“
”Markets in Focus
Timely analysis of market moves and sectors of opportunity
The S&P 500 Index experienced its worst week in over a year, but don’t let that cloud your view of its year-to-date performance.
Markets are expected to be more sensitive to new economic data during the U.S. Federal Reserve’s communications blackout period.
Softer than expected jobs data left the path for interest rates little changed; expectations are leaning in favor of a 25 basis point (bp) cut in September rather than a 50 bp cut.
Although defensive stocks are performing well due to ongoing macroeconomic angst, their delayed improvements in performance are an argument for building balanced portfolios.
Last week was the S&P 500 Index’s worst week in over a year, triggering a flurry of negative headlines.1 “With so much pessimism around, it’s important to take a step back and consider the greater context,” said Joey Del Guercio, Research Associate for Market Strategy at Raymond James Investment Management.
After its poor week of performance, the S&P 500 was still up 14.48% year to date.
“While it’s true that last week was the S&P 500 Index’s worst week since March of 2023, it just came off eight consecutive days of green amid a torrid rally off the last economic scare and the unwinding of the yen carry trade,” Del Guercio said.
The S&P 500® Equal Weight Index outperformed the S&P 500 Index, its capitalization-weighted counterpart, by 1.10% last week. It also outperformed the S&P 500 by 20 basis points (bps) since the drawdown on Aug. 5, and it has outperformed by 4.47% quarter to date. “This expanding market breadth underscores the importance of selectivity in the current environment,” Del Guercio said.
Last week, which was shortened by the Labor Day holiday, investors paid close attention to a slew of economic data: the Job Openings and Labor Turnover Survey (JOLTS), the ADP® National Employment Report™, and the Employment Situation Summary.
There’s plenty to be positive about
Index quarter-to-date returns
Source: Bloomberg, as of 9/6/24.
The Employment Situation Summary showed total nonfarm payrolls increasing by 142,000 month over month, which was less than the consensus estimates of 165,000. The unemployment rate lowered to 4.2% from last month’s 4.3%, which was in line with expectations.
The U.S. Federal Reserve (Fed) is now in the blackout period ahead of its September Federal Open Market Committee (FOMC) meeting, and markets are convinced that it will deliver a rate cut. Del Guercio said that the August jobs report still left up in the air whether the Fed will decide on a 25-bp cut or a more accommodative 50-bp cut.
“The report was likely just good enough for the Fed to favor a 25-bp cut in September,” Del Guercio said. “Furthermore, Fed board member Christopher Waller’s speech on Friday suggested that he was leaning towards the 25-bp cut despite his statement about remaining open-minded.”
Del Guercio said that he doesn’t think the story has changed much. “The labor market is weakening, not breaking, and we’re likely to see increased volatility around data releases,” he said. Rate cut expectations have ticked down for September, but they increased for November and December. Del Guercio said that he believes the expectations for big rate cuts look even more overdone. “The base case remains for three successive 25-bp cuts, with September’s cut being a practical certainty.”
Last week, the only sector showing a positive return was consumer staples (+0.66%), while utilities and real estate were down -0.10% and -0.34%, respectively. Every other sector was down more than -2%. Five sectors posted drops of more than -4%, led by technology declining -7.15%.
Utilities have been the year’s strongest-performing sector, up +22% year to date, followed by financials up +19% and consumer staples up +18%. Technology and communications stocks are still outperforming the S&P 500 Index year to date, but their outperformance continues to wane.
“Earnings season is effectively over, and the main takeaway is that it’s not just the Magnificent Seven anymore,” Del Guercio said. “Earnings breadth has broadened out. More than 80% of S&P 500 Index companies beat their earnings per share (EPS) growth estimates.” At least 70% of the constituents in each sector beat their EPS growth estimates.
Del Guercio said that the technology sector may still be the biggest contributor to overall index earnings growth, but financials are a close second, followed by healthcare. “This earnings season has not suggested a recession: earnings growth has been robust, margins are holding up, and guidance has been positive.”
Despite repeated declarations of their demise, consumers are also broadly holding up. “The consumer’s story continues to be a bifurcated one where higher income consumers — who account for the majority of spending — are basically unfazed while lower income consumers are deteriorating,” Del Guercio said.
“The outperformance of defensive stocks is partially attributable to the macroeconomic angst we’re continuously reminded of, but it’s also an argument for having balance in your portfolio,” he said.
