Review the latest portfolio strategy commentary from Mike Gibbs, managing director of Equity Portfolio & Technical Strategy.
After trading down to the 200-DMA, U.S. equities have moved higher this week. However, we believe this back and forth trading that we have seen over the last couple weeks, is normal and likely to persist as we believe the S&P 500 remains in a consolidation phase as the rate of ascent slows and digests the strong move higher from the March lows.
In the near-term, the percentage of stocks trading above their 10-DMA has not reached overbought territory suggesting that there could be some further upside to this recent run. However, we generally believe the market is likely to trade in a range of +5% to -5%, or 3,200-3,250 on the upper bound to 2,950-3,000 on the lower bound assuming the consolidation is “normal”. If the market backdrop, however, becomes more challenging in regards to COVID-19 cases, US/China tensions becoming the central influence, or a stall in the economic recovery, the draw down could be more severe towards to the 2736-2850 range, or 8%-12% lower than current levels. We continue to have a positive bias, and would use bouts of volatility as buying opportunities.
Despite the uncertainties, we continue to find signs of optimism the recovery is well underway, even if there is still a long road until full recovery.
- The US jobs market continues to show some improvement (which should be positive for sectors levered to consumption such as Consumer Discretionary (recently upgraded to Overweight)) as the unemployment rate moved lower to 11.1%, however, it is still a far cry from the under 4% seen prior to the pandemic.
- US ISM Manufacturing returned to expansionary territory. Historically, rising ISM Manufacturing readings have held a strong correlation to rising 10-year yields, and improving relative performance in the small-caps. However, there seems to be a disconnect between the improvement in the ISM Manufacturing data and the relative performance of small cap and yields, which did not respond accordingly to the recent data. We would continue to monitor this as it could present a “catch-up” trade opportunity for small-caps.
- Copper prices continue to move higher, which historically has been seen as a good indicator for the health of the global macro environment, and tends to have a strong correlation to Chinese equities. A continued move higher in copper could lead to continued improvement in the relative performance of Chinese equities, along with Emerging Markets.
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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.
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.
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