“
”Markets in Focus
Timely analysis of market moves and sectors of opportunity
U.S. Federal Reserve Chair Jerome Powell has clearly signaled a September rate cut, but the size of the cut and the depth of the cutting cycle are still unknown.
Volatility seems likely to remain high as investors react to economic data releases ahead of the September Federal Open Market Committee (FOMC) meeting.
Data that upholds a “soft landing” narrative could support equities and provide increased support to the ongoing expansion of market breadth.
The market liked U.S. Federal Reserve (Fed) Chair Jerome Powell’s message from the Jackson Hole Economic Symposium, but expectations may still be too optimistic, pricing in 100 basis points (bps) of interest rate cuts before year end1. Economic data released in the weeks ahead could upset some expectations for excessive rate cuts, and investors will need to assess whether market moves are temporary setbacks or signs of bigger problems.
Matt Orton, CFA, Chief Market Strategist at Raymond James Investment Management, says he believes that the bull market can extend into the end of the year. “I have been constructive on the market — despite the volatility over the past month — and I’m particularly encouraged that the increase in earnings breadth that we’ve seen for the past few quarters is finally starting to translate to an increase in price breadth,” he said.
The S&P 500® Equal Weight Index outperformed the capitalization-weighted S&P 500 Index on its way down earlier this month. The equal-weight index has also surged higher than its cap-weighted counterpart, pushing to new highs this week. “Nearly 80% of S&P 500 companies are trading above their 50- and 200-day moving averages while the market doesn’t look overbought across a number of different technical metrics,” Orton said.
Volatility has fallen nearly as fast as it spiked, but the path forward could still have some bumps. This week, the earnings report from the leading designer of semiconductors used in artificial intelligence (AI) applications could be a significant hurdle for the market. After that, the market’s next hurdle will be the Employment Situation Summary, the August payroll report released by the U.S. Bureau of Labor Statistics. Later, investors will look to the September Federal Open Market Committee (FOMC) meeting. “We’re also heading into one of the weakest periods for the market from a seasonal perspective,” Orton said.
“I continue to believe that the macro data is supportive of a soft landing, and guidance throughout earnings season corroborates this,” Orton said. “If we see any downside around upcoming announcements, I would encourage investors to consider being opportunistic to continue building balance in their portfolios.” He said that opportunities remain across asset classes for investors to consider locking in attractive yields and exploring positioning in sectors and industries where earnings are accelerating higher and valuations are well off their highs.
Fed Chair Jerome Powell gave his clearest signal yet regarding a September rate cut. In his speech at the Jackson Hole Economic Symposium on Friday, Powell said that the time has come for cuts, showing confidence that inflation is on a sustainable path back to the central bank’s 2% target. “They were also his most definitive remarks on the softening we’re starting to see in the labor market,” Orton said.
Powell’s remarks confirmed a dovish turn for the Fed, but there are still a lot of unknowns about future policy. “The door remains open for the size of the cut and the depth of the cutting cycle, but traders are running through it and continuing to price 100 bps of cuts for this year,” Orton said. “The market has retained hope for at least one 50 bp cut over the next three meetings, but I still question whether the market is running too fast.”
Financial conditions are already loose — the Bloomberg Financial Conditions Index is close to its least restrictive since the Fed started hiking in 2022 — and Orton said he believes that the need for a rapid and deep cutting cycle is likely less than market pricing would suggest. “I expect volatility to remain high as investors react to new economic data in advance of the September FOMC meeting.”
“The key question is what kind of labor market would warrant more stimulative policy and how far we are from that point today,” Orton said. “We’ll know much more after the Fed releases its Summary of Economic Projections in September. For now, there is clearly a Fed put on growth/labor market dynamics, and the market likes what it heard. It seems likely that we will get a series of 25 bp cuts at the next three FOMC meetings this year.”
“The economy is certainly slowing, but it’s not breaking,” Orton said. “We cannot ignore the recent Bureau of Labor Statistics revision to payrolls, the fact that 11% of credit cards are more than 90 days delinquent, or the fact that wage growth is slowing and ‘white collar’ professional payrolls are nearly flat year over year.”
Powell’s Jackson Hole Economic Symposium
speech confirmed cuts are coming
Futures-implied size of basis point (bp) cuts
Source: Bloomberg; as of 8/23/24.