Del Guercio has repeatedly said to expect volatility, have a shopping list, and be opportunistic. “The ongoing rotation is an opportunity worth considering that investors shouldn’t ignore,” he said. “Mega-cap tech isn’t the only game in town any more, and the case for building balance across portfolios is even stronger.” Del Guercio said that investors should use the anticipated September seasonality to consider exploring areas that could be this rotation’s potential beneficiaries:
Bond proxies. Del Guercio is optimistic about real estate and utilities. “These sectors are ‘bond proxies’ because they have higher yields and relatively low volatility, like a bond.” Lower interest rates may present tailwinds for the sectors because (1) lower rates could help finance more projects, and (2) risk-averse investors, looking for yield, may leave lower-interest money market funds to invest in these sectors. “Utilities have an additional tailwind from the U.S. demand for electricity accelerating, due to artificial intelligence (AI) enthusiasm, after decades of stagnation,” he said.
No, the AI trade is not over. It makes for a good headline, but Del Guercio said he doesn’t think it’s time to pump the brakes on investing in AI infrastructure. “In my opinion, the near-term perceived risks of overinvestment are overblown,” he said. “The companies spending hundreds of billions are the only ones who really can afford to. AI is a platform shift similar to the iPhone.” Besides chip designers, Del Guercio said that electronic design automation providers look attractive. They could benefit from increased chip complexity and a growing number of use cases alongside new entrants into the chip design space.“ Outside of tech, there are plenty of opportunities in industrials with companies providing services, like liquid cooling, to the hyperscalers and their datacenters.”
Big opportunity for small caps. Investors have been painfully aware of the relatively disappointing performance of small-cap stocks over the past few years, but Del Guercio said that things are looking up for smaller market cap companies. “The Russell 2000® Index is outperforming the S&P 500 Index by around 3% quarter to date, and there’s a solid argument for the outperformance to continue,” he said. The Russell 2000 Index is still 15% from its all-time high in 2021, compared to the S&P 500 Index being around 5% from its all-time high in July of this year. “Small-cap earnings growth is also expected to finally inflect positive, year over year, at the end of 2024 before accelerating ahead of large caps in 2025,” Del Guercio said. He added that small caps also stand to benefit from a continuation of the “soft landing” narrative.
Traders will use this week’s incoming data to finalize their interest rate bets while the Fed is in its blackout period. Two main releases to monitor will be the Consumer Price Index (CPI) on Wednesday and Producer Price Index on Thursday. Del Guercio said he doesn’t expect much volatility around these prints unless they are miserable. The National Federation of Independent Business Index of Small Business Optimism will come out on Tuesday, and the University of Michigan Index of Consumer Sentiment comes out on Friday. Overseas, the U.K. Office for National Statistics will release gross domestic product (GDP) figures and Labour Market Overview data ahead of the European Central Bank’s monetary policy meeting.
1 Unless otherwise indicated, all data cited is sourced from Bloomberg as of September 6, 2024.
Risk Information:
Investing involves risk, including risk of loss.
Diversification does not ensure a profit or guarantee against loss.
Disclosures:
Index or benchmark performance presented in this document does not reflect the deduction of advisory fees, transaction charges, or other expenses, which would reduce performance. Indexes are unmanaged. It is not possible to invest directly in an index. Any investor who attempts to mimic the performance of an index would incur fees and expenses that would reduce return.
This document is a general communication being provided for informational purposes only. It is educational in nature and not designed to be taken as advice or a recommendation for any specific investment product, strategy, plan feature, or other purpose in any jurisdiction, nor is it a commitment from Raymond James Investment Management or any of its affiliates to participate in any of the transactions mentioned herein. Any examples used are generic, hypothetical, and for illustration purposes only. This material does not contain sufficient information to support an investment decision, and you should not rely on it in evaluating the merits of investing in any securities or products. In addition, users should make an independent assessment of the legal, regulatory, tax, credit, and accounting implications and make their own determinations together with their own professionals in those fields. Any forecasts, figures, opinions, or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions, and are subject to change without prior notice. All information presented herein is considered to be accurate at the time of production, but no warranty of accuracy is given and no liability in respect of any error or omission is accepted. It should be noted that investment involves risks, the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements, and investors may not get back the full amount invested. Both past performance and yields are not reliable indicators of current and future results.
The views and opinions expressed are not necessarily those of the broker/dealer or any affiliates. Nothing discussed or suggested should be construed as permission to supersede or circumvent any broker/dealer policies, procedures, rules, and guidelines.
Link(s) are being provided for informational purposes only. Raymond James Investment Management is not affiliated with and does not endorse, authorize or sponsor any of the listed websites or their respective sponsors. Raymond James Investment Management is not responsible for the content of any website or the collection or use of information regarding any website's users and/or members.
Sector investments are companies engaged in business related to a specific sector. They are subject to fierce competition and their products and services may be subject to rapid obsolescence. There are additional risks associated with investing in an individual sector, including limited diversification.
Investing in small cap stocks generally involves greater risks, and therefore, may not be appropriate for every investor. The prices of small company stocks may be subject to more volatility than those of large company stocks.
