more and more of a weight on the stock market. And there’s a growing list of stimuli that suggests that trend is likely to continue. In addition to the massive U.S. debt and continuing budget deficits, many major country central banks have been increasing their benchmark interest rates. More recently, the odds of a hike in our own Federal Reserve (Fed) benchmark rate have also increased. As the last two years have proven, Fed reductions in its target overnight lending rate do not necessarily cause long-term rates to decline. The 10-year yield stood at 3.60% when the Fed began its rate-cutting cycle in September 2024. What might happen to long-term rates if the Fed hikes between now and year-end?

An area of the market that has been especially volatile in recent months is the stocks of companies in the computer memory chip business. Manufacturers of dynamic random access memory products, or DRAM, have seen some spectacular rallies as demand for the chips from data centers has exploded. The South Korean stock market has been on a tear this year driven in large part by the strong performance of a couple of that country’s DRAM producers. That market got hammered last Tuesday as the DRAM stocks tanked. U.S. memory producers also suffered. Micron Technology, Sandisk, Seagate Technology and Western Digital, all of which enjoyed steep second quarter rallies, have given back big chunks of their gains in the last two weeks. By far, the largest of those four is Micron, with a market capitalization greater than the other three combined. Even with a late week bounce, Micron is down about 20% from its late June high. Not to worry, net of the recent loss, the stock is still up 243% year-to-date.

The Roundhill Memory Fund (ticker symbol “DRAM,” catchy!), a fund of 25 “memory company” stocks, which has only been available for trading for a little over three months, began trading in early April around $27. The rush of buying in memory chip stocks in recent months drove that fund’s price to more than $80 by late June. In the three weeks since then, DRAM has tanked about 25%. Since the beginning of May, DRAM has had six daily price swings of more than 10%, three up, three down. A couple of the popular indices of the overall semiconductor subsector (SMH and SOXX) have been similarly volatile, except that a big day for them is in the plus or minus 5% range.

The second-quarter earnings season will kick off this week with reports from several of the big money center banks. Interspersed among the earnings announcements will be several important economic reports. Tuesday brings the Consumer Price Index (CPI) update with the Producer Price Index (PPI) and the Fed Beige Book on Wednesday. We’ll get the initial unemployment claims number on Thursday, as usual, along with an update on retail sales.

Links to previously published commentaries can be found at benjaminfedwards.com/Library/Market Commentary

5742413 EXP. 07/31/2029