Weekly Market Guide
Review the latest portfolio strategy commentary from Mike Gibbs, managing director of Equity Portfolio & Technical Strategy.
Short-Term Summary:
Interest rate movements continue to dominate market rotation as the S&P 500 trades sideways near all-time highs. The FOMC meeting yesterday provided an update on the Fed’s monetary policy plans, which showed a shift up in the timeline for eventual rate hikes- the dot plot now reflects two hikes in 2023 (with seven members seeing a hike in 2022). The Fed also increased its 2021 PCE inflation expectation to 3.4% (from 2.4%), although 2022 estimated inflation was still just 2.1% (from 2.0%). That said, the Fed increased its 2021 real GDP estimate to 7% from 6.5%, and maintained its $120B monthly asset purchases. In our view, the upshot is the Fed will remain accommodative even after liftoff (which is likely more than a year out), and raising rates will come because the economy is strong. The risk of overtightening remains minimal.
The US 10 year Treasury yield ticked higher to 1.56% following the announcement (from 1.50%), but is trading lower from technical resistance at its 50-day moving average (1.59%) today. We ultimately believe rates will grind higher as the year progresses, and view its consolidation over the past few months as normal and healthy. Still low interest rates are a tailwind for equities broadly. The S&P 500 equity risk premium is 2.4% currently, which is the lower-end of the post-credit crisis era but still well above the historical average (since 1960) of 0.6%. Another way of looking at this relationship between stocks and bonds is the S&P 500 dividend yield (1.4%) vs. US 10 year Treasury yield (1.5%). This slight advantage for bond yields is still very high (and unusual) historically. The only timeframes on record with higher dividend yields (vs bonds) were the 2008 credit crisis, 2012 EU debt crisis, 2015/16 manufacturing recession, and 2020 pandemic. All of these periods presented good long-term buying opportunities, and (interestingly) as the metric moved back in favor of bond yields (as could be occurring now), equity market returns remained solid. Pullbacks are bound to occur and the rate of ascent is due to moderate in year two of a bull market, but we expect positive intermediate term trends to continue.
As (and if) this rotational market continues to transpire, we recommend using pullbacks at the sector and stock level as opportunities. We thus recommend using the current digestion phase in rates as an opportunity to accumulate Value, as well as the banks. For example, the banks are oversold in the short term with 0% of stocks above their 10- and 20-day moving averages, though this is occurring within a strong intermediate term uptrend (100% of banks are above their 200 DMA).
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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.
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.
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