Review the latest portfolio strategy commentary from Mike Gibbs, managing director of Equity Portfolio & Technical Strategy.
The S&P 500 is currently undergoing its largest one day pullback in almost three months. But as has been the case with performance recently, the headline performance does not tell the full story of what is happening beneath the surface. We have been noting that Technology strength has been driving the market upside while the average stock has not been participating. Well, today those roles are somewhat reversed and technology’s weakness is weighing on the overall index while some areas are actually performing fairly well. Today’s gainers have generally been the weakest areas year-to-date, i.e. cruise lines, airlines, and some retail, financials, and energy names. The 50 worst-performing stocks year-to-date are up +0.6% today on average while the 50 best-performing stocks are down -4.8% today.
In today’s weakness, this rotation is encouraging as we have been waiting to see market participation broaden out beneath the surface for some time. Likewise, technology had gotten extended technically (30% above its 200 DMA yesterday) and was due for a “cooling off” period. For Technology, the sector has seen pullbacks occur after reaching 7-8% above its 20 day moving average in recent months. In those instances, the sector was able to hold at its 20 DMA or just below before resuming its path higher. The sector is currently trading just above its 20 DMA, so we will be monitoring that trend. Regardless, we view the Technology sector as in a strong technical uptrend (justified by strong fundamental momentum) that bodes well for intermediate term performance. For those that are in need of increasing exposure to Technology, we would be accumulating the sector on its pullback.
The positive underlying tone of the market- fueled by unprecedented global stimulus supporting the economic recovery and pushing interest rates to record lows- remains in our view. The S&P 500 trades at an elevated P/E of 24.5x, but we continue to believe valuations can remain high due to low rates (and the likelihood that they stay lower for longer), along with the expected earnings recovery ahead. The difference between the S&P 500 earnings yield and US 10 year Treasury yield remains historically “cheap” vs bonds at 3.3%. Additionally, the S&P 500 dividend yield vs US 10 year Treasury yield is still near the highest level on record prior to COVID-19 at 1%.
In the short term, we believe the odds are higher for a more challenging market- due to very strong recent gains, weak seasonality, the election cycle heating up, complacent sentiment, and the fiscal battle to avoid a government shutdown on 9/30. So overall, we remain positive but short term we are a little more cautious. With that in mind, we woud look to make portfolio tweaks as necessary, be selective at the stock level, and look to generally continue accumulating favored equities on weakness.
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