June featured notable sector rotation and increased equity market volatility. The S&P 500 declined 1.1%, its second-worst June since 2015. In contrast, the Dow Jones Industrial Average rose 2.5%, and the Nasdaq 100 was nearly flat, down 0.2%. The SpaceX initial public offering was a key event, rising 19% on its June 12 debut and closing up 27%, which drew capital from the broader technology sector. The artificial intelligence trade persisted but showed signs of fatigue, with information technology stocks falling 3.3% and ending a two-month rally. Weak quarterly results from major software companies prompted a rotation from large-cap technology to previously lagging sectors, particularly industrials, which gained 7.2%, and healthcare, which rose 6.5%. The reopening of the Strait of Hormuz following a U.S.-Iran interim peace agreement returned oil prices to pre-conflict levels, causing energy stocks to fall 5.1% for the month. The gold-tracking position, IAU, declined nearly 10% as the precious metal continued to underperform, largely due to Federal Reserve policy.
In June, the Federal Reserve, led by its new chairman, shifted its policy stance. The Federal Open Market Committee kept rates unchanged but signaled a more hawkish approach by removing forward guidance and prioritizing price stability. Updated projections raised median core PCE inflation for 2026 to 3.3%, up from 2.7%. Nine committee members supported at least one rate increase this year, and six favored a tightening of 50 basis points or more in 2026. U.S. Treasury markets responded with a bear flattening of the yield curve. The removal of forward guidance represents a structural change in policy communication, increasing the influence of economic data and Federal Reserve commentary on markets. June underscored the importance of sector selection and credit quality over broad index exposure, which we continue to reflect in our portfolio positioning.
The Consumer Confidence Index (Conference Board) rose slightly to 91.2 in June from a revised 90.6 in May, partly due to easing geopolitical tensions and lower gasoline prices, which provided households with some financial relief. This was reflected in a modest increase in the expectations component, up to 74.4 from 71.4, and a slight rise in big-ticket purchase intentions for the next six months. Consumers also maintained discretionary spending on dining, streaming, and personal care services. However, underlying data remain mixed. The present situation component declined to 116.4 from 119.4, indicating a less favorable view of current conditions. Labor market concerns persist, with 22.5% of respondents describing jobs as “hard to get,” the highest level since January 2021. While lower fuel costs offer short-term support for household budgets and spending confidence, the labor market remains the primary barrier to a sustained improvement in consumer sentiment. We will continue to monitor these trends as they affect the broader economic environment and our portfolio positioning.
As we close the second quarter, we want to share our perspective on the broader market environment. We remain constructive on the long-term outlook and continue to identify attractive opportunities in both equities and fixed income where fundamentals support our view. However, several technical market breadth indicators suggest that the next one to six months may bring below-average returns for major stock indexes, with the potential for a near-term correction or a period of sideways performance. While none of these signals alone warrant exiting the market, and we are not subscribers to technical analysis, these indicators highlight rising investor complacency and a growing divide between market winners and losers. In this environment, patience, selectivity, and disciplined portfolio construction are especially important. We are monitoring conditions closely, managing risk within our current positions, and are prepared to act if more attractive entry points arise.
Please see the following updates on existing positions held at the firm:
Eagle Financial Services (Ticker: EFSI)—The bank reported a constructive Q1 2026 net interest margin, expanding 2 basis points sequentially to 3.63%, as disciplined deposit pricing and the runoff of higher-cost wholesale funding continued to benefit its balance sheet repositioning. The efficiency ratio improved to 68% from 70% in the prior quarter, reflecting management’s effective cost discipline and a stronger operating earnings foundation. Credit quality remained solid, with net recoveries on the broader portfolio despite a $2 million provision build related to a closely monitored commercial relationship. This outcome highlights the conservatism of the bank’s underwriting and the strength of its collateral positions. We continue to believe the bank is pursuing an acquisition, with M&A discussions described by CEO Brandon Lorey as active and strategically disciplined.
American Exceptionalism Acquisition Corp (Ticker: AEXA)—Our special-situation pre-deal SPAC rose approximately 5% this month, closing at $11.82. We will continue to hold the position, as such moves in pre-deal SPACs are uncommon. The increase may reflect speculation about a potential deal, given that the stock is trading well above the trust’s cash levels. We continue to view these investments as an asymmetrical way to allocate capital. As a reminder, Sponsor Shares must reach $15.00 per share before vesting. Sponsor shares are the primary profit driver for SPAC Sponsors, so leadership requires a deal to achieve this price threshold.
CF Bankshares (Ticker: CFBK)—We have sold the remainder of our shares in the bank at above-book value. The bank continues to reprice its deposit base as the Federal Reserve may raise rates multiple times in the coming year. We still expect a sale, likely toward the end of 2027. If the stock declines by year-end, we will consider reestablishing our position. Currently, the bank’s profitability and book value do not justify a significant premium above book value. Accordingly, we chose to lock in gains on the position.
Fixed Income Positions (Bonds and Term Preferreds)—In recent quarters, we have allocated capital to short-dated positions (less than 5 years) with yields of at least 7% annually. Over the past month, these annualized interest rates have increased to approximately 7.5%. We continue to monitor credit quality closely and will not expose your capital to unnecessary risk or impairment. These interest rates remain attractive at current levels. We prefer to maintain our fixed income exposure on the short end of the yield curve and expect inflationary pressures to persist despite the recent decline in oil prices.
Best Regards,
Stash J. Graham