Markets in Focus

Timely analysis of market moves and sectors of opportunity

April 25, 2022: Earnings can’t save us from ourselves

It was a tough week for most sectors, and Matt Orton, CFA, Chief Market Strategist at Carillon Tower Advisers, said the set-up heading into this week doesn’t offer much cause for short-term enthusiasm.

“There’s a risk now of re-testing the February lows, if not a little bit lower,” Orton said. “But the longer-term outlook still looks more optimistic. If you asked me where the market will be in six months, I would say pretty definitively higher than where we are today. That’s because the actual underlying fundamentals of the economy and of the market are still incredibly sound. I think that the market has just found itself in this negative feedback loop around what the U.S. Federal Reserve is going to do and that we’re going to throw ourselves into a recession as a result of these rate hikes. I just don’t think that gloomy outlook really holds water.”

Price action on Thursday and Friday was downright awful: 489 constituents of the S&P 500 Index moved lower on Friday, pushing the market into oversold territory while breadth continued to deteriorate. Orton said it’s understandable to see heightened volatility as investors contend with rapid moves in the fixed income market, including real yields briefly crossing into positive territory. Also, for the first time since 2000, the market is pricing in the U.S. Federal Reserve (Fed) raising its target interest rates by 50 basis points (bps) at each of the next three meetings in May, June, and July. None of this should be too surprising, yet the market moved and moved swiftly. Even more surprising — and challenging — is that the narrative has been incredibly negative for some time, and no amount of good news has been able to change it, Orton said. The doom and gloom is all about inflation right now. Until we start to see some positive reactions to good news, it’s hard to get too excited about the broader market. Orton said he does believe that when sentiment starts to change and breadth improves along with it, we’ll start to see some sustained upside.

“And I believe we’ll get there in the next few months,” he said. “But until then, tread carefully.”

Last week was pretty eventful, but this week has even more potential landmines for investors to navigate. Earnings results from mega-cap technology and, importantly, the reaction to them will be absolutely critical in setting the short-term direction of the market, Orton said. He said his biggest concern is that earnings have actually been quite strong so far, but you wouldn’t know that by reading headlines. “Earnings misses” have been blamed, along with the Fed, for the bad price action on Thursday, Friday, and really the past two weeks. However, the actual blended earnings growth rate for the S&P 500 stands at 6.6% (versus the 4.7% that was expected on March 31), with 79% of the companies that have reported beating expectations and only eight companies releasing negative guidance. More importantly, the blended net profit margin is better than expected at 12.3% (versus the consensus of 12.1%), which is the fifth-highest net profit margin reported by the index since FactSet began tracking this metric in 2008. There’s a plethora of good news that has been almost completely ignored in the prevailing market narrative:

  • The admirable ability of a major electric-vehicle manufacturer to beat estimates and navigate supply chain shortages;
  • Consumer staples companies navigating spiraling inflation with strong demand;
  • Transports have been hammered with fears of an economic slowdown, but one major railroad doesn’t see a 2022 recession in the freight market;
  • Airlines highlighting incredibly strong demand, with one Dallasbased carrier going as far as to project that the second quarter will be its best in terms of revenues in its history. “That sort of optimism amid all this volatility and uncertainty that we have means a lot for a CEO to go out and say that publicly to the market,” Orton said.

In short, that’s a lot of good news, and it provides evidence that “fundamentals are solid,” he said. “They are in place. The outlooks going into the rest of this year and into next year have not changed. If anything we’ve even seen some strengthening across certain metrics.” But he noted, that’s “being ignored by the market right now.” And Orton said that has him more uneasy than usual, especially if mega-cap tech reports good numbers that aren’t rewarded.