International investing presents specific risks, such as currency fluctuations, differences in financial accounting standards, and potential political and economic instability. These risks are further accentuated in emerging market countries where risks can also include possible economic dependency on revenues from particular commodities or on international aid or development assistance, currency transfer restrictions, and liquidity risks related to lower trading volumes.
Real estate investments can be subject to different and greater risks than more diversified investments. Declines in the value of real estate, economic conditions, property taxes, tax laws and interest rates all present potential risks to real estate investments.
Definitions
The ADP® National Employment Report™ is published monthly by the ADP Research Institute® in close collaboration with Moody’s Analytics. The ADP® National Employment Report™ provides a monthly snapshot of U.S. nonfarm private sector Employment based on actual transactional payroll data.
Basis points (bps) are measurements used in discussions of interest rates and other percentages in finance. One basis point is equal to 1/100th of 1%, or 0.01%.
Breadth describes the relationship between the median and the mean of a market index. When a few data outliers result in a mean that is substantially larger (or smaller) than the median of the full data set, then the performance of the entire index is being driven by a “narrow” selection of companies. An index supported by “broad” market movements is one where the median is closer to the mean.
A carry trade involves borrowing money in countries where interest rates are low and using the funds to make investments in countries with high interest rates.
The U.S. Consumer Price Index (CPI) measures the change in prices paid by consumers for goods and services. The U.S. Bureau of Labor Statistics bases the index on prices of food, clothing, shelter, fuels, transportation, doctors’ and dentists’ services, drugs, and other goods and services that people buy for day-to-day living. Prices are collected each month in 75 urban areas across the country from about 6,000 households and 22,000 retailers. Headline readings of CPI inflation, also known as nominal CPI inflation, include food and energy prices, which tend to be more volatile than other components of the Consumer Price Index.
Defensive stocks are companies that tend to have a constant demand for their products or services, making their operations more stable during different phases of the business cycle.
Earnings per share (EPS) is calculated as a company’s profit divided by the outstanding shares of its common stock. The resulting number serves as an indicator of a company’s profitability.
Electronic design automation (EAD) services provide software tools to designing electronic systems, including integrated circuits and printed circuit boards.
The Employment Situation Summary, also known as the payroll report, is a monthly U.S. Bureau of Labor Statistics report tracking nonfarm payroll employment and the national unemployment rate, with data on changes in average hourly earnings, and job trends in public and private sectors of employment. The report is based on surveys of households and employers.
The Federal Open Market Committee (FOMC) consists of 12 members: the seven members of the Board of Governors of the Federal Reserve System; the president of the Federal Reserve Bank of New York; and four of the remaining 11 Reserve Bank presidents, who serve one-year terms on a rotating basis. The FOMC holds eight regularly scheduled meetings per year at which it reviews economic and financial conditions, determines the appropriate stance of monetary policy, and assesses the risks to its long-run goals of price stability and sustainable economic growth. The FOMC observes a blackout period, which begins at midnight of the second Saturday before each meeting. During the blackout periods, committee members do not make public comments about macroeconomic developments or monetary policy issues.
Guidance refers statements from the managers of publicly traded companies that indicate whether they expect to realize near-term profits or losses and why.
A “hard landing” occurs when a central bank’s unsuccessful management of interest rates causes a recession.
Hyperscaler refers to the largest cloud computing providers that can provide massive amounts of computing resources and storage at enterprise scale.
The Job Openings and Labor Turnover Survey (JOLTS) program produces monthly data on job openings, hires, and separations compiled by the U.S. Bureau of Labor Statistics. The survey’s job openings rates consider month-to-month changes in the number of job openings reported on both a state and national level.
Labour Market Overview data is published by the U.K. Office for National Statistics to provide estimates of employment, unemployment, economic inactivity and other employment-related statistics for the UK.
The Magnificent Seven refers to the seven largest stocks by market capitalization in the S&P 500 Index, as of Dec. 29, 2023. Collectively they made up more than 25% of the market capitalization of the entire index. They are Alphabet, Amazon.com, Apple, Meta Platforms, Microsoft, NVIDIA and Tesla.
Market capitalization, or market cap, refers to the total dollar market value of a company’s outstanding shares of stock.
Mega-cap stocks are the largest publicly traded companies as measured by market capitalization. Generally, this refers to companies with market capitalizations over $200 billion.
The National Federation of Independent Business Index of Small Business Optimism consists of 10 equally weighted and seasonally adjusted variables. The monthly change of each variable contributes proportionally to the overall monthly change in the index.
The Producer Price Index (PPI), published monthly by the U.S. Bureau of Labor Statistics, measures the average change over time in the selling prices received by domestic producers for their output.
