Review the latest portfolio strategy commentary from Mike Gibbs, managing director of Equity Portfolio and Technical Strategy.
The equity market has been resilient to begin the new year (up 5% YTD) and we believe that it is attempting to turn.
When considering the equity market outlook, on one hand we have an economy that appears set to weaken. For example, the yield curve is deeply inverted, leading economic indicators are negative, banks are tightening lending standards and demand surveys are pointing lower. We believe the odds of economic contraction are high, which will lead to lower corporate earnings. This view is supported by company comments regarding their earnings outlooks during Q4 earnings season. For example, the banks are increasing reserves on expectations of higher loan delinquencies, technology companies are citing broad-based weakness, and the rails are noting muted volume growth.
On the other hand, stocks discount the future and are likely to bottom well ahead of the economy and fundamentals. This is where technical analysis can help, and the positive developments are stacking up. Recent additions to the list are relative strength breakouts of high beta versus low volatility and equal-weight consumer discretionary versus consumer staples. This risk-on tone bodes well for the underlying backdrop of the market. Additionally, the percentage of Russell 3000 stocks making new 4-week highs recently moved above 50%. This bullish reading did not occur in the bear market rallies of the 2001 dotcom bubble and 2008 financial crisis and adds further support that the worst of this bear market may be behind us.
That said, we do not believe that equities are ready for sustainable upside quite yet. A disconnect lies in Federal Reserve (Fed) expectations in our view. The market-implied federal funds rate bakes in ~50 basis points (bps) worth of hikes left in the first half of 2023, followed by ~50bps worth of cuts in the second half. We believe that the Fed will be hesitant to begin cutting rates and risk disrupting the moderation in high inflation. They wish to avoid the stop-and-go policy of the 1970s that led to a prolonged period of high inflation and was very damaging to the economy. Thus, we believe they will be tighter for longer than the market currently expects, in order to bring inflation down to their target. Updated Fed comments come at next Wednesday’s FOMC meeting, which along with a full slate of economic data and Q4 earnings season will be catalysts over the coming week.
The result is a bottoming and recovery process that may be more elongated this cycle. We expect volatility to persist and for the S&P 500 to trade in more range-bound fashion over the coming months (potentially between ~3700-4300). Longer-term, we believe that equities present attractive risk/reward for investors and that stocks will be climbing by year-end. But for those investors trying to be timely, we recommend pragmatism and patience. Accumulate favored stocks over time as the trend evolves, refrain from chasing the rally periods, and use the weak periods as opportunity within 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.
Markets & Investing March 20, 2023 Doug Drabik discusses fixed income market conditions and offers...
Economy & Policy March 20, 2023 CIO Larry Adam outlines the positive events that are outweighing...
Markets & Investing Recent market activity and rising interest rates have investors thinking twice about...