Negative sentiment levels that have persisted for some time now certainly play a role in the negative reception investors have had to earnings, Orton said. Last week he highlighted how individual investor bullish sentiment in the American Association of Individual Investors Sentiment Survey hit its lowest level since 1992. It didn’t improve much on the most recent survey with only 18.9% of investors in the bullish camp, a level that’s still lower than the worst reading in the Global Financial Crisis or the Corona Crash of early 2020. Updated data from the University of Michigan Index of Consumer Sentiment was similarly glum. Until we can start to see improved readings on the back of good earnings results and sustained economic growth, Orton said it becomes ever more important for investors to be judicious with their entry points and tactical with respect to asset allocation. There are certainly some opportunities out there right now, he said, and those who look past the negativity and lean into the volatility could be rewarded over the long term.

Real rates have jumped higher

S&P 500 Net Profit Margin First quarter 2018 through first quarter 2022

Source: Bloomberg, as of 4/22/22.

Stop telling consumers how poorly they’re doing

Orton said he can’t describe how frustrating it was to read article after article over the weekend about the negative state of the consumer given rising rates and persistently elevated inflation. Clearly nobody’s following the earnings, he said, which is too bad since without that the prevailing narrative just doesn’t paint an accurate picture. There are risks for sure, he said, but there have been risks for a year and look where we are. Coming into 2022, household debt service ratios are the best they’ve been in decades and consumers were sitting on over $2 trillion in savings. The switch from goods to services spending has been picking up, and the consumer has been more than willing and able to go out and travel. One financial services company on Friday reported that spending on its cards for travel and entertainment just about matched the pre-pandemic 2019 level in March. Rising prices might be squeezing people at the pump, but it doesn’t yet seem to be a big deterrent to travelling. A second bank further corroborated this trend, seeing its airline card spend volume flat in March 2022 versus 2019, the first time the bank had seen a recovery to pre-pandemic levels. A third bank has seen a large bump in travel and entertainment spending, while it also noted that spending for its customers with annual incomes under $50,000 was up strongly from 2019 in the first few weeks of April. Two consumer-facing companies — in swimming pool accessories and automotive parts — also reported great results last week with strong commentary around their core customers.

The consumer is clearly in good shape, and it’s also worth highlighting that risks of a self-inflicted recession due to rate hikes are overstated, Orton said. Three weeks ago the U.S. 2/10 Curve, known as the 2s10s curve, inverted and investors were very concerned that the Fed was hiking into a slowdown and that recession was inevitable. Orton said that was never his base case, and noted that now the curve actually steepened by almost 50 bps with the back end actually moving. The rise in longer-term rates certainly doesn’t point to collapsing economic growth, he said, and he continues to believe that healthy corporate investment coupled with a strong consumer will provide a buffer that has been largely ignored or written-off by the market.

Noteworthy improvement in the U.S. 2/10 Curve

S&P 500 Net Profit Margin First quarter 2018 through first quarter 2022

Source: Bloomberg, as of 4/22/22.

Amid the rubble, opportunity awaits

The broad brushstrokes being used to paint many sectors and industries is “crazy,” Orton said, and creates long-term opportunities for investors who are patient. For example, consumer discretionary

“Pretty soon you may be able to buy a U.S. Treasury bond in the expectation of making a positive return in real terms when it pays off,” he said. “That says good things about future growth and inflation and leaves some ammunition for future central bank cutting should it be necessary down the road.” has been weighed down by the homebuilding industry and anything tangentially related as well as autos. This concern weighed on companies tied to travel and leisure until the recently when three major airlines posted decent quarterly results accompanied by incredibly optimistic outlooks. Similarly, healthcare had finally started to break out given some positive results and pretty compelling valuations, but bad results from a few hospitals last week as soured sentiment and led a strong sell-off across the sector. Hospitals have been and will likely continue to be a challenging space, Orton said, especially given labor issues and rapid wage inflation, not to mention ongoing COVID-19 and regulatory concerns. That has created opportunities for long-term investors, said Orton, who added that he continues to like the space due to its counter-cyclical and defensive characteristics as well as strong earnings growth and margins.

