Weekly Market Guide
Review the latest portfolio strategy commentary from Mike Gibbs, managing director of Equity Portfolio & Technical Strategy.
Short-Term Summary:
The aftermath of the FOMC announcement since last Wednesday (6/16) has seen the yield curve narrow to 1.23% (as short-term rates moved up, and longer-term rates moved down). The yield curve can often be used as a gauge of economic expectations, so the narrowing has stoked some concerns about the health of the recovery. We believe that is a misinterpretation, with our view supported by a narrowing in credit spreads to multi-year lows. There has been a 90% inverse correlation between credit spreads and the yield curve over the past year, so it has been unusual for them to both move in the same direction (i.e. both lower over the past week). Additionally, some of the more defensive, interest-sensitive areas such as Consumer Staples and Utilities both pushed to new relative lows (positive indication for market trends). We view the economic recovery on solid footing, and ultimately believe long-term rates will grind higher as the recovery transpires. So broadly, we view still low rates and lower credit spreads as supportive of equity markets. The aftermath has been felt more at the individual sector and stock level. And while it is difficult to determine how long this will play out in the short term, we would be using the pullbacks in certain areas as an opportunity to accumulate for a 6-12 month time horizon.
The S&P 500 was able to hold support at its 50-day moving average over the past week and bounce to new all- time highs today. This trend has largely been the case since early November positive vaccine news. However, the breakout is occurring with less than half of stocks above their 50 DMA- reflecting the still very rotational market playing out beneath the surface. The banks were the biggest victim of the yield curve narrowing, and we recommend accumulating the pullback. Close to 0% of bank stocks are above their 10, 20, or 50 DMA but 100% remain above their 200 DMA- reflecting oversold short term conditions within a solid intermediate term backdrop. Additionally, the Fed releases results of both the Dodd-Frank Act stress test (DFAST) and Capital Analysis and Review (CCAR) today, which could act as a catalyst for the group- as capital return announcements are likely to follow in our view, which could be substantial. Sector rotation over the past week has also put added pressure on the relative performance of Value (vs Growth). Value’s relative strength uptrend is being tested, but the group is oversold enough in the short term for a bounce in our view. 10-day relative performance for the group has declined to a similar degree witnessed in January and April, in which the uptrend held and relative strength improved. We still have a bias for Value to maintain leadership- supported by strong fundamental momentum and a historically cheap relative valuation- and would use the pullback as an opportunity.
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