A bond proxy is a term used to describe equity shares are other securities that provide comparably predictable levels of return to bonds. Bond proxies include dividend-paying stocks, including those in industries with more predictable revenue streams such as utilities and consumer staples.
Rotation describes the movement of investments in securities from one industry, sector, factor, or asset class to another as market participants react to or try to anticipate the next stage of the economic cycle.
Seasonality refers to predictable changes that occur over a one-year period in a business, market, market sector, or economy based on the season, including calendar or commercial seasons.
A “soft landing” occurs when a central bank adjusts interest rates to successfully reduce inflation and slow economic growth while avoiding a recession.
Tailwind is a term used to describe events or market forces that exert a positive influence on an investment’s performance.
The U.K. Office for National Statistics publishes gross domestic product (GDP) estimates as the main measure of U.K. economic growth based on the value of goods and services produced during a given period.
The University of Michigan Index of Consumer Sentiment is based on monthly telephone surveys in which at least 500 consumers in the continental United States are asked 50 questions about what they think now and what their expectations are for their personal finances, business conditions, and buying conditions. Their responses are used to calculate monthly measures of consumer sentiment that can be compared to a base value of 100 set in 1966.
Indices
The Nasdaq 100® is a stock market index made up of 103 equity securities issued by 100 of the largest non-financial companies listed on the Nasdaq stock market. It is a modified capitalization-weighted index.
The S&P 500 Index measures change in stock market conditions based on the average performance of 500 widely held common stocks. It is a market-weighted index calculated on a total return basis with dividend reinvested. The S&P 500 represents approximately 80% of the investable U.S. equity market.
The S&P 500® Equal Weight Index is the equal-weight version of the S&P 500. It includes the same constituents as the capitalization-weighted S&P 500, but each company in the S&P 500 Equal Weight Index is allocated a fixed weight, or 0.2% of the index total at each quarterly rebalance.
The Russell 2000® Index measures the performance of the 2,000 smallest companies in the Russell 3000® Index, which represents approximately 7% of the total market capitalization of the Russell 3000® Index.
The Russell 3000® Index measures the performance of the 3,000 largest U.S.-traded stocks, which represent about 96% of the total market capitalization of all U.S. incorporated equity securities.
London Stock Exchange Group plc and its group undertakings (collectively, the “LSE Group”). ©LSE Group 2024. FTSE Russell is a trading name of certain of the LSE Group companies. Russell® is a trademark of the relevant LSE Group companies and is used by any other LSE Group company under license. All rights in the FTSE Russell indexes or data vest in the relevant LSE Group company which owns the index or the data. Neither LSE Group nor its licensors accept any liability for any errors or omissions in the indexes or data and no party may rely on any indexes or data contained in this communication. No further distribution of data from the LSE Group is permitted without the relevant LSE Group company’s express written consent. The LSE Group does not promote, sponsor, or endorse the content of this communication.
M-604596 Exp. 1/9/2025
Earnings breadth has continued to expand with sectors like financials, healthcare, utilities, and consumer discretionary increasingly contributing to growth alongside information technology.
The labor market is key to sustaining current market momentum. The path forward is unlikely to be a straight line, especially with this week’s focus on a slew of public and private jobs data.
Areas to consider: Small and mid caps. The capital expenditure beneficiaries of artificial intelligence. Fixed income. Select global markets.
September might be the S&P 500 Index’s most challenging month historically, but the market heads into this seasonally weak period with tailwinds that keep Matt Orton, CFA, Chief Market Strategist at Raymond James Investment Management, optimistic on the longer-term outlook.1
With earnings season largely complete, the S&P 500’s second-quarter earnings growth stands at 11.4%, well ahead of expectations, and with generally positive guidance going forward. Critically, Orton said, the reliance on a handful of mega-cap technology companies to deliver profit growth is fading. Earnings breadth has continued to expand with sectors like financials, healthcare, utilities, and consumer discretionary increasingly contributing to growth alongside information technology. And now that quarterly results from the leading designer of artificial intelligence (AI) chips are out of the way, Orton said anxiety around the AI trade and concerns around the capital expenditures cycle can take a bit of a breather.
“We’re seeing the increase in earnings breadth finally start translating to an increase in price breadth, and I believe this can continue going forward,” he said. “Not only are we seeing better performance across market capitalizations, but international developed markets are back at all-time highs while India’s NIFTY 50 Index late last week posted its longest winning streak ever. The path forward is unlikely to be a straight line, especially with a slew of jobs data in focus this week, but I believe investors should consider using downside opportunistically to build better balance in portfolios.”
S&P 500 second-quarter earnings growth by sector
(as of 8/30/2024)
Source: Bloomberg, as of 8/30/24. The numbers in parentheses indicate the number of companies that have reported second-quarter earnings so far, followed by the total number of companies in each category.
