Weekly Market Guide
Review the latest portfolio strategy commentary from Mike Gibbs, managing director of Equity Portfolio & Technical Strategy.
Short-Term Summary:
The legislative agenda is heating up with government funding expiring at midnight Thursday in order to avoid a “government shutdown.” US Treasury Secretary Janet Yellen also estimates that the debt ceiling will need to be raised by October 18th- less than 3 weeks away. We have found that often these discussions need to fall apart in order to come together. So while the brinkmanship can lead to headline volatility in the process, a bill is probably passed by the deadline. And even if a “government shutdown” occurs, it is likely to be brief. Moreover, the debt ceiling will ultimately be raised.
Technically, the headline noise has contributed to some of the market’s volatility lately. The S&P 500 bounced from oversold levels but has been unable to get back above its 50-day moving average (now acting as resistance). The lower high increases the odds that the current pullback/consolidation phase has more to go. Last Monday’s low of ~4305 is the first level to watch, followed by horizontal support at 4233-4250 which coincides with the 65-day low- often a good area of technical support in normal pullback periods unless there is something more problematic beneath the surface. This 4233 level is also just above the upward-trending 200 DMA (4132). We believe the current pullback is unlikely to push below this (4132 is 9% from recent highs) unless the narrative materially changes.
Through the market’s volatility over the past week, there has been a pro-cyclical tone to underlying performance as the yield curve has steepened and credit spreads narrowed to new lows. In the aftermath of last Wednesday’s FOMC meeting, the US 10-year Treasury yield broke above the ~1.40% range that has capped it for the past few months. Technically, this breakout implies a move to ~1.63%, though it is testing longer-term resistance at ~1.55% currently. Our view on the economic backdrop supports a grind higher in bond yields over the next 6-12 months, and this should support relative performance of the “average S&P 500 stock” (fairly strong correlation between the equally-weighted S&P 500 index and US 10 year Treasury yield over the past year). This increased cyclicality in the market plays into our diversified, but pro-cyclical approach to sector positioning- allocating a healthy amount to tech-oriented stocks, but building exposure to areas like Energy, Financials, Industrials, select Consumer Discretionary as the momentum builds (and underweight the more defensive, interest-sensitive sectors).
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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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