Orton said that over the past two weeks, economic and earnings data from several large consumer companies have indicated consumer resilience. Recent jobs data also continues to show a muted level of layoffs in the economy. “We’re likely to see tame job cut announcements and Worker Adjustment and Retraining Notification (WARN) notices remaining near one-year lows.”
“Fixed business investment has also remained quite strong, and that seems likely to continue into 2025, particularly as AI capital expenditure (capex) provides a meaningful tailwind,” Orton said. “Any data that we get in the coming weeks to corroborate a ‘soft landing’ narrative could further support equities and provide increased confidence for investors.”
One of Orton’s key investment themes heading into the second half of this year has been building better balance in portfolios. “The breadth we’re finally seeing in the market hasn’t received enough attention, but it’s worth noting the positive historical analogs when market breadth led the stock market,” Orton said. “We cannot rule out some downside as investors digest the aggressive rate cutting cycle currently priced into the market, but I would recommend that investors consider using downside opportunistically as long as the pattern of higher highs and higher lows remains in place.”
Orton says that plenty of opportunities remain across the market of stocks. In an interview with CNBC on Friday afternoon, he highlighted some of the most relevant trends:
Looking to the “AI 2.0” basket. Fixed investment has been one of the key drivers behind resilient U.S. growth in the first half of 2024. “AI capex has remained a strong theme emerging from this earnings season; major internet and hyperscaler companies maintained or increased their capex guidance when releasing results,” Orton said. The deployment of funding from the Inflation Reduction Act and the CHIPS (Creating Helpful Incentives to Produce Semiconductors) and Science Act could provide further tailwinds for AI infrastructure. Orton said that capex beneficiaries like electrical equipment companies, electrical utilities, and machinery companies involved in actual construction look attractive, especially after the recent selloff.
Playing offense with defense. Aerospace and defense companies have been one of Orton’s preferred areas this year. “We’re seeing the sector inflect higher due a threat environment that is more belligerent, showing earnings strength as international demand picks up and reignites growth,” he said. “Overall, top line performance across the defense space has been better than expected, and there is increased confidence that the supply chain will continue to improve.” (Supply chain headwinds were a key reason for softness in 2022-2023.) Orton also said that historically speaking, defense stocks tend to outperform in election years.
Could small caps shoot for all-time highs? The Russell 2000® Index hasn’t been close to recovering its highs from 2021, but it has been marking a series of higher highs and higher lows while working through concerns over interest rates and economic growth. “With economic growth holding up and rates on a clear path down, this could finally translate to longer-term sustainability for an upward trend,” Orton said. “I would expect volatility as the tension between narratives works itself out, but I believe that the risk/reward proposition looks quite favorable. Investors should consider having some positioning in the space, particularly in higher-quality companies.”
Opportunities in emerging markets and outside the Americas. Yields and the U.S. dollar continue to break lower, which has meaningful global implications. “There might be some volatility in the short term as the dollar reacts to the market’s pricing for the depth and pace of rates, but its path looks lower,” Orton said. “I favor emerging markets ex-China, and India remains my most preferred emerging market, particularly as it has lagged a bit on the recent global recovery.” He said there are also opportunities in international developed markets, but selectivity is critical.
“I expect the European Central Bank to cut rates again in September as recent data bolsters the case that inflation is continuing to move lower, though the pace forward is still likely to be gradual,” Orton said. “In Europe, luxury goods makers look favorably priced, and the entry point is appealing for the market leaders.”
Orton said that the pace of rate hikes in Japan is also likely to be quite gradual, due to market volatility and the underlying fundamental trends that support the strength of Japanese equities. “I advocated for buying the dip in Japan and continue to see value despite some heightened uncertainty around the appreciating Japanese yen impacting earnings.”
Nvidia earnings will be released on Wednesday, and the company’s weight in the S&P 500 Index, along with its psychological impact on the AI trade, could have meaningful short-term implications. The Personal Consumption Expenditures (PCE) excluding Food and Energy Price Index — also known as “core PCE,” the Fed’s preferred measure of inflation — is due Friday. Data from the University of Michigan Index of Consumer Sentiment is also worth watching. Remarks from Federal Reserve Bank of San Francisco President Mary Daly are scheduled for Monday. Fed board member Christopher Waller and Federal Reserve Bank of Atlanta President Raphael Bostic will be speaking on Wednesday, and the remarks from Fed officials could provide insights into FOMC thinking regarding the size of the initial rate cut in September.
