Weekly market guide - Butler Financial, LTD
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Weekly market guide

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

Equities have staged an impressive rally to begin 2023 – S&P 500 +7.2%, Nasdaq Composite +13.8% and Russell 2000 +10.3%. Along the way, the S&P 500 has broken through multiple technical resistance levels, including the defined downtrend that capped rallies in 2022. This is igniting investor optimism over a potential “soft-landing” scenario, and there are reasons for some optimism – i.e., good dataflow in the U.S. recently, China reopening (end of zero-COVID policy), warmer winter pushing natural gas prices significantly lower, and Europe’s economy holding up. We also cannot ignore the positive technical developments taking shape throughout the equity market, as the technicals often move ahead of the fundamentals. But after the recent surge in equities, we recommend exercising some patience – a V-bottom remains unlikely in our view.

An interesting development following last Friday’s January jobs report has been the bounce in bond yields and U.S. dollar. The 2-year yield acts as a gauge of Federal Reserve (Fed) expectations and jumped from 4.08% to 4.46% in just two days. The reason for the move was the strength of the jobs report, which showed a 517k payroll increase in January – pushing the unemployment rate to a new low of 3.4%. The strong labor market is good for the economy but bad for the Fed, as wage growth (in a tight jobs market) may take longer to moderate and ease inflationary pressures. In other words, the report reduces the likelihood of Fed cuts coming soon. One week ago, market-implied Fed expectations reflected one more rate hike (~4.9% peak rate) before three cuts by January 2024. This has shifted to current expectations of now two more rate hikes (~5.1% peak rate) followed by two cuts by January 2024. This latest shift is closer to our base case expectation that the Fed is likely to hike-and-hold at ~5% through 2023, avoiding the stop-and-go policy that plagued the 1970s stagflationary period.

The 2-year yield and U.S. dollar have both been important influences on equities over the past year, so their bounces are notable – and we will need to monitor them closely in order to assess the path forward for equity markets. Just as their declines since October have supported higher equities (and valuation expansion), a continuation of their recent bounce would likely weigh on multiples. In fact, there is a small disconnect emerging in equity valuations versus bond yields recently – there has been a strong inverse relationship between the two over the past couple of years, with the most recent divergence suggesting equities may be getting a bit ahead of themselves in the short-term.

Overall, we believe the market is trying to turn, and we do expect equities to be higher over the next 12 months. But there are also a lot of headwinds still out there that can rear their head at any time. Therefore, we want to be adding exposure (as needed) to favored stocks, but also want to exercise some patience and act with pragmatism in doing so. Our short-term bias is for a sideways grind (or consolidation), as the market digests its recent strength to overbought conditions.

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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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