Review the latest portfolio strategy commentary from Mike Gibbs, managing director of Equity Portfolio & Technical Strategy.
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).
IMPORTANT INVESTOR DISCLOSURES
This material is being provided for informational purposes only. Expressions of opinion are provided as of the date above and subject to change. Any information should not be deemed a recommendation to buy, hold or sell any security. Certain information has been obtained from third-party sources we consider reliable, but we do not guarantee that such information is accurate or complete. This report is not a complete description of the securities, markets, or developments referred to in this material and does not include all available data necessary for making an investment decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct.
Links to third-party websites are being provided for informational purposes only. Raymond James is not affiliated with and does not endorse, authorize, or sponsor any of the listed websites or their respective sponsors. Raymond James is not responsible for the content of any third-party website or the collection or use of information regarding any websites users and/or members.
This report is provided to clients of Raymond James only for your personal, noncommercial use. Except as expressly authorized by Raymond James, you may not copy, reproduce, transmit, sell, display, distribute, publish, broadcast, circulate, modify, disseminate, or commercially exploit the information contained in this report, in printed, electronic, or any other form, in any manner, without the prior express written consent of Raymond James. You also agree not to use the information provided in this report for any unlawful purpose. This report and its contents are the property of Raymond James and are protected by applicable copyright, trade secret, or other intellectual property laws (of the United States and other countries). United States law, 17 U.S.C. Sec. 501 et seq, provides for civil and criminal penalties for copyright infringement. No copyright claimed in incorporated U.S. government works.
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.
For clients in the United Kingdom:
For clients of Raymond James Financial International Limited (RJFI): This document and any investment to which this document relates is intended for the sole use of the persons to whom it is addressed, being persons who are Eligible Counterparties or Professional Clients as described in the FCA rules or persons described in Articles 19(5) (Investment professionals) or 49(2) (high net worth companies, unincorporated associations, etc.) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (as amended)or any other person to whom this promotion may lawfully be directed. It is not intended to be distributed or passed on, directly or indirectly, to any other class of persons and may not be relied upon by such persons and is, therefore, not intended for private individuals or those who would be classified as Retail Clients.
For clients of Raymond James Investment Services, Ltd.: This document is for the use of professional investment advisers and managers and is not intended for use by clients.
For clients in France:
This document and any investment to which this document relates is intended for the sole use of the persons to whom it is addressed, being persons who are Eligible Counterparties or Professional Clients as described in “Code Monetaire et Financier” and Reglement General de l’Autorite des marches Financiers. It is not intended to be distributed or passed on, directly or indirectly, to any other class of persons and may not be relied upon by such persons and is, therefore, not intended for private individuals or those who would be classified as Retail Clients.
For clients of Raymond James Euro Equities: Raymond James Euro Equities is authorised and regulated by the Autorite de Controle Prudentiel et de Resolution and the Autorite des Marches Financiers.
For institutional clients in the European Economic rea (EE ) outside of the United Kingdom:
This document (and any attachments or exhibits hereto) is intended only for EEA institutional clients or others to whom it may lawfully be submitted.
For Canadian clients:
This document is not prepared subject to Canadian disclosure requirements, unless a Canadian has contributed to the content of the document. In the case where there is Canadian contribution, the document meets all applicable IIROC disclosure requirements.
Broker Dealer Disclosures
Securities are: NOT Deposits • NOT Insured by FDIC or any other government agency • NOT GUARANTEED by the bank • Subject to risk and may lose value
Raymond James & Associates, Inc., member New York Stock Exchange/SIPC. Raymond James Financial Services, Inc., member FINRA/SIPC. Raymond James® is a registered trademark of Raymond James Financial, Inc.
Economy & Policy March 20, 2023 CIO Larry Adam outlines the positive events that are outweighing...
Markets & Investing March 20, 2023 Doug Drabik discusses fixed income market conditions and offers...
Markets & Investing Recent market activity and rising interest rates have investors thinking twice about...