This week is all about U.S. data with the August payrolls release out on Friday, preceded by the Services ISM® Report on Business®, the ADP® National Employment Report™, and the Job Openings and Labor Turnover Survey (JOLTS).
“It’s worth noting that most of the data that has come out following July’s surprisingly weak payroll release has been constructive and certainly doesn’t paint the picture of an economy heading for recession,” Orton said. Recent jobless claims data makes the July payrolls data seem more like an aberration, while last week’s consumer spending figures signaled some resilience and better than expected positive momentum heading into the third quarter.
“I’ve long contended that American consumers are in better shape than the prevailing market narrative,” he said. Certainly, more affluent consumers are spending more robustly than lower-income consumers, but he said overall consumers are simply becoming more discerning in their purchases, not retrenching. The labor market is the key to sustaining this momentum, and Orton expects labor and activity data to show additional signs of resilience, which will push back against the perceived need for the 50-basis point interest rate cut that is currently priced into the market.
“That said, I believe U.S. Federal Reserve Chair Jerome Powell has signaled a low bar for an accelerated pace of cuts,” Orton said. “If payrolls and the unemployment rate show the wrong mix of unwanted deterioration, he likely could coax cautious Federal Open Market Committee holdouts to support such a move based on risk-management concerns.”
While Orton thinks the market is too aggressive in its pricing of the rate-cutting cycle, he said that’s not a reason to stay out of the market. He believes far too many narratives have been bearish about the economy. Now he sees the narrative as too bearish as it mostly holds that the economy needs aggressive cuts to avoid a hard landing and that the Federal Reserve (Fed) is too short-sighted to see through the recent data.
“The former view has been wrong for the past two years, and the latter view is simply an extension of misplaced bearishness,” he said. “Even if there is some volatility around normalizing the pace and depth of rate cuts priced into the market, that doesn’t mean stocks are suddenly viewed as being more expensive, particularly companies in the technology sector.”
If anything, Orton said any adjustments to the discount rate will probably be a wash when contextualized with earnings and guidance that continue to exceed expectations. He said he also would bear in mind we’re starting the rate-cutting cycle at a time when financial conditions are already quite loose, which supports growth.
Markets pushed higher last month despite a surge in volatility from a confluence of technically driven factors, economic concerns, and some critical earnings reports. What’s key to notice, Orton said, was some change in the composition of market leadership during the recovery, with healthcare and financials the top two sectors contributing to August performance. The average stock is sitting at new highs with the S&P 500® Equal-Weighted Index finally starting to outperform. But he said that doesn’t mean investors should abandon what has been working: Information technology rounded out the top three contributors to S&P 500 gains for August. Instead, he favors considering starting to lower concentration levels in portfolios and thinking about gradually leaning into the broadening market.
“September or not, we should be encouraged by the longer-term tailwinds,” Orton said, noting that the market trend is still positive and that positive momentum is expanding. Overseas, the MSCI EAFE® (Net) Index broke out to levels that it previously failed to overtake in 2021 and 2007. Orton believes there are still plenty of opportunities in this market, and investors may want to consider using any September downside to evaluate their portfolios during these downside opportunities. Accordingly, his investment playbook highlights four key themes:
Consider adding exposure down the market-cap spectrum: Small caps have been the perennial laggard over the past few years, but Orton has been increasingly constructive as financial conditions have eased and earnings look to be approaching an inflection point. The Russell 2000® Index has outperformed the S&P 500 by nearly 5% quarter to date (up 8.51% versus 3.67%, as of Aug. 30, 2024), and Orton said there is scope for this to continue if the economic narrative holds up while interest rates continue to move lower. With large caps pushing back through all-time highs, the Russell 2000 remains about 10% below its all-time high from July 2021. Earnings season was constructive with an improvement in companies posting results that exceeded expectations and management guidance generally holding up, he said. Orton also noted that mid-cap performance has been close to the S&P 500 Equal-Weighted Index as breadth has expanded. “I believe there is certainly opportunity down market-cap with a favorable risk-reward given historic valuation discounts and improving fundamentals,” he said.
Building balance doesn’t mean ignoring the mega-caps: “All too often I hear rotation portrayed as a zero-sum game, where the broader market can only do well at the expense of the mega-caps,” Orton said. “That narrow and reductive perspective leaves a lot of value on the table, ignoring the size of the cash arsenal on the sidelines and the impact that flows to passive funds will have on this cohort of companies.”
It also ignores the fact that most of the business models across the largest companies, including the Magnificent Seven, are strong and powered by durable secular growth tailwinds that Orton believes should hold up regardless of economic environment going forward. He continues to have conviction in what he calls the “AI 2.0” basket of companies, which are the beneficiaries of rapid capital expenditures from the hyperscale cloud computing companies. And he noted that some of these companies trade at valuations lower than the broader index. Investors should consider leaning into the highest-quality growth businesses, he said, and that includes many of the mega-caps.