Information technology also remains incredibly oversold, he said, adding that valuations for many higher quality companies are becoming compelling. The impact of aggressive rate hikes is fully baked into the market right now, he said, while strong topline growth can provide a buffer to economic fears. Margins are also pretty resilient and have held up better than most other sectors. Orton’s approach of focusing on high-quality prime tech versus speculative tech has been playing out, and he said he believes it should continue to work in the current environment. The information technology sector also is incredibly oversold with only 8% of its members trading above their 10-day daily moving average (DMA), so he said there is definitely opportunity once we bounce.

What to watch

Along with macroeconomic reports from across the globe, this week’s earnings calendar is crammed with 50% of the S&P 500 market cap reporting results. Companies reporting include those in soft-drink bottling; video games; managed healthcare; information technology; auto manufacturing; restaurants; package delivery; manufacturing; pharmaceuticals and biopharmaceuticals; banking; airlines; foods; social media; telecommunications; heavy equipment manufacturing; aerospace and defense technology; online retailing; electronics and software; tobacco; online payments; oil and gas; and pizza delivery.

This week's data releases

Monday ifo Institute Business Climate Index for Germany
Tuesday U.S. durable goods, consumer confidence, and new home sales
Wednesday U.S. Mortgage Bankers Association applications survey; U.S. wholesale inventories; Consumer price indexes for Australia and Brazil
Thusday U.S. gross domestic product (GDP), jobless claims and core Personal Consumption Expenditures Index quarter-over-quarter data; Japan monetarypolicy decision, Consumer Price Index, GDP forecasts, retail sales, and industrial output
Friday University of Michigan Index of Consumer Sentiment; U.S. Employment Cost Index, personal income and spending

 

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 Carillon Tower Advisers 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.

Oversold is a term used to describe a security believed to be trading at a level below its intrinsic or fair value.

Real yield curve rates, commonly referred to as “Real Constant Maturity Treasury” rates, on Treasury Inflation-Protected Securities (TIPS) at “constant maturity” are estimated by the U.S. Treasury from the Treasury’s daily par real yield curve. These par real yields are calculated from indicative secondary market quotations obtained by the Federal Reserve

Bank of New York. The par real yield values are read from the par real yield curve at fixed maturities, currently 5, 7, 10, 20, and 30 years. This method provides a par real yield for a 10-year maturity, for example, even if no outstanding security has exactly 10 years remaining to maturity.

A yield curve is a line that plots yields (interest rates) of bonds having equal credit quality but differing maturity dates. The slope of the yield curve gives an idea of future interest rate changes and economic activity. Investors and market analysts watch certain yield curves for signs of inversion, when yields for longer-term debt instruments fall below yields on short-term debt with the same credit quality. Inversions are watched as potential signs of a weakening economy and in certain cases, a harbinger of recessions.

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%.

Blended earnings growth rates combine actual results for companies that have reported earnings and estimated results for companies that have yet to report.

A blended net profit margin combines actual net profit margins from companies that have reported earnings and estimated margins for companies that have yet to report.

The American Association of Individual Investors Sentiment Survey reflects answers offered each week by AAII members to the question: What direction do they feel the stock market will take in the next six months? Answers are sorted into bullish, neutral, and bearish categories.

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.

The U.S. 2/10 Curve, known as the 2s/10s, is a bellwether indicator that measures the difference between the rates of the 10-year U.S. Treasury bond and the 2-year Treasury note. Measured in basis points, it is watched as an indicator of where the U.S. economy is in the business cycle, as the spread typically narrows as the economy moves through the cycle, reaches a low point and may go negative near the onset of a recession, then widens again during and after a recession.

Cyclical stocks have prices influenced by macroeconomic changes in the economy and are known for following the economy as it cycles through expansion, peak, recession, and recovery.

Defensive stocks provide consistent dividends and stable earnings regardless whether the overall stock market is rising or falling. Companies with shares considered to be defensive tend to have a constant demand for their products or services and thus their operations are more stable during different phases of the business cycle.

