Weekly Market Guide - Butler Financial, LTD


Weekly Market Guide

Review the latest portfolio strategy commentary from Mike Gibbs, managing director of Equity Portfolio & Technical Strategy.

Short-Term Summary

Since the S&P 500 reached pre-Covid highs about two weeks ago, performance has been dominated by Technology stocks as the sector’s strong fundamental and technical trends has only intensified. For example, the Tech sector is up ~8% over the past two weeks while the average S&P 500 stock is roughly flat (up 0.6%) and the small cap index is actually ~1% lower. This internal consolidation has created attractive entry points within various sectors, despite the S&P 500 index as a whole looking extended- such is the nature of the equity market in this unique technology-dominated environment.

We continue to favor Technology and believe the sector’s fundamental momentum due to the accelerated trajectory into the digital economy (as a result of the pandemic) remains attractive. However, we would not be surprised to see rotation occur in the short term as the other areas “catch up.” The catalyst could be interest rates, which are ticking slightly higher and are currently looking to move to their highest levels since June at 0.73%. There has been a 90% correlation between relative performance of the equal weight S&P 500 index and the US 10 year yield year-to-date, so a continued advance is likely to see the average stock gain some strength. For reference, the average S&P 500 stock is still below early June highs (when the US 10 year yield briefly spiked to 0.91%) while the Technology sector and S&P 500 are up 15% and 10% since then, respectively.

For the S&P 500 as a whole, a broadening out of market participation would be a positive for internal technical momentum and support our continued positive view on the equity markets. Despite the S&P 500 at all-time highs and trading at a trailing 12 month P/E of 23.75x, we do not view valuation as extreme when considering the unprecedented stimulus, low inflation, and record low interest rates (and likelihood they remain lower for longer). The Fed has effectively stated its intent to leave the fed funds rate at zero for the foreseeable future, and became more dovish in a speech today stating its desire to leave rates at zero even if inflation gets “moderately above its 2% target for some time”- switching to an “average 2% inflation target” from an absolute target that had been in place since 2012. For example, equity valuation relative to bonds (using the S&P 500 earnings yield vs the US 10 year Treasury yield) is only in line with its average since the credit crisis at 3.8% (which is still over one standard deviation “cheap” vs the 0.6% average since 1954). Additionally, the difference between the S&P 500’s dividend yield and the US 10 year Treasury yield is still at 1% which is near the highest levels ever seen prior to COVID-19 (only similar readings near market lows in 2009 credit crisis, 2011-12 EU debt crisis, and 2015-16 manufacturing recession).

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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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