Weekly market guide - Butler Financial, LTD
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Weekly market guide

Review the latest portfolio strategy commentary from Mike Gibbs.

The S&P 500 has remained resilient in the face of growing economic concerns. The primary catalyst for the strength is declining Federal Reserve (Fed) expectations and lower bond yields in our view. Wednesday’s Federal Open Market Committee (FOMC) Minutes supported this stance – that in the aftermath of March’s banking crisis, financial market tightening (as banks tighten lending) replaces the need for a materially higher Fed funds rate. The Fed now expects a recession to begin this year with rapidly lower inflation next year – its inflation estimate drops to 2% by year-end 2024.

Our takeaways from the Fed tone and recent economic data supports a 25 basis point (bps) hike at the May 3 FOMC meeting, which may end up being the peak rate of this cycle (at 5-5.25% Fed funds rate). The market is currently implying 69% odds of a 25 bps hike in May, followed by the potential for cuts beginning as early as July. We believe the Fed would like to hike and then hold for a prolonged period, in order to get inflation lower and keep it there. But if economic damage intensifies, we also believe the Fed would begin to support (with easier monetary policy) as needed. The ongoing data flow will continue to influence Fed expectations and bond yields, in turn impacting equity market fluctuations.

The good news is that the Fed’s rapid rate hike cycle is likely near an end, and Fed pauses have typically been supportive of equity markets historically. The bad news is that Fed cuts likely come as economic weakness intensifies, which can correspond with increased market volatility. We do believe that a lot has already been priced in, as this bear market was down 27% at its lows and has now spanned 15 months, but we are not convinced that equities are ready for sustainable upside quite yet.

Our view is that equities are likely rangebound for now, and we believe the underlying message of the market supports this stance. We have seen plenty of technical positives since the October lows, typically consistent with a market bottom, but recent participation in the upside has also gotten very narrow at the top. For example, the mega-cap Tech-oriented stocks have been the primary drivers of recent index strength with more economic-sensitive areas showing weakness. It is natural for clustering at the top to occur in times of uncertainty; but for a healthy bull market, we want to see participation broaden out.

Narrow breadth reaffirms our thinking that the market is unlikely ready to sprint back to a new high. And with the S&P 500 overbought in the short-term and approaching overhead resistance at ~4200, we would exercise some caution in putting cash to work at current levels. A big catalyst to monitor will be Q1 earnings season, which begins Friday morning with major banks. Their message, along with many others reporting in the coming weeks, may allow us to move our expected S&P 500 range (~4200-3600) higher or not.

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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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