Weekly market guide
Review the latest portfolio strategy commentary from Mike Gibbs, managing director of Equity Portfolio and Technical Strategy.
Short-Term Summary:
Equities have consolidated some of their recent gains over the past week (down ~4% following the two-month 17% rally). Investors will be closely listening to Fed Chair Powell’s speech at Jackson Hole tomorrow for indications on the path of Fed policy ahead. Fed members have been talking hawkish in the aftermath of the market’s positive reaction to the July CPI report, reminding that inflation remains high and that the Fed is intent on bringing it under control. But it might take hearing the message from Powell to have more weight. It will be paramount for the Fed and equity markets to see inflation improve in a clear and convincing way over the coming months- its path forward will be a large determinant on how long this tightening cycle transpires.
Because inflation is so high and the Fed is likely to increase the fed funds rate by an additional 100bps by year end, we do not expect a sharp V-bottom recovery out of this bear market. It is normal to have back-and-forth trading as equities rebuild themselves for renewed upside. The last two bear markets (2018 and 2020) saw sharp recoveries from the lows, but inflation was low then and the Fed was able to ease policy- we do not have that luxury right now. Additionally, Fed tightening will act with a lag on the economy, as lending tightens and demand softens. This is likely to weigh on corporate fundamentals over the next year, and we believe current earnings estimates need to be revised lower. Market concerns may shift from inflation toward economic and fundamental growth. The question is how much negative news is priced in because we believe the market will bottom before the economy and fundamentals (stocks discount the future).
Valuation is much more reasonable (and supportive) throughout the equity market, particularly if interest rates continue to subside their sharp ascent from the first half of the year. We believe that inflation and interest rates have likely peaked, but their movements moving forward will be a large influence on investor confidence toward the outlook (and, in turn, valuation multiples). We also lean on the technical backdrop for clues on market movements. The underlying strength and participation in the recent rally bodes well for the overall market trend- increasing the odds that the lows are in. While we believe the worst of this bear market may be behind us, we do not believe that equities are set for unbridled enthusiasm to the upside. We expect setbacks and normal back-and-forth trading ahead, as investors gain more clarity on the path of inflation within a tightening cycle. With this in mind, we would refrain from chasing the rallies and use pullbacks in favored stocks as opportunity for the next bull market.
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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.
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