Review the latest portfolio strategy commentary from Mike Gibbs, managing director of Equity Portfolio and Technical Strategy.
After bouncing ~9% from the recent lows, the S&P 500 has traced out a tight range between 4177-4074 over the past couple of weeks. But there remains plenty of overhead resistance with the predominant market trend still downward for now. With inflation uncertainty high (and the stakes so high), accompanied by a Fed in tightening mode and the path of least resistance still lower technically, we err on the defensive side for the short-term.
We believe that equities are unlikely to V-bottom back to market highs yet (as they did out of the late 2018 trade war and 2020 Covid shutdown market weakness) with the Fed still behind the curve. If inflation was not so high and the Fed was farther along on its tightening path, we believe the potential would be higher for a quick dovish pivot. This is what occurred and fueled the sharp rally in equities out of those 2018 and 2020 selloffs. Unfortunately, we do not have that luxury right now in our view. Unless the narrative changes- i.e. Fed or Russia backs off (two low probabilities in the near-term)- we believe it is unlikely that the market moves sustainably to the upside yet.
That said, we remain positive over the intermediate term given our base case economic outlook of positive GDP growth (in 2022 and 2023), along with a moderation of inflation. Thus, we believe equities will be higher over the next 6-12 months- but also likely to remain choppy over the coming weeks and months ahead. With this in mind, we would refrain from chasing the rallies and use the downdrafts as opportunity to accumulate favored names with a longer-term perspective- building conviction as the inflation outlook and/or technical momentum builds.
Tomorrow’s May CPI report will be another update on the trajectory of inflation. We believe that inflation has peaked, but the degree of moderation will go a long way in determining the pace of Fed hikes later in the year- and ultimately be a large influence on market trends. With such a wide range of potential outcomes and uncertainty so high, we expect investors to remain hyper- sensitive to inflationary data.
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