Weekly market guide
Review the latest portfolio strategy commentary from Mike Gibbs, managing director of Equity Portfolio and Technical Strategy.
Short-Term Summary:
With Western countries and organizations ratcheting up Russian sanctions, Russia’s equity market has fallen 75% in just two weeks. Also in response to a 40% depreciation in the Russian ruble, Russia’s central bank hiked interest rates up to 20%. Despite the enormous hit to the Russian economy, we see limited financial contagion with Russia just 3% of global GDP. The major impact so far has been on commodity prices, of which Russia is a large global exporter (particularly to Europe). WTI crude oil is up to $110/barrel (+22% in two weeks), and a broad index of commodities is up over 10%. The degree of escalation and duration of the Russia/Ukraine war remain very uncertain (and fluid). But our sense is that it may get worse before it gets better. The higher input costs only complicate the Fed’s situation as it embarks on a rate hike cycle to stave off inflation, increasing the potential for a policy mistake.
However, we still believe inflation can moderate over the course of the year and the Fed can successfully navigate the current environment. The Russia/Ukraine war net/net may result in a more gradual pace of tightening, and the market-implied odds of rate hikes are down to 5-6 expected this year from 6-7 just two weeks ago. Additionally, our base case expectation remains for above-trend economic growth this year (recession risk is low), solid earnings growth (low double digits), and valuation has become much more compelling (particularly vs. low bond yields). To be sure, it could take months for the current situation to play out. And when uncertainty is elevated, investors can overshoot to the downside. Still, we believe equity markets can get back to highs by year-end and note that geopolitical events are often good buying opportunities for long-term investors. For example, the 1962 Cuban Missile Crisis (Russian nuclear missiles just 90 miles off US shores) resulted in a 3-month 22% decline but equities were back to highs within 12 months. The 1990 Gulf War (accompanied by a US recession) resulted in a 20% 3-month decline, but equities put in a new price high within just 4 months.
At the sector level, we recommended some repositioning in our March report (here), given our view that this corrective phase will drag on in duration over the near-term but the market will gain over the next 12 months. We maintain cyclical exposure to benefit from higher commodity prices and the anticipation of macro expansion with our overweight view for Energy, Financials, and Industrials. We add some defensive exposure for the near term by upgrading Health Care to overweight. More significant downside pressure on discretionary income influences us to equal weight the Consumer Discretionary space. Falling earnings revision trends and weak relative technical trends cause us to move to an equal-weight rating in the Communications Services sector.
IMPORTANT INVESTOR DISCLOSURES
This material is being provided for informational purposes only. Expressions of opinion are provided as of the date above and subject to change. Any information should not be deemed a recommendation to buy, hold or sell any security. Certain information has been obtained from third-party sources we consider reliable, but we do not guarantee that such information is accurate or complete. This report is not a complete description of the securities, markets, or developments referred to in this material and does not include all available data necessary for making an investment decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct.
Links to third-party websites are being provided for informational purposes only. Raymond James is not affiliated with and does not endorse, authorize, or sponsor any of the listed websites or their respective sponsors. Raymond James is not responsible for the content of any third-party website or the collection or use of information regarding any websites users and/or members.
This report is provided to clients of Raymond James only for your personal, noncommercial use. Except as expressly authorized by Raymond James, you may not copy, reproduce, transmit, sell, display, distribute, publish, broadcast, circulate, modify, disseminate, or commercially exploit the information contained in this report, in printed, electronic, or any other form, in any manner, without the prior express written consent of Raymond James. You also agree not to use the information provided in this report for any unlawful purpose. This report and its contents are the property of Raymond James and are protected by applicable copyright, trade secret, or other intellectual property laws (of the United States and other countries). United States law, 17 U.S.C. Sec. 501 et seq, provides for civil and criminal penalties for copyright infringement. No copyright claimed in incorporated U.S. government works.
Index Definitions
The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market.
The Dow Jones Industrial Average (DJIA) is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange (NYSE) and the NASDAQ.
The NASDAQ Composite is a stock market index of the common stocks and similar securities listed on the NASDAQ stock market.
The MSCI World All Cap Index captures large, mid, small and micro-cap representation across 23 Developed Markets (DM) countries. With 11,732 constituents, the index is comprehensive, covering approximately 99% of the free float-adjusted market capitalization in each country.
MSCI EAFE (Europe, Australasia, and Far East) is a free float-adjusted market capitalization index that is designed to measure developed market equity performance, excluding the United States & Canada. The EAFE consists of the country indices of 21 developed nations.
MSCI Emerging Markets Index is designed to measure equity market performance in 23 emerging market countries. The index’s three largest industries are materials, energy, and banks.
Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor’s results will vary. Past performance does not guarantee future results. Future investment performance cannot be guaranteed, investment yields will fluctuate with market conditions.
International Disclosures
For clients in the United Kingdom:
For clients of Raymond James Financial International Limited (RJFI): This document and any investment to which this document relates is intended for the sole use of the persons to whom it is addressed, being persons who are Eligible Counterparties or Professional Clients as described in the FCA rules or persons described in Articles 19(5) (Investment professionals) or 49(2) (high net worth companies, unincorporated associations, etc.) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (as amended)or any other person to whom this promotion may lawfully be directed. It is not intended to be distributed or passed on, directly or indirectly, to any other class of persons and may not be relied upon by such persons and is, therefore, not intended for private individuals or those who would be classified as Retail Clients.
For clients of Raymond James Investment Services, Ltd.: This document is for the use of professional investment advisers and managers and is not intended for use by clients.
For clients in France:
This document and any investment to which this document relates is intended for the sole use of the persons to whom it is addressed, being persons who are Eligible Counterparties or Professional Clients as described in “Code Monetaire et Financier” and Reglement General de l’Autorite des marches Financiers. It is not intended to be distributed or passed on, directly or indirectly, to any other class of persons and may not be relied upon by such persons and is, therefore, not intended for private individuals or those who would be classified as Retail Clients.
For clients of Raymond James Euro Equities: Raymond James Euro Equities is authorised and regulated by the Autorite de Controle Prudentiel et de Resolution and the Autorite des Marches Financiers.
For institutional clients in the European Economic rea (EE ) outside of the United Kingdom:
This document (and any attachments or exhibits hereto) is intended only for EEA institutional clients or others to whom it may lawfully be submitted.
For Canadian clients:
This document is not prepared subject to Canadian disclosure requirements, unless a Canadian has contributed to the content of the document. In the case where there is Canadian contribution, the document meets all applicable IIROC disclosure requirements.
Broker Dealer Disclosures
Securities are: NOT Deposits • NOT Insured by FDIC or any other government agency • NOT GUARANTEED by the bank • Subject to risk and may lose value
Raymond James & Associates, Inc., member New York Stock Exchange/SIPC. Raymond James Financial Services, Inc., member FINRA/SIPC. Raymond James® is a registered trademark of Raymond James Financial, Inc.