Weekly Market Snapshot
Review the latest portfolio strategy commentary from Mike Gibbs, managing director of Equity Portfolio & Technical Strategy.
Short-Term Summary:
Yesterday’s FOMC minutes indicated that most Fed participants think it will be appropriate to begin tapering this year. This has spurred a bit of volatility in the past couple of days, and the S&P 500 has pulled back toward its 50-day moving average. This upward-trending level has acted as technical support since the positive vaccine news last November and will once again be the first key level to monitor. The Fed’s recent tapering update does not alter our positive stance on equities over the intermediate term. Tapering is not tightening, and the Fed will remain accommodative to the economic recovery in our view. Up next, investors will be listening to Fed Chair Powell’s address at Jackson Hole next week in what could be a stronger indication on the eventual timeline and composition of tapering asset purchases (currently $120B/month).
Q2 earnings season is winding down as 93% of S&P 500 stocks have reported results. 86% of companies beat on the bottom line by an aggregate 16.1% (both well above historical averages and continuing the trend of the past four quarters). Forward earnings estimates for the second half of 2021 and all of 2022 continue to trend higher. Also importantly, margin estimates are holding steady at record high levels despite the ongoing pressure of supply chain shortages. At the sector level, our takeaway from results supports our view on sector allocations- that being a balanced but pro-cyclical tilt within portfolios. We remain positive overall on the fundamental recovery and expect upside to continue. In addition, low interest rates and enormous stimulus are supporting elevated valuation multiples as this fundamental momentum takes place- providing upside to equities.
Technically, modest upward momentum continues for the S&P 500, but breadth remains narrow in the ascent. The percentage of stocks above their 200 DMA has been generally declining over the past few months and is at its lowest level since November (~75%). While this is not overly concerning (still solid and reflective of internal rotation), it does leave the broader market more susceptible to pullbacks. We also remain mindful that the largest pullback (on a closing basis) since November has been just -4.6%. Historically, bull market years see 9% pullbacks on average. With the seasonally softer period of the calendar ahead (Aug-Oct) and narrow market participation, along with key items on the agenda (i.e. taxes, infrastructure, debt ceiling, tapering), we recommend some pragmatism with new purchases. We continue to see more opportunity at the sector and stock level, and would use pullbacks as buying opportunities.
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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.
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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.
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