1 Unless otherwise indicated, all data cited is sourced from Bloomberg as of August 23, 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
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.
Capital expenditures, or capex, are monies used by a company to buy, improve, or maintain physical assets such as real estate, facilities, technology, or equipment, and may include new projects or investments.
The CHIPS (Creating Helpful Incentives to Produce Semiconductors) and Science Act is federal legislation passed in 2022. It aims to increase investments in U.S. semiconductor manufacturing capacity, while also aiming to support the development leading-edge technologies, such as quantum computing, AI, clean energy, and nanotechnology, while also looking to create high-tech hubs that can foster a larger and more inclusive science, technology, engineering, and math (STEM) workforce.
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 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.
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 term “Fed put” is an adaption of the option term “put,” and it describes the belief among market participants that the U.S. Federal Reserve would step in and implement policies to limit the equity market’s decline beyond a certain point.
Guidance refers statements from the managers of publicly traded companies that indicate whether they expect to realize near-term profits or losses and why.
Hawkish, dovish, and centrist are terms used to describe the monetary policy preferences of central bankers and others. Hawks prioritize controlling inflation and may favor raising interest rates to reduce it or keep it in check. Doves tend to support maintaining lower interest rates, often in support of stimulating job growth and the economy more generally. Centrists tend to occupy the middle of the continuum between tight (hawkish) and loose (dovish) monetary policy.
Headwind is a term used to describe events or market forces that hinder the prospects for performance in an individual investment or group of investments. The opposite of a headwind is a tailwind, which exerts a positive influence on an investment’s performance.
Hyperscaler refers to the largest cloud computing providers that can provide massive amounts of computing resources and storage at enterprise scale.
The Inflation Reduction Act (IRA) is federal legislation passed in August 2022. It aims to help curb inflation by directing spending toward reducing carbon emissions and lowering healthcare costs, while also aiming to improve taxpayer compliance through increased funding for the Internal Revenue Service.
The Jackson Hole Economic Symposium, hosted annually by the Federal Reserve Bank of Kansas City in Jackson Hole, Wyo., brings together dozens of central bankers, policymakers, scholars, and economists to discuss economic issues, implications, and policy options.
Market capitalization, or market cap, refers to the total dollar market value of a company’s outstanding shares of stock.
Overbought is a term used to describe a security or group of securities believed to be trading at a level above its or their intrinsic or fair value.
Core PCE, officially known as the Personal Consumption Expenditures (PCE), excluding Food and Energy, 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.
A “soft landing” occurs when a central bank adjusts interest rates to successfully reduce inflation and slow economic growth while avoiding a recession. A “hard landing” occurs when a central bank’s unsuccessful management of interest rates causes a recession.
The summary of economic projections is produced following meetings of the Federal Open Market Committee and includes meeting participants’ projections of the most likely outcomes for real gross domestic product growth, the unemployment rate, and inflation for a forward-looking three-year window and over the longer run.
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.
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.
Worker Adjustment and Retraining Notification (WARN) notices are issued when companies with 100 or more full time workers will be laying off at least 50 people at a single site of employment. Companies that are subject to the WARN act must issue these written notices at least 60 calendar days in advance of the layoffs.
Indices
The Bloomberg U.S. Financial Conditions Index tracks the overall level of financial stress in the U.S. money, bond, and equity markets to help assess the availability and cost of credit. A positive value indicates accommodative financial conditions, while a negative value indicates tighter financial conditions relative to pre-crisis norms.
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 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 dividends reinvested. The S&P 500 represents approximately 75% 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.
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 trade mark 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-598201 Exp. 12/26/2024
Prices remain elevated in services and housing, but inflation is broadly cooling while retail sales and unemployment data look more benign.
U.S. Federal Reserve (Fed) Chair Jerome Powell’s remarks at the Jackson Hole Economic Symposium are expected to set the table for a rate cut in September.
The market’s path higher may not be a straight line. Even if the Fed clearly signals a rate cut, investors could be disappointed by what they hear given the market’s lofty expectations.
Last week’s constructive data provided an opportunity to take a deep breath and better assess whether the U.S. Federal Reserve (Fed) will successfully avoid an economic hard landing.1
Matt Orton, CFA, Chief Market Strategist for Raymond James Investment Management, has consistently been in the soft-landing camp.
