Weekly market guide - Butler Financial, LTD


Weekly market guide

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

Equities have extended their rally over the past week, now up 10% from the recent lows. Less hawkish takeaways on the potential Fed path have been the primary catalyst, i.e. a WSJ article stating the Fed may be leaning toward a 50bp hike in December (breaking the streak of 75bp hikes), the Bank of Canada hiking by 50bp this week (below expectations for 75bp), and discussions that the Fed may act to increase liquidity in the bond market. These influences have contributed to a stall in real yields and pullback in the U.S. dollar, in turn pushing equities higher.

We are also in the heart of Q3 earnings season with nearly 50% of the S&P 500’s market cap already reported. Overall, current results are coming in near expectations, but the -0.6% aggregate earnings surprise is the weakest rate since Q1 2020 (Covid shutdown). Additionally, forward estimates are moving sharply lower as analysts cut their outlooks into a slowing economic backdrop. We expect this trend to continue and remain well below consensus estimates for 2023 S&P 500 earnings at $215 vs. $235 consensus given our expectation for a mild recession in early 2023. That said, a lot of negative news has already been priced in. Despite the deteriorating fundamental outlook, the average S&P stock has rallied 1.7% on results (3-day price reaction). This supports our view that the market pullback was overdone into earnings season, but also that the most important influences are currently macro, inflation, and interest rate driven.

Market-implied Fed expectations have retracted slightly over the past week, with higher odds of a 50bp hike in December vs. 75bp previously and the 5% terminal rate in 1st half 2023 shifting toward 4.8%. Upcoming catalysts over the next week include September PCE and Q3 Employment Costs tomorrow (Fed’s favored measures of inflation and wages), followed by the FOMC rate decision next November 2. A fourth consecutive 75bp hike is expected at the Fed meeting, but investors will be closely monitoring any clues toward the potential outlook for December and beyond in the release and press conference.

Technically, the current bounce is just a bear market rally for now that may extend a bit further in the short-term. While the overall trend is attempting to become more sideways (versus down), we continue to believe that the market will remain data-dependent on the economy and inflation. As investors gain clarity that inflation is on a sustainable path lower, the Fed is likely to back off, bond yields should moderate, and valuations will be more supportive for equity markets. We expect this to occur over the next 12 months, but it also may take time – and volatile data is likely to correlate with volatile markets. Given our expectation that this bear market is likely in its later stages but also that volatility may persist over the coming months (with the potential for further downside), we believe it is important to maintain balance in portfolios between managing risk while also keeping an eye on the longer-term opportunity.

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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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