Weekly market guide
Review the latest portfolio strategy commentary from Mike Gibbs, managing director of Equity Portfolio and Technical Strategy.
Short-Term Summary:
The S&P 500 has pulled in ~4% over the past couple of weeks, digesting the sharp 11% rally in 11 days (from the lows) experienced in late March. However, declining volume has lacked real selling conviction in the pullback. For example, Monday’s -1.7% drawdown only came on 63% declining volume. What has occurred beneath the surface is a decisively defensive posture at the sector level. Areas such as Utilities and Consumer Staples have reached overbought status in the short-term, while the average Consumer Discretionary and Technology stock has come under pressure. Positively, credit spreads have narrowed considerably toward prior lows- supportive of equity market trends.
The S&P 500 is attempting to hold support at the ~4400 level, and we would not be surprised for rotation to occur beneath the surface. While the more defensive areas are overbought, the more cyclical and technology-oriented areas are oversold enough for a bounce. A potential catalyst could be bond yields. The US 10-year Treasury yield has risen considerably in recent weeks and is approaching 40-year downtrend resistance at ~2.85%. Pre-pandemic highs are also nearby in the 3.0-3.25% area. Technically, it is unlikely that bond yields slice through these levels without at least some pause. We have not seen bond yields begin to consolidate yet; but if they do, it is likely to provide some relief to the cyclical areas and technology (market’s largest weighting).
Earnings season will also be a key influence on performance over the coming weeks. Q1 earnings season unofficially kicked off yesterday with a slew of Financials. So far, 73% of companies are beating earnings by 1.9%. It will be interesting to hear from companies on inflationary pressures, margin impacts, and their outlook moving forward as earnings season progresses. Early indications suggest the economic re-opening is moving ahead of expectations as the quarter ended. This may ultimately leave a low bar set for companies in the more cyclical industries to provide upside (we’ll see).
Overall, we expect the market to remain choppy as investors continue gaining information on the Russia/Ukraine war, inflation, and the Fed’s rate hike cycle. That said, economic growth and earnings trends remain healthy in our view. We believe inflation could be at or near a peak in y/y numbers, and if it can moderate over the course of the year (our base case view) along with a de-escalation in the Russia/Ukraine war, it may ease pressure on the Fed’s path later in the year. So we expect volatility in the shorter-term, but believe equities can advance toward prior highs by year-end. As such, we would use weakness in favored stocks as opportunity.
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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.
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