Review the latest portfolio strategy commentary from Mike Gibbs, managing director of Equity Portfolio and Technical Strategy.
Equity markets have experienced a strong start to the year – the average S&P 500 stock is up ~8% YTD with outperformance coming from the higher-beta, harder-hit areas in last year’s decline. This is significant, as technical improvements often come well ahead of the fundamentals out of bear markets.
On one hand, the technical positives are becoming difficult to ignore. For example, the S&P 500 held its 200-week moving average at the October lows (a good level of long-term support). Investor sentiment and net positioning reached depressed levels, and selling conviction decreased at the October lows versus June lows. Additionally, the S&P 500 staged impressive breadth thrusts in the advance and broke above its 12-month downtrend with a risk-on tone. These are characteristics often consistent with a market attempting to turn out of bear market lows. We do view equities as overbought in the short-term and are due some consolidation.
On the other hand, we also believe that a glide path higher (V-bottom) is unlikely at this point. 2023 will be heavily influenced by the degree of inflation moderation, central bank policy, and ultimately the level of economic weakness inflicted (in order to bring inflation down). This week’s stickier-than-expected Consumer Price Index (CPI) and Producer Price Index (PPI) reports support our view that the path to inflation normalizing is unlikely to be smooth. Core CPI and core PPI rose 0.4% and 0.5% respectively – both likely to keep the Federal Reserve (Fed) uneasy and more restrictive. To be sure, we do believe the Fed will be successful in bringing inflation down, but this process will also take some time.
Market-implied Fed expectations have shifted toward a hike-and-hold Fed strategy over the past two weeks, rather than optimism for a dovish pivot in the back half of this year – and this is resulting in higher bond yields. The U.S. 2-year yield is back up to 4.67% (near cycle highs from early November), and the U.S. 10-year yield has risen to 3.85% (from 3.40% two weeks ago). This is a headwind to equities in our view, as P/E multiples have held a strong inverse correlation to bond yields over the past two years. Moreover, earnings estimates continue to get revised lower – and we expect this trend to continue as Fed tightening (which remains ongoing) works with a lag on economic growth.
The net result is a bottoming process and recovery that are likely elongated – with normal back-and-forth trading along the way. We believe that stocks will be higher over the next 12 months as investors gain clarity on inflation, Fed policy, and their impacts on economic growth. Multiple expansion will drive upside despite weak earnings growth (as stocks discount the future). However, that clarity needed for sustained appreciation is also likely to take some time. And with equities short-term overbought in our view, we recommend exercising some patience at current levels- using weakness as opportunity to accumulate favored stocks for the longer-term.
View full PDF
IMPORTANT INVESTOR DISCLOSURES
This material is being provided for informational purposes only. Expressions of opinion are provided as of the date above and subject to change. Any information should not be deemed a recommendation to buy, hold or sell any security. Certain information has been obtained from third-party sources we consider reliable, but we do not guarantee that such information is accurate or complete. This report is not a complete description of the securities, markets, or developments referred to in this material and does not include all available data necessary for making an investment decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct.
Links to third-party websites are being provided for informational purposes only. Raymond James is not affiliated with and does not endorse, authorize, or sponsor any of the listed websites or their respective sponsors. Raymond James is not responsible for the content of any third-party website or the collection or use of information regarding any websites users and/or members.
This report is provided to clients of Raymond James only for your personal, noncommercial use. Except as expressly authorized by Raymond James, you may not copy, reproduce, transmit, sell, display, distribute, publish, broadcast, circulate, modify, disseminate, or commercially exploit the information contained in this report, in printed, electronic, or any other form, in any manner, without the prior express written consent of Raymond James. You also agree not to use the information provided in this report for any unlawful purpose. This report and its contents are the property of Raymond James and are protected by applicable copyright, trade secret, or other intellectual property laws (of the United States and other countries). United States law, 17 U.S.C. Sec. 501 et seq, provides for civil and criminal penalties for copyright infringement. No copyright claimed in incorporated U.S. government works.
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.
International Disclosures
For clients in the United Kingdom:
For clients of Raymond James Financial International Limited (RJFI): This document and any investment to which this document relates is intended for the sole use of the persons to whom it is addressed, being persons who are Eligible Counterparties or Professional Clients as described in the FCA rules or persons described in Articles 19(5) (Investment professionals) or 49(2) (high net worth companies, unincorporated associations, etc.) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (as amended)or any other person to whom this promotion may lawfully be directed. It is not intended to be distributed or passed on, directly or indirectly, to any other class of persons and may not be relied upon by such persons and is, therefore, not intended for private individuals or those who would be classified as Retail Clients.
For clients of Raymond James Investment Services, Ltd.: This document is for the use of professional investment advisers and managers and is not intended for use by clients.
For clients in France:
This document and any investment to which this document relates is intended for the sole use of the persons to whom it is addressed, being persons who are Eligible Counterparties or Professional Clients as described in "Code Monetaire et Financier" and Reglement General de l'Autorite des marches Financiers. It is not intended to be distributed or passed on, directly or indirectly, to any other class of persons and may not be relied upon by such persons and is, therefore, not intended for private individuals or those who would be classified as Retail Clients.
For clients of Raymond James Euro Equities: Raymond James Euro Equities is authorised and regulated by the Autorite de Controle Prudentiel et de Resolution and the Autorite des Marches Financiers.
For institutional clients in the European Economic rea (EE ) outside of the United Kingdom:
This document (and any attachments or exhibits hereto) is intended only for EEA institutional clients or others to whom it may lawfully be submitted.
For Canadian clients:
This document is not prepared subject to Canadian disclosure requirements, unless a Canadian has contributed to the content of the document. In the case where there is Canadian contribution, the document meets all applicable IIROC disclosure requirements.
Broker Dealer Disclosures
Securities are: NOT Deposits • NOT Insured by FDIC or any other government agency • NOT GUARANTEED by the bank • Subject to risk and may lose value
Raymond James & Associates, Inc., member New York Stock Exchange/SIPC. Raymond James Financial Services, Inc., member FINRA/SIPC. Raymond James® is a registered trademark of Raymond James Financial, Inc.
Read more commentaries by Raymond James
