Weekly market guide
Review the latest portfolio strategy commentary from Mike Gibbs, managing director of Equity Portfolio and Technical Strategy.
Short-Term Summary:
After a waterfall selloff to begin the week that reached excessive levels, equity markets have since shown some signs of stabilization. That said, volatility is likely to remain elevated in the short-term, and the market may take months to fully adjust to the Fed’s rate hike cycle. For these reasons, we recommend investors be pragmatic and pick their points in buying stocks without feeling that they have to pile in on any one day.
Just as ultra-lenient monetary policy provided a sentiment backstop through negative headlines over the past year, it is logical for negative headlines to come with more volatility as the Fed becomes hawkish. The Fed provided a clear signal that rate liftoff is expected to commence in March, and that the pace of rate hikes thereafter will depend on inflationary trends. Our base case remains for inflation to moderate over the course of the year as Covid concerns subside and the global reopening progresses- allowing supply to catch up with demand. And moderating inflation should ease pressure on the Fed to raise rates too rapidly. Nonetheless, the trajectory is likely to be choppy, and uncertainty can result in volatile periods (such as now). With overall conditions likely to remain healthy and the current bull market to continue, we recommend long-term investors use pullbacks as opportunity to accumulate favored equities- increasing conviction as/if positive data points on the path of inflation grow and market momentum builds.
Technology companies have borne the brunt of the market weakness this year, as higher interest rates put pressure on high valuations. And given the sector’s size and status within the market, we have been looking to earnings as a significant influence on market trends in the short-term. It is still early, but initial indications have been supportive. IT demand trends remain strong with increasing order backlog (and visibility). Valuation remains elevated, and we are not yet convinced the group is ready to regain market leadership; but it is hard to get too negative with fundamental trends so solid.
Technically, we are watching to see if the S&P 500 can hold above Monday’s intraday low (4222). If it doesn’t, the pullback may have more to go. Regardless of the near-term direction, the intermediate-term technical trend is damaged. Even if the low is near (or been seen), we expect back-and-forth trading as the market forms a base. With uncertainty regarding inflation, economic slowing (albeit still healthy growth), and a Fed tightening cycle upon us, we may be in for several months of volatility before the market can resume an uptrend.
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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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