Yields might be down, but fixed income is still attractive: With U.S. inflation gauges such as the headline Consumer Price Index and the core Personal Consumption Expenditures (PCE) Price Index back below 3% year over year, Orton said U.S. Treasuries seem to have regained their role as a decent hedge against significant equity drawdowns. Elevated inflation levels produced positive equity-bond correlations for much of this time, but that relationship seems to have reversed.
“There are still many investors who are overweight short-term cash instruments, and there are many reasons I’ve pointed out in the past about why cash almost always underperforms during rate-cutting cycles,” Orton said. “There are still opportunities to generate income, and any short-term reversal because of negative September seasonality, spending concerns around elections, or rate-cut repricing will provide investors with an opportunity to put more cash to work.”
While money market rates certainly aren’t going back to the 0% that most investors got accustomed to over the last 14 years, Orton expects them to settle around wherever the neutral rate is, perhaps between 2.5% and 3.0%. And he believes there are plenty of opportunities to do meaningfully better than that right now.
Opportunities in emerging markets and Europe, Australasia and the Far East. As yields and the U.S. dollar move lower, Orton sees meaningful implications globally. If the MSCI Emerging Markets Currency Index could break out, he thinks this would bode well for emerging market equities. There might be some volatility in the short term as the dollar reacted to the depth and pace of the market’s rate-cut pricing, but longer-term the path for the dollar looks lower. Orton favors emerging markets excluding China with India remaining his preference, particularly as it has lagged a bit on the recent global recovery. There are also opportunities in international developed markets, but he said selectivity is critical. He expects the European Central Bank to cut rates again in September as recent data bolstered the case that inflation continues to move lower, though the pace forward is still likely to be gradual. In Japan, he said the pace of rate hikes also is likely to be gradual given that market volatility and the underlying fundamental trends supporting the strength of Japanese equities remain largely in place. Orton had advocated for thinking about using recent downside opportunistically in Japan and said he continues to see value despite some heightened uncertainty around the impact on earnings from appreciation in the Japanese Yen Currency Index.
Can small caps sustain a breakout?
Russell 2000 Index since 2020
Source: Bloomberg, as of 8/30/24.
Friday’s employment data takes center stage. With a hefty four quarter-point rate cuts currently priced in by the end of this year, there’s a heightened risk for some market volatility should we see any sharp repricing. Orton expects the labor and activity data this week to show continued resilience, which would lean against the need for a 50-basis point cut from the Fed in September. In addition to jobs, Fed officials will get a lot more information this week via the July JOLTS report on Wednesday, ADP’s employment report on Thursday, and the Institute for Supply Management’s surveys on manufacturing and services on Tuesday and Thursday, respectively.
1 Unless otherwise indicated, all data cited is sourced from Bloomberg as of August 30, 2024.
Risk Information:
Investing involves risk, including risk of loss.
Diversification does not ensure a profit or guarantee against loss.
Disclosures:
Index or benchmark performance presented in this document does not reflect the deduction of advisory fees, transaction charges, or other expenses, which would reduce performance. Indexes are unmanaged. It is not possible to invest directly in an index. Any investor who attempts to mimic the performance of an index would incur fees and expenses that would reduce return.
This document is a general communication being provided for informational purposes only. It is educational in nature and not designed to be taken as advice or a recommendation for any specific investment product, strategy, plan feature, or other purpose in any jurisdiction, nor is it a commitment from Raymond James Investment Management or any of its affiliates to participate in any of the transactions mentioned herein. Any examples used are generic, hypothetical, and for illustration purposes only. This material does not contain sufficient information to support an investment decision, and you should not rely on it in evaluating the merits of investing in any securities or products. In addition, users should make an independent assessment of the legal, regulatory, tax, credit, and accounting implications and make their own determinations together with their own professionals in those fields. Any forecasts, figures, opinions, or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions, and are subject to change without prior notice. All information presented herein is considered to be accurate at the time of production, but no warranty of accuracy is given and no liability in respect of any error or omission is accepted. It should be noted that investment involves risks, the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements, and investors may not get back the full amount invested. Both past performance and yields are not reliable indicators of current and future results.
The views and opinions expressed are not necessarily those of the broker/dealer or any affiliates. Nothing discussed or suggested should be construed as permission to supersede or circumvent any broker/dealer policies, procedures, rules, and guidelines.
Link(s) are being provided for informational purposes only. Raymond James Investment Management is not affiliated with and does not endorse, authorize or sponsor any of the listed websites or their respective sponsors. Raymond James Investment Management is not responsible for the content of any website or the collection or use of information regarding any website's users and/or members.
