Review the latest portfolio strategy commentary from Mike Gibbs, managing director of Equity Portfolio and Technical Strategy.
Inflation remains the primary driver of equity markets currently, and last week’s hot CPI report resulted in a sharp -9% selloff over just four days- pushing the S&P 500 to new lows (and bear market territory). The longer inflation stays at stubbornly high levels, the more problematic it becomes for the economy and the Fed (as it attempts to bring inflation under control). Supply challenges, contributed greatly by the Russia/Ukraine war and China’s zero-tolerance Covid policy, have made it hard for supply to improve toward demand. The Fed cannot help supply, but it can negatively impact demand through tighter monetary policy. The Committee elected to raise the fed funds rate by 75bps yesterday, taking its target range to 1.5-1.75% (matching consensus expectations). And in its commentary has attempted to gain more credibility- being hawkish but not too much, and tight but also flexible based on the data ahead. Ultimately, the trajectory of inflation moving forward will remain a significant influence on equity market trends. Unless the narrative changes in regard to Russia backing off or China ending lock-downs, it will be difficult for equities to sustainably move to the upside without better inflation data in our view.
Given our base case economic outlook of positive (albeit slower) economic growth and moderating inflation, we believe that equities will be higher than current prices over the next 12 months. However, the path of least resistance remains lower for equities in the shorter-term, and we do not expect inflation to rapidly improve overnight- leaving the Fed in tightening mode. Our favored area of potential downside continues to be the 3400-3600 area, as we see plenty of fundamental and technical justification for this level. The S&P 500 is currently trading at a 17.3x P/E, which is much cheaper than multiples witnessed in the post-Covid era and very reasonable historically. We note that severe draw-downs in the 2015/16 US manufacturing recession, 2018 trade war, and 2020 Covid shutdown found lows in the 14-16x P/E range. At 16x, the S&P 500 would trade at 3458 (interestingly, very near the pre-Covid peak) and would be -43% multiple compression (in line with that seen in the dotcom bubble and credit crisis). Additionally, 3648 represents the average -24% non-recessionary bear market decline historically. Technically, the S&P 500 200-week moving average has been a good level of support over the past decade in major market weakness- and is currently 3500.
Inflation remains the main variable to watch for market movements, and we expect investors to remain reactive to the data. If inflation can begin to improve, sharp upward pressure on bond yields is likely to abate- in turn, removing downward pressure on equity valuations. Once the dust settles on the current bear market, we believe that long-term investors will find compelling risk/reward from current valuations- it’s more a matter of timing in the shorter-term (weeks-months). With this in mind, we recommend using the downdrafts as opportunity to accumulate high quality stocks with a long-term perspective.
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 31, 2023 Chief Economist Eugenio J. Alemán discusses current economic...
Markets & Investing March 31, 2023 Review the latest Weekly Headings by CIO Larry Adam. Key...
Markets & Investing March 31, 2023 Review the latest portfolio strategy commentary from Mike Gibbs,...