The daily moving average (DMA) is a calculation that takes the arithmetic mean of a given set of prices over the specific number of days in the past; for example, over the previous 15, 30, 100, or 200 days.

The ifo Institute Business Climate Index for Germany is based on a monthly survey of about 9,000 firms in manufacturing, the services sector, and construction, plus wholesale and retail sales about their characterization of their current business and their expectations for the next six months. It is published by the ifo Institute for Economic Research, based in Munich.

The Mortgage Bankers Association Weekly Applications Survey covers mortgage application activity that includes purchase, refinance, conventional, and government application data, weekly data on mortgage rates, and indices covering fixed-rate, adjustable, conventional, and government loans for purchases and refinances.

The Australian Consumer Price Index is a quarterly report from the Australian Bureau of Statistics measuring household inflation. It includes statistics about changes in price for a wide range of categories of household spending.

Brazil’s Extended National Consumer Price Index (IPCA), calculated by the Brazilian Institute of Geography and Statistics, measures the inflation rate for selected retail products and services, including food and beverages; housing; household articles; wearing apparel; transportation; health and personal care; personal expenses; education; and communication. The index is constructed to cover 90% families living in 13 geographic zones: the metropolitan areas of Belém, Fortaleza, Recife, Salvador, Belo Horizonte, Vitória,

Rio de Janeiro, São Paulo, Curitiba, Porto Alegre, as well as the Federal District and the cities of Goiânia and Campo Grande.

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.

The Japan Consumer Price Index, released monthly by the Statistics Bureau of Japan, tracks core inflation by monitoring price changes in a wide variety of goods and services, excluding fresh foods but including energy, purchased by households nationwide.

The Employment Cost Index measures the change in the cost of labor, free from the influence of employment shifts among occupations and industries, for three- and 12-month periods. The U.S. Bureau of Labor Statistics collects data for the index from thousands of private and government employers nationwide.

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 75% of the investable U.S. equity market.

 

CTA22-0274 Exp. 8/25/2022


April 18, 2022: Three reasons for confidence in the face of inflation

Earnings season takes off this week with a cross section of many sectors and industries as well as some blue-chip stocks. Earnings from the large-cap banks that reported last week were just fine, said Matt Orton, CFA, Chief Market Strategist at Carillon Tower Advisers. There were no red flags, and management so far has simply reinforced what we already knew about the economy.

That said, “overall sentiment is just incredibly negative,” Orton said. The percentage of bulls in last week’s American Association of Individual Investors Sentiment Survey was 15.8%, the lowest reading since September 1992. “Bullish sentiment is lousier now than it was during February and March 2020 at the start of the COVID pandemic. It’s worse than it was during the Global Financial Crisis. That extreme bearishness should result in a powerful rally at some point. The question is when. I hope that earnings season gives us the catalyst to see some improvement, but it’s going to take some time to digest all of the upcoming reports.”

As we start to hear from more consumer-oriented companies in the coming weeks, we will get some critical information regarding the impact of inflation on demand as well as margin trends moving forward. And the ability of companies and consumers to navigate inflation over the next few quarters will be critical in setting the market direction, Orton said. Consumer prices increased by 8.5% in March, the largest year-over-year increase since 1981, and last week’s Producer Price Index showed the costs of goods and services for producers soar by a whopping 11.2% from a year ago. But, he noted, the Consumer Price Index (CPI) came in below expectations for the first time “in a very long time.”

“That, in and of itself, was positive for the overall markets,” Orton said. “Perhaps we have seen a peak in the CPI and consumers are finally getting some relief at the pump. Looking ahead, I believe there are still at least three key reasons to be optimistic.”