Sector investments are companies engaged in business related to a specific sector. They are subject to fierce competition and their products and services may be subject to rapid obsolescence. There are additional risks associated with investing in an individual sector, including limited diversification.
Investing in small cap stocks generally involves greater risks, and therefore, may not be appropriate for every investor. The prices of small company stocks may be subject to more volatility than those of large company stocks.
International investing presents specific risks, such as currency fluctuations, differences in financial accounting standards, and potential political and economic instability. These risks are further accentuated in emerging market countries where risks can also include possible economic dependency on revenues from particular commodities or on international aid or development assistance, currency transfer restrictions, and liquidity risks related to lower trading volumes.
Definitions
The ADP® National Employment Report™ is published monthly by the ADP Research Institute® in close collaboration with Moody’s Analytics. The ADP® National Employment Report™ provides a monthly snapshot of U.S. nonfarm private sector Employment based on actual transactional payroll data.
Basis points (bps) are measurements used in discussions of interest rates and other percentages in finance. One basis point is equal to 1/100th of 1%, or 0.01%.
A beat is when a company’s reported earnings or other business results exceed or are better than the expectations of analysts and others who follow the company’s stock.
Breadth describes the relationship between the median and the mean of a market index. When a few data outliers result in a mean that is substantially larger (or smaller) than the median of the full data set, then the performance of the entire index is being driven by a “narrow” selection of companies. An index supported by “broad” market movements is one where the median is closer to the mean.
A breakout takes place when an index level or asset price rises above a resistance level (a price point that the metric in question has had trouble exceeding in the time period being considered) or a drops below a support level (the price at which buyers tend to enter the market).
The U.S. Consumer Price Index (CPI) measures the change in prices paid by consumers for goods and services. The U.S. Bureau of Labor Statistics bases the index on prices of food, clothing, shelter, fuels, transportation, doctors’ and dentists’ services, drugs, and other goods and services that people buy for day-to-day living. Prices are collected each month in 75 urban areas across the country from about 6,000 households and 22,000 retailers. Headline readings of CPI inflation, also known as nominal CPI inflation, include food and energy prices, which tend to be more volatile than other components of the Consumer Price Index.
Core inflation is measured by the Personal Consumption Expenditures (PCE) excluding Food and Energy, Price Index, also known as the core PCE price index, is a measure of the prices that U.S. consumers pay for goods and services, not including two categories – food and energy – where prices tend to swing up and down more dramatically and more often than other prices. The core PCE price index, released monthly by the U.S. Department of Commerce Bureau of Economic Analysis, measures inflation trends and is watched closely by the U.S. Federal Reserve as it conducts monetary policy.
Correlation is a statistic that measures the degree to which two securities, indices, or other variables move in relation to each other.
The discount rate is the interest rate set by the U.S. Federal Reserve for loans that the Fed makes to commercial banks or other depository institutions. It is distinct from the federal funds rate, which is a suggested rate for those private institutions when lending to each other.
A drawdown is a decline in the returns of a security or group of securities, as measured over a period from the peak of returns to their trough.
Earnings per share (EPS) is calculated as a company’s profit divided by the outstanding shares of its common stock. The resulting number serves as an indicator of a company’s profitability.
An earnings inflection marks a sudden change in the direction and rate of change of earnings growth. Earnings inflections can lead to either positive or negative change.
The federal funds rate, known as the fed funds rate, is the target interest rate set by the Federal Open Market Committee of the U.S. Federal Reserve. The target is the Fed’s suggested rate for commercial banks to borrow and lend their excess reserves to each other overnight.
The Federal Open Market Committee (FOMC) consists of 12 members: the seven members of the Board of Governors of the Federal Reserve System; the president of the Federal Reserve Bank of New York; and four of the remaining 11 Reserve Bank presidents, who serve one-year terms on a rotating basis. The FOMC holds eight regularly scheduled meetings per year at which it reviews economic and financial conditions, determines the appropriate stance of monetary policy, and assesses the risks to its long-run goals of price stability and sustainable economic growth.
Guidance refers statements from the managers of publicly traded companies that indicate whether they expect to realize near-term profits or losses and why.
A “hard landing” occurs when a central bank’s unsuccessful management of interest rates causes a recession.
Hyperscaler refers to the largest cloud computing providers that can provide massive amounts of computing resources and storage at enterprise scale.
The Institute for Supply Management produces several surveys assessing business conditions and outlooks across a variety of industries. They include the ISM Purchasing Managers’ Index (PMI), which measures the prevailing direction of economic trends in the manufacturing sector, and the Services ISM® Report on Business®, which is based on data compiled from purchasing and supply executives and reflects the change, if any, in the current month compared to the previous month in supplier deliveries along with seasonally adjusted business activity, new orders, and employment.
