Review the latest portfolio strategy commentary from Mike Gibbs, managing director of Equity Portfolio and Technical Strategy.
The S&P 500 has done well to recover from banking sector concerns over the past few weeks. However, the rally has been a bit more uneven beneath the surface, reflecting the confusion inherent within the current backdrop.
Technology and the semiconductors (often a good market barometer given its widespread economic applications) are leading in the rally, but participation has been top-heavy. For example, despite Technology moving to year-to-date highs, the percentage of stocks above their 50-day moving average has contracted. This is a negative divergence indicating weaker breadth in the advance. Additionally, the small caps and transports (areas with outsized leverage to the economy) have lagged. On the positive side, credit spreads remain contained – supporting the recent market upside.
These conflicting internal signals make sense, considering crosscurrents within the macro in terms of inflation, economic growth, and potential Federal Reserve (Fed) policy. The underlying tone is another factor supporting our suggestion to not plunge in with idle cash, preferring to rather accumulate exposure in the weak periods. Range-bound trading (potentially ~3500-4100 S&P 500) remains our bias for short-term trends.
There are plenty of economic data points coming up that will influence the data-dependent Fed and equity markets. February Core PCE (the Fed’s favored measure of inflation) is reported today; followed next week by March ISM surveys, February JOLTS Job Openings, and March jobs report; and then March CPI, PPI, retail sales, and industrial production the week after.
Additionally, with today being the last day of Q1, earnings season will begin in two weeks with the banks. Their updates will be of particular focus given recent volatility in that area. The bank decline has left many at oversold levels, but the group has been unable to bounce much from those conditions – and provides further caution in the short-term. For the S&P 500 overall, we believe that forward earnings estimates will continue to get revised lower as results come out, given our expectations of a mild recession later this year. However, similar to the past three quarters, interest rate movements (and economic updates) may be a bigger influence on how the S&P 500 trades during earnings season.
In summary: Bank contagion fears have subsided in recent weeks, allowing for the S&P 500 to recover back to prior levels. But the rally has been uneven with mixed signals beneath the surface – reflective of confusion on the economic backdrop. We remain comfortable with our view of range-bound trading for now (potentially ~3500-4100 S&P 500). It will be difficult for equities to move sustainably higher without inflation lower, but the Fed is also at the stage where it will support economic damage as needed.
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