First, corporate margins are expected to hold up

The market has been understandably concerned about higher inflation. But Orton said the narrative has never focused on how well the majority of companies have navigated through supply chain disruptions, wage increases, and rising commodity prices, ultimately maintaining margins above pre-pandemic levels. The blended net profit margin for the S&P 500 Index for the first quarter of 2022 is 12.1%: below the expected 12.3% for the quarter on Dec. 31 and below the year-ago net profit margin of 12.8%. However, Orton noted, it’s above the 5-year average net profit margin of 11.2%, and it also would mark the fifth-highest net profit margin reported by the index since FactSet started tracking the metric in 2008. It’s also worth noting that profit margins are holding up best not only in commodity-exposed sectors like energy and materials, but also in information technology and healthcare.

The chart below tells the entire story, Orton said. Profit margins are expected to rebound next quarter, but even if they stayed at current levels, profit margins would remain above pre-COVID levels and well above the 5-year average.

S&P 500 Net Profit Margin
First quarter 2018 through first quarter 2022

S&P 500 Net Profit Margin First quarter 2018 through first quarter 2022

Source: Bloomberg, FactSet consensus estimates, as of 4/14/22.

Next, the consumer is doing better than we think

Orton said he has been very constructive on the consumer for quite a while now and remains sanguine moving forward until proven otherwise. Despite consumer sentiment data consistently painting a negative picture and contending that consumers are inclined to cut back in response to higher prices, consumers have continued to spend. Retail sales have continued to increase at the same time that consumers have started to get out and spend on services such as vacations and dining out. Recent banking data show that consumers’ finances, particularly of those in lower income groups, are holding up, and Orton said that data counters the pessimistic findings of consumer sentiment surveys.

“Having spent a lot of time in airports over the past few weeks to visit with clients, I’ve encountered packed airports, crowded hotels, and restaurants broadly at capacity,” he said. “There is still a tremendous amount of savings still left to be deployed – more than $2 trillion – and even the consumers in lower income groups continue to spend.”

Last, Orton still believes recession is unlikely

With the backdrop of a strong consumer and healthy corporate profits, Orton said he just doesn’t see recession playing out anytime soon. Gas prices are starting to come down, and we’re seeing record bookings across airlines and online travel companies. Additionally, real yields are continuing to move higher – real 10-year U.S. Treasury note yields ended at the highest level since March 23, 2020, the day of the U.S. Federal Reserve’s pandemic-rescue package. A lot of ink has been spilled on the recession signal from yield curve inversion, but Orton said he believes that a positive real 10-year yield should be considered a healthy sign for any economy.

“Pretty soon you may be able to buy a U.S. Treasury bond in the expectation of making a positive return in real terms when it pays off,” he said. “That says good things about future growth and inflation and leaves some ammunition for future central bank cutting should it be necessary down the road.”

So where do we go from here?

Orton said he continues to believe that the market will trade in a range driven by knee-jerk reactions to earnings reports and economic data releases.

“Investor sentiment remains downright awful, and it’s hard to find a bull wherever I go,” he said. “It’s understandable that investors feel the pressure with correlations between rates and stocks moving negative over the past couple of months.”

In fact, Orton noted that the recent environment has been so anomalous that an 80% stock/20% bond portfolio would have outperformed a 60% stock/40% bond portfolio in the first quarter despite negative equity returns.

“Part of the challenge for equities is that the market is positioned as if a recession is brewing,” he said. “I believe that recession and crash fear are high and probably overdone, for now. Until we have a sustained breakout in stocks, I believe in continuing to use downside opportunistically and not chasing the market higher.”

As we move deeper into earnings season, Orton said we’ll start to get more insight from the information technology sector, including mega-cap technology, which has weighed heavily on the market so far this year. Earnings are expected to remain strong and margins are expected to hold up better than the broad market. If this plays out and management teams deliver some optimistic commentary, Orton said he would expect to see a strong bounce. The S&P 500 information technology sector is oversold, with just over 10% of its constituents trading above their 10-day daily moving average (DMA). On the other hand, he said, staples and other defensive sectors have moved significantly and are overvalued and overbought and could be on the wrong side of re-allocation.

