Weekly market guide
Review the latest portfolio strategy commentary from Mike Gibbs, managing director of Equity Portfolio and Technical Strategy.
Short-Term Summary:
After selling off ~18% from 3/29 to 5/20, the S&P 500 has bounced ~9% (from oversold levels) over the past two weeks with many of the most beaten-up names seeing the sharpest rallies. There have been a few positive technical developments within the bounce, such as high yield 5-year CDS spreads pulling back, a positive MACD cross supporting short-term trends, and a couple of strong readings in advancers vs. decliners. However, with the overall level of uncertainty high (regarding inflation and economic growth), we view the move as only a bounce for now until additional momentum develops. Overall, the S&P 500 remains in a downtrend, and the ~4200-4300 area looks like stout resistance.
The path ahead for inflation will ultimately be a significant influence on market movements. We believe that inflation has peaked and can moderate over the course of the year, but the degree of moderation will be a large determinant on Fed policy. Consequently, it will be a big factor on whether or not the market lows have been seen, along with the timeline for equities to rebuild themselves for renewed upside on the other side of this bear market. The degree and duration of Russian escalation remain large unknowns affecting economic growth and inflation, along with China lockdowns (which appear to be easing). Investors will remain hyper-sensitive to inflationary data points moving forward, as its trajectory results in a wide range of potential outcomes over the coming months.
Over the next twelve months, we believe that stocks will be higher than today and above our 2022 base case target of 4180 (bull case 4830). But we also expect additional weakness in the weeks and months ahead. The technical trend is broken, and summer is traditionally a little more challenging for market upside. Also, Fed tightening and balance sheet runoff, combined with uncertainty regarding inflation and the economy, raise the odds of additional weakness for equities.
With this in mind, we would use the market downdrafts as opportunities to accumulate high quality, favored stocks with a longer-term perspective- increasing conviction as the inflation picture and/or market momentum improves. Investors can also use the relief rallies as opportunities to lighten exposure as needed for repositioning. Watching how certain stocks and sectors trade during the bounces will help formulate positioning for the inevitable elongated rally that stocks will see on the other side of the current weak trend, regardless of where or when the market finds the ultimate low.
Also Highlighted in This Week’s Report:
- High Yield Credit Default Swaps
- Advancers vs. Decliners
- Industrials
- Energy
- S&P 500 YTD Returns Based on Dividend Yield
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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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