Review the latest portfolio strategy commentary from Mike Gibbs, managing director of Equity Portfolio and Technical Strategy.
As bank contagion fears subsided, equities rallied over the past week. The banking industry will cut back on lending even more in the aftermath, raising the odds of economic contraction ahead. But a silver lining is that inflation decreases in recessions, so the tightening in financial markets may bring the Federal Reserve (Fed) closer to where it wants to get.
At Wednesday’s Federal Open Market Committee (FOMC) meeting, Fed Chairman Jerome Powell noted that dynamic in finding a balance to monetary policy. As expected, the Fed raised rates by 25 basis points to a 4.75-5% target range and left its year-end fed funds projection at 5.1% – implying only one more hike. The Committee also altered its language from “ongoing increases” to “some additional policy firming may be appropriate.” This leaves policy flexible and dependent on the incoming data pertaining to inflation, the economy, and market behavior. The upshot is that the market will also remain highly sensitive to the incoming data flow.
In the short-term, we expect range-bound trading (will stick with our ~3500-4100 potential S&P 500 range for now). We get news daily, weekly, and monthly on the variables impacting markets (i.e. inflation, Fed policy, and economy). The economic normalization process (from excessive easing in COVID to excessive tightening post-COVID) is likely to be lumpy with confusing data along the way. And given investor uncertainty on its path and the stakes being so high, we expect sentiment swings to occur. There will be excited periods where stocks rally and disappointed periods where they pull back. Until inflation is down, it will be difficult for stocks to move sustainably higher. For example, the Fed may be emboldened to act tighter with inflation high in good markets. On the flip side, the Fed is also at the stage where it will ease if economic concerns intensify, supporting bad markets.
This lends itself to being patient and pragmatic in deploying marginal cash balances. Use the drawdown periods as opportunity to accumulate, and refrain from chasing the rally periods. If fully invested, stay diversified and shift positioning from conservative areas toward more risk-on areas as the trends evolve (and further information is gained on inflation, the Fed, and economy). We remind you that this bear market is almost 15 months long at this point, it will bottom (may already have), bottoms can happen rapidly, and the best returns always come after the worst returns.
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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.
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