“A few weeks ago, the surge in volatility across asset classes was an opportunity for investors to consider deploying cash and build better balance in their portfolios,” he said. “Growth is certainly slowing, and there are some cracks appearing in the labor market, but the totality of the data certainly doesn’t point to a rapid slowdown.”
Last week’s Consumer Price Index (CPI) and Producer Price Index (PPI) data show the disinflationary trend remains intact. Continuing low jobless claims and a strong retail sales report could further quell recession fears. And Orton said he believes investors should not ignore the strength of earnings season, robust corporate margins, and generally upbeat guidance.
“However, the market’s path higher likely isn’t a straight line,” he said. “Expectations for a 50-basis point (bp) rate cut and an aggressive cutting cycle have been priced into the market, but I don’t think the data justifies it.” Orton believes that any normalization in rate pricing will likely spill over to equities, and investors could see a few more opportunities to deploy capital on short-lived market pullbacks. “Any pullback in bonds could also provide an opportunity to consider moving out of cash, and depending on each investor’s situation, locking in rates before the very front of the yield curve starts moving around rate cuts,” he said.
In Orton’s view, the market has gone through a healthy reset, and the worst volatility likely has passed. “Investors should continue to work through their shopping lists and consider putting capital to work on pullbacks, leaning into higher quality companies with durable secular growth drivers,” he said.
From recession to reality
Futures-implied 25 basis point cuts priced in by U.S. Federal Reserve meeting 2024 year to date
Source: Bloomberg; as of 8/16/24.
Orton will be focused on the Jackson Hole Economic Symposium this week, hosted by the Federal Reserve Bank of Kansas City. “This is not typically what the U.S. Federal Reserve (Fed) uses to steer expectations for its next policy meeting, but this year’s speech from Fed Chair Jerome Powell may occasion more of an explicit focus given the events of the past few weeks,” he said. “I expect Powell to downplay fears that the Fed is moving too slowly and to set the table for a rate cutting cycle that starts in September.”
Orton said that the next payrolls report will be released the day before the Fed’s upcoming communications blackout period, which increases the likelihood of more overt guidance. “Policymakers will only have a limited window to influence expectations ahead of the September Federal Open Market Committee meeting, should they still want or need to guide against a 50-bp cut,” he said.
“My base case remains for 25-bp cuts in September and December,” Orton said. “Inflation continues to normalize, but the recent PPI and CPI reports still show evidence of stickiness in services and housing. Additionally, retail sales and more benign unemployment data do not point to an economy headed off a cliff,” he said.
The market might be disappointed by what it hears, even if the Fed clearly signals a rate cut. Orton believes that an adverse reaction could create another opportunity for investors to explore putting money to work in equities and fixed income.
“While questions around the speed and depth of the rate cutting cycle might put a near-term floor under volatility, we should not lose sight of the fact that earnings and margins have remained strong,” Orton said. Blended second-quarter earnings per share (EPS) growth for S&P 500 Index companies stands at 10.9% — well ahead of expectations — with sectors like financials, healthcare, real estate, and utilities reporting some of the strongest earnings beats.
Orton said that earnings across cyclical sectors have inflected and accelerated higher, building on the past two quarters’ broadening trend. “We also can’t forget about the strength in profit margins, which gives me even more confidence that we’re not going to see mass layoffs in the near future,” he said. “And perhaps most importantly, we’re finally seeing the increased breadth in earnings growth translate into better performance: The S&P 500® Equal Weight Index is outperforming the capitalization-weighted S&P 500 Index by more than 2% quarter to date, and small-caps are doing even better.”
The key question is whether this can continue.
“There has been a lot of noise over the past month, but I think the swift market selloff has reminded many investors about the importance of balance in portfolios,” Orton said. “Some of the mega-caps look attractive right now, after a bruising few weeks, but I think that across sectors we’ll continue to see higher-quality companies maintain their strong recent performance.”
Orton remains optimistic about the bull market and the U.S. economy’s prospects for a soft landing, but he said that investors should be prepared for some bumps in the near term. The S&P 500 Index has jumped more than 7% from its lows on Aug. 5, and the Chicago Board Options Exchange Volatility Index (VIX) fell below 15 after peaking at 65, which is a remarkable round trip. Orton believes that investors will have a number of opportunities to better position their portfolios heading into the fall and the end of the year.
