Review the latest portfolio strategy commentary from Mike Gibbs, managing director of Equity Portfolio and Technical Strategy.
Equities surged on November 10 in response to the October CPI report, which showed the lowest monthly growth rate of core CPI in a year – S&P 500 +5.5%, Nasdaq Composite +7.4%, and Russell 2000 +6.0%. Leading indicators have been suggesting that inflation should moderate, but the hard/actual CPI data has remained sticky for months. With October’s better-than-expected Core CPI reading of 0.3% m/m, the question may shift from “when will inflation start to come down?” toward “how quickly will inflation come down?” It is clearly a step in the right direction, but will also take follow-through in the coming months for the Fed and investors to get clear and convincing evidence that inflation is indeed on a better path. Overall, the report supports the Fed slowing its pace of hikes but remaining hawkish as inflation is still too high. Nonetheless, the potential “light at the end of the tunnel” is a welcome sign for markets.
Fed expectations remain an important influence on bond yields, which in turn are affecting equity market valuations. In the initial aftermath of the November 10 CPI report, market expectations for the peak Fed funds rate ticked lower to 4.84% from ~5%. Additionally, we note that in prior Fed tightening cycles, the 2-year and 10-year Treasury yields have reached (at least) that peak Fed funds rate. So, if Fed expectations (which remain very fluid) can continue to recede, it would ease the upward pressure on bond yields in our view – which would be supportive of equity market trends. Thursday’s drop in the U.S. 10-year Treasury yield and U.S. dollar are encouraging – and could be the beginning of a more stable trend for bond yields and the dollar – but we need to see follow-through next. One day does not make a trend.
Technically, Thursday’s strength (which was the largest S&P 500 price change since the Covid lows) may support additional upside for equities in the short-term. We believe that the S&P 500 may be set to challenge resistance at the 4000-4100 area, which would be consistent with the recent decline in high yield CDS spreads (a good indicator for short-term trends this year). Additionally, advancers vs. decliners reached an elevated 7.7x today – the type of “thrust” you like to see as market trends attempt to rebuild themselves from low levels.
In summary: There is a lot to like about Thursday’s CPI report finally showing the potential for a slowdown in inflation. This is supporting lower Fed expectations, lower bond yields, and higher equity valuations. We believe that this recipe for equity market upside will transpire over the next 12 months, however the Fed remains in tightening mode and more data will be needed over time to gain clarity that inflation is indeed moving to a more reasonable level. With this in mind, the worst may be behind us, but we continue to expect choppiness over the coming months.
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.
Estate & Giving Check in with your advisor and review dates to remember this season. Market...
Markets & Investing June 01, 2023 Raymond James CIO Larry Adam provides insight and key takeaways on...
Markets & Investing Managing substantial wealth often requires specialized capabilities and expertise....