What to watch

It will be a busy week with some important global economic data releases and earnings season picking up in the U.S. with earnings reports from companies in banking; financial services; transportation and logistics; consumer goods; pharmaceuticals; technology; online streaming; energy and petroleum production; health insurance; medical devices; electric vehicles; airlines; semiconductors; used car sales; telecommunications; tobacco; social media; casinos and resorts; and mining.

This week's data releases

Monday China reports on industrial output, retail sales, and gross domestic product
Tuesday U.S. housing starts
Wednesday U.S. Fed Beige Book; existing home sales; Eurozone industrial output
Thusday U.S. initial jobless claims, Federal Reserve Bank of Philadelphia’s Manufacturing Business Outlook Survey; Eurozone Harmonised Index of Consumer Prices
Friday U.K. retail sales; Japan core Consumer Price Index

 

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 Carillon Tower Advisers 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.

The American Association of Individual Investors Sentiment Survey reflects answers offered each week by AAII members to the question: What direction do they feel the stock market will take in the next six months? Answers are sorted into bullish, neutral, and bearish categories.

The U.S. 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.

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.

A blended net profit margin combines actual net profit margins from companies that have reported earnings and estimated margins for companies that have yet to report. Estimated profit margin numbers are based on FactSet consensus estimates.

Real yield curve rates, commonly referred to as “Real Constant Maturity Treasury” rates, on Treasury Inflation-Protected Securities (TIPS) at “constant maturity” are estimated by the U.S. Treasury from the Treasury’s daily par real yield curve. These par real yields are calculated from indicative secondary market quotations obtained by the Federal Reserve Bank of New York. The par real yield values are read from the par real yield curve at fixed maturities, currently 5, 7, 10, 20, and 30 years. This method provides a par real yield for a 10-year maturity, for example, even if no outstanding security has exactly 10 years remaining to maturity.

A yield curve is a line that plots yields (interest rates) of bonds having equal credit quality but differing maturity dates. The slope of the yield curve gives an idea of future interest rate changes and economic activity. Investors and market analysts watch certain yield curves for signs of inversion, when yields for longer-term debt instruments fall below yields on short-term debt with the same credit quality. Inversions are watched as potential signs of a weakening economy and in certain cases, a harbinger of recessions.

The daily moving average (DMA) is a calculation that takes the arithmetic mean of a given set of prices over the specific number of days in the past; for example, over the previous 15, 30, 100, or 200 days.

Overbought is a term used to describe a security believed to be trading at a level above its intrinsic or fair value.

Oversold is a term used to describe a security believed to be trading at a level below its intrinsic or fair value.

Defensive stocks provide consistent dividends and stable earnings regardless whether the overall stock market is rising or falling. Companies with shares considered to be defensive tend to have a constant demand for their products or services and thus their operations are more stable during different phases of the business cycle.

The Federal Reserve Bank of Philadelphia’s Manufacturing Business Outlook Survey is a monthly survey in which manufacturers in the Third Federal Reserve District, which includes Pennsylvania, New Jersey, and Delaware, indicate the direction of change in overall business activity and in various measures of activity at their plants: employment, working hours, new and unfilled orders, shipments, inventories, delivery times, prices paid, and prices received.

The Eurozone Harmonised Index of Consumer Prices is a composite measure of inflation in the Eurozone based on changes in prices paid by consumers in the European Union for items in a basket of common goods. The index tracks the prices of goods such as coffee, tobacco, meat, fruit, household appliances, cars, pharmaceuticals, electricity, clothing, and many other widely used products.

The Japan Consumer Price Index, released monthly by the Statistics Bureau of Japan, tracks core inflation by monitoring price changes in a wide variety of goods and services, excluding fresh foods but including energy, purchased by households nationwide.

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 75% of the investable U.S. equity market.

 

CTA22-0261 Exp. 8/18/2022