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Review the latest portfolio strategy commentary from Mike Gibbs.

The S&P 500 has done well to recover from banking issues over the past several weeks, and actually has advanced above prior levels.

However, market participation in the move has been weak with performance dominated by Large Cap Growth-oriented stocks. Economic-sensitive areas such as the banks, small caps, and transports have come under more pressure with declining relative strength. The S&P 500 is also reaching overbought levels and approaching technical resistance at the upper-end of its recent range ~4200. This provides some caution in the short-term. But we read the market’s message as not ready for sustainable upside yet, rather than indicating something more dire.

Additionally, we believe this view is supported by macro developments. In the aftermath of bank liquidity issues, bank lending is likely to tighten even further, which will choke off economic growth ahead. The odds of economic contraction move higher and its timeline shifts forward in our view. However, a silver lining is that tightening in financial markets brings the Federal Reserve (Fed) closer to where it wants to be. In fact, the bond market is indicating that the Fed’s rate hike cycle is virtually over.

So, on one hand, it will be difficult for equities to move sustainably higher without inflation being lower. But inflation goes down in recessions. And if economic damage intensifies, the Fed is at the stage where it will step in and add support as needed (as they did to support the banking issues last month).

This lends itself to range-bound trading for now. Good markets are likely to embolden the Fed to talk tougher (headwind for equities), whereas bad markets are likely to see the Fed talk easier (supporting equities). While we expect volatility to continue over the coming weeks and months, we also believe this bear market is in its later stages. The current bear market is already 15 months long and was down 27% at its lows (recessionary bear markets have averaged -33% declines over 13 months historically). So, we want to remain pragmatic in putting cash to work in the shorter-term, but also want to be using drawdown periods as opportunity for the long-term.

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