The Job Openings and Labor Turnover Survey (JOLTS) program produces monthly data on job openings, hires, and separations compiled by the U.S. Bureau of Labor Statistics. The survey’s job openings rates consider month-to-month changes in the number of job openings reported on both a state and national level.
Loose financial conditions are those in which it is relatively easier for businesses and other borrowers to get loans or credit on favorable terms.
The Magnificent Seven refers to the seven largest stocks by market capitalization in the S&P 500 Index, as of Dec. 29, 2023. Collectively they made up more than 25% of the market capitalization of the entire index. They are Alphabet, Amazon.com, Apple, Meta Platforms, Microsoft, NVIDIA and Tesla.
Market capitalization, or market cap, refers to the total dollar market value of a company’s outstanding shares of stock.
Mega-cap stocks are the largest publicly traded companies as measured by market capitalization. Generally, this refers to companies with market capitalizations over $200 billion.
The neutral rate is the theoretical federal funds rate at which the stance of U.S. Federal Reserve monetary policy is neither accommodative nor restrictive. It is the short-term real interest rate consistent with the economy maintaining full employment with associated price stability.
Overweight describes a portfolio position in an industry sector or some other category that is greater than the corresponding weight level in a benchmark portfolio.
The payroll report, officially known as the Employment Situation Summary, is a monthly U.S. Bureau of Labor Statistics (BLS) report tracking nonfarm payroll employment and the national unemployment rate, with data on changes in average hourly earnings, and job trends in public and private sectors of employment. The report is based on surveys of households and employers.
Retrenching is a term used to describe a pulling back of or reduction in some form of economic activity.
Rotation describes the movement of investments in securities from one industry, sector, factor, or asset class to another as market participants react to or try to anticipate the next stage of the economic cycle.
Seasonality refers to predictable changes that occur over a one-year period in a business, market, market sector, or economy based on the season, including calendar or commercial seasons.
Secular trends are large-scale and ongoing changes in economies and societies that have the potential to drive broad and lasting economic, technological, social or other kinds of changes.
Tailwind is a term used to describe events or market forces that exert a positive influence on an investment’s performance.
Technicals refers to technical indicators of historic market data, including price and volume statistics, to which analysts apply a wide variety of mathematical formulas in their study of larger market patterns.
A zero-sum game is a set of circumstances where a gain for any one party results in a loss for another.
Indices
The S&P 500 Index measures change in stock market conditions based on the average performance of 500 widely held common stocks. It is a market-weighted index calculated on a total return basis with dividend reinvested. The S&P 500 represents approximately 80% of the investable U.S. equity market.
The S&P 500® Equal Weight Index is the equal-weight version of the S&P 500. It includes the same constituents as the capitalization-weighted S&P 500, but each company in the S&P 500 Equal Weight Index is allocated a fixed weight, or 0.2% of the index total at each quarterly rebalance.
The Japanese Yen Currency Index tracks trends affecting the Japanese yen and its relation to other foreign exchange currencies.
The MSCI EAFE® (Net) Index measures the performance of performance of large and mid-cap securities across 21 developed markets, including countries in Europe, Australasia and the Far East, excluding the United States and Canada. The MSCI EAFE® (Net) Index subtracts any foreign taxes applicable to US citizens but not applicable to citizens in the overseas country.
The MSCI Emerging Markets Currency Index measures the total return of 25 emerging market currencies relative to the U.S. dollar, the euro, or the Japanese yen with the weight of each emerging markets currency being equal to its country weight within I the MSCI Emerging Markets Index.
The NIFTY 50 Index is a stock index on the National Stock Exchange of India that tracks the largest assets in the Indian equity market. It is diversified across 13 sectors of the Indian economy: financial services, information technology, consumer goods, oil and gas, automobiles, telecommunications, construction, pharmaceuticals, metals, power, cement and cement products, fertilizers and pesticides, and media and entertainment.
The Russell 2000® Index measures the performance of the 2,000 smallest companies in the Russell 3000® Index, which represents approximately 7% of the total market capitalization of the Russell 3000® Index.
London Stock Exchange Group plc and its group undertakings (collectively, the “LSE Group”). ©LSE Group 2024. FTSE Russell is a trading name of certain of the LSE Group companies. Russell® is a trademark of the relevant LSE Group companies and is used by any other LSE Group company under license. All rights in the FTSE Russell indexes or data vest in the relevant LSE Group company which owns the index or the data. Neither LSE Group nor its licensors accept any liability for any errors or omissions in the indexes or data and no party may rely on any indexes or data contained in this communication. No further distribution of data from the LSE Group is permitted without the relevant LSE Group company’s express written consent. The LSE Group does not promote, sponsor, or endorse the content of this communication.
M-601409 Exp. 1/3/2025