There’s still a place for mega-caps. Although mega-cap companies have endured significant losses — some of them have valuations that are at their lowest level since last October — Orton argued that they are now quite fairly valued, especially given generally positive earnings results. “Many of these companies provide defensive business models with rock solid balance sheets, holding more cash than the entire market capitalization of many S&P 500 Index companies,” he said. “For investors who need to add growth to their portfolios, this is a great chance to consider getting exposure to many of the greatest beneficiaries of secular growth trends.” Orton said that the long-term tailwinds driving earnings growth and enthusiasm remain in place.
Lean into the “Artificial intelligence (AI) 2.0” basket. Business fixed investment, which has been a key driver behind resilient U.S. growth in the first half of the year, is another reason for Orton’s optimism about the economy. “AI capital expenditure has remained a strong theme during this earnings season. Major internet and hyperscaler companies have maintained or increased their capex guidance when releasing results,” Orton said. The deployment of funding from the Inflation Reduction Act and the CHIPS (Creating Helpful Incentives to Produce Semiconductors) and Science Act could provide further tailwinds for AI infrastructure. Orton said that capex beneficiaries like electrical equipment companies, electrical utilities, and machinery companies involved in actual construction look attractive, especially after the recent selloff.
Dividend growth for balance. Dividend growers have outperformed the S&P 500 Index by nearly 4% quarter to date, and they held up remarkably well during the selloff. “This is an area of the market I have favored due to strong free cash flow, earnings growth, and correlation benefits that can help investors balance some of the higher growth areas of their portfolios,” Orton said. He warned that as the U.S. election heats up, volatility may not settle at the levels from earlier this summer. “Valuations remain attractive across many of these companies, and I think this is an area where investors can feel comfortable adding exposure now,” Orton said.
Playing offense with defense. Aerospace and defense companies have been one of Orton’s preferred areas this year. “We’re seeing the sector inflect higher due to a threat environment that is more belligerent, showing earnings strength as international demand picks up and reignites growth,” he said. “Overall, top line performance across the defense space has been better than expected, and there is increased confidence that the supply chain will continue to improve.” (Supply chain headwinds were a key reason for softness in 2022-2023). Orton also said that historically speaking, defense stocks tend to outperform in election years.
Economic data was in the driver’s seat last week, but monetary policy will take center stage in the week ahead. U.S. Federal Reserve and European Central Bank (ECB) minutes will be released midweek, and Fed Chair Jerome Powell’s Jackson Hole Economic Symposium speech will end the week. The Bank of Japan’s (BoJ’s) potentially dovish Governor Kazuo Ueda will make a speech to his country’s parliament on Friday coupled with the release of Japan Consumer Price Index data, which will be key for investors — Japanese stocks posted their biggest weekly advance in more than four years after losing more than 20% in three days during the unwind of the carry trade that caused havoc across global markets. There’s also the potential for some added political noise from the Democratic National Convention that kicks off this week. And although earnings season is winding down, a few additional updates will provide important consumer-related insights.
1 Unless otherwise indicated, all data cited is sourced from Bloomberg as of August 16, 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
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.
Blended earnings combine actual results for companies that have reported earnings and estimated results for companies that have yet to report.
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.
Capital expenditures, or capex, are monies used by a company to buy, improve, or maintain physical assets such as real estate, facilities, technology, or equipment, and may include new projects or investments.
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 CHIPS (Creating Helpful Incentives to Produce Semiconductors) and Science Act is federal legislation passed in 2022. It aims to increase investments in U.S. semiconductor manufacturing capacity, while also aiming to support the development leading-edge technologies, such as quantum computing, AI, clean energy, and nanotechnology, while also looking to create high-tech hubs that can foster a larger and more inclusive science, technology, engineering, and math (STEM) workforce.
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.
Dividend payers are the companies that distribute a portion of their profits to shareholders in the form of a dividend.
Defensive stocks provide consistent dividends and stable earnings regardless of 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.
Dividend payers are companies that distribute a portion of their profits to shareholders in the form of a dividend.
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.
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.
Hyperscaler refers to the largest cloud computing providers that can provide massive amounts of computing resources and storage at enterprise scale.
Headwind is a term used to describe events or market forces that hinder the prospects for performance in an individual investment or group of investments. The opposite of a headwind is a tailwind, which exerts a positive influence on an investment’s performance.
