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.

Narrative shift after narrative shift that is the road ahead. Good economic data and better-than-expected inflationary readings in January led to investor talk of a soft-landing (and even “no-landing”) with a resulting surge higher in equities. Of course, this was then followed by hotter inflation readings in February, pumping the brakes on investor enthusiasm over the past month. Expected Federal Reserve (Fed) rate hikes have moved up significantly over this time frame with the market now implying 67% odds of a 50 basis point (bps) hike at the March 22 Federal Open Market Committee (FOMC) meeting (and a total of 5 hikes in 2023 to reach a peak rate of 5.6%).

Due to uncertainty and the stakes being so high on inflation, emotional sentiment swings are likely to continue for the market as investors digest the incoming dataflow. The next measures to watch include the February jobs report on March 10, followed by February CPI on March 14. This incoming data will be important for the Fed, and accordingly will be highly influential on market moves. But just as January optimism was unjustified, the current adjustment may be too far in the other direction. In the coming weeks and months, we expect the shifting narrative to continue – and it is why we believe that equities may trade between a potential 3700-4300 range.

In periods of high uncertainty and volatility, it is easy for long-term investors to lose focus and become increasingly short term thinking. But a lot of these market fluctuations are noise for the long-term investor. In fact, some positives can be gained in the recent move. Following Fed Chairman Jerome Powell’s testimony this week, higher rate expectations coincided with lower inflation expectations – reflecting Powell’s message that the Fed remains committed to bringing inflation lower (and keeping it there). Accordingly, 5- and 10-year inflation expectations pulled back and sit within the Fed’s targeted 2-2.5% range. This is a big deal for long-term potential values, as equities typically trade at their highest valuations when inflation is in that 2-3% “sweet spot.” Just as the Fed is willing to take some short-term pain for long-term gain, we believe that long-term investors should too.

In the short-term, our bias is for some caution ahead of the incoming data. The S&P 500 is near the midpoint of our expected 3700-4300 potential range and breaking below support on March 9, as concerns increase on the economy. Additionally, the 2-year Treasury yield, TIPS yield, and U.S. dollar are trending higher, which have been negative influences on equities over the past year.

In summary: First we need to need to conquer inflation, and then assess how much damage will be inflicted on the economy. Until we get a degree of clarity on inflation, the odds are low that the market is able to trade back to new highs. However, technical characteristics over recent months also indicate that October may have been the bear market lows. This lends itself to a bottoming and recovery process that are likely more elongated this cycle. Expect volatility to persist in the short-term, but don’t lose focus on the long-term. We recommend using the drawdown periods as opportunity to accumulate favored areas within a long-term perspective.

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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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