The Inflation Reduction Act (IRA) is federal legislation passed in August 2022. It aims to help curb inflation by directing spending toward reducing carbon emissions and lowering healthcare costs, while also aiming to improve taxpayer compliance through increased funding for the Internal Revenue Service.
The Jackson Hole Economic Symposium, hosted annually by the Federal Reserve Bank of Kansas City in Jackson Hole, Wyo., brings together dozens of central bankers, policymakers, scholars, and economists to discuss economic issues, implications, and policy options.
The Japan Consumer Price Index (CPI), 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.
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 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.
Secular growth 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.
A “soft landing” occurs when a central bank adjusts interest rates to successfully reduce inflation and slow economic growth while avoiding a recession. A “hard landing” occurs when a central bank’s unsuccessful management of interest rates causes a recession.
The VIX — officially known as the Chicago Board Options Exchange (CBOE) Volatility Index — is a real-time market index that represents the market’s expectation of 30-day forward-looking volatility. Derived from the price inputs of the S&P 500 index options, it provides a measure of market risk and investors’ sentiments. Higher VIX values reflect higher levels of volatility.
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.
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 dividends reinvested. The S&P 500 represents approximately 75% 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.
M-595562 Exp. 12/19/2024
Last week’s frenzy did damage to market sentiment and technical indicators that will take some time to mend.
That said, nothing that happened last week points to a recession, and corporate earnings growth and profit margins remain strong.
Expect further volatility and consider using it selectively to add to positions in areas like dividend growers, beneficiaries of the capital expenditures planned to support artificial intelligence, developed international markets, and maybe small caps.
The speed and size of the Aug. 5 drawdown mark it as the fifth-highest velocity crash for the S&P 500 Index in the last century.1
“Significant damage has been done from a technical and sentiment perspective that will take time to heal,” said Matt Orton, CFA, Chief Market Strategist at Raymond James Investment Management. “But without a macroeconomic rationale for further weakness, I expect the market to return to its prior bull trend as we work through some remaining indigestion caused by the selloff.”
In particular, Orton said, market pricing for the U.S. Federal Reserve’s (Fed’s) rate-cutting cycle went too far too fast. At peak panic, the market briefly signaled a chance of an emergency, inter-meeting cut of the federal funds rate. By the end of the week, market pricing of Federal Open Market Committee rate cuts for the rest of this year remained at more than 100 basis points (bps), compared to 160 bps at its peak on Aug. 5, with more than 200 bps of cuts priced in over the next two years.
“The burden of proof is on a rapid, significant deterioration in the macroeconomic data to justify the extreme levels of Fed cut pricing observed last week, and I just don’t see that playing out given the totality of recent economic data, earnings, and corporate guidance,” Orton said. If the Consumer Price Index on Wednesday is in line with expectations or better than expected, Orton suspects we’ll see a continued reversal in rate-cut pricing.
“While there have been and remain some tactical opportunities for investors, I think later this week will provide a higher degree of confidence for investors thinking about opportunistically putting capital to work,” he said. “With volatility comes opportunity, and investors have been presented with an opportunity to consider adding exposure to some of the long-term secular growth winners that were thrown out with the bathwater.”
The price action also was a reminder of the need to have balanced portfolios, both across geography and market capitalization and within the fixed income markets, he said.
Markets caught off guard by recent volatility spike
Intraday Chicago Board Options Exchange Volatility Index (VIX), 2008 to present
Source: Bloomberg; as of 8/9/24.
After last week’s frenzy across asset classes, Orton said it’s worth taking a step back and asking what has actually changed. The S&P 500 Index peaked in July at 5667 and troughed on the morning of Aug. 5 at 5119, which is just under a 10% move. While this is a meaningful correction, he said a 10% peak-to-trough move in the S&P 500 wouldn’t normally be considered a crash. But the spike in volatility and rapid drawdown weren’t normal and were, in fact, more consistent with market crashes. The swift moves shook investor complacency and caused some serious damage to confidence, likely heightening the responses to economic data to be reported in coming weeks.
“While I believe the correction was overdone, the damage to confidence will take some time to fully heal,” Orton said. “Neither stocks nor credit are close to pricing in recession, but that makes them vulnerable to shock and panic in the face of bad news. We certainly didn’t learn anything new last week that would point to a recession, and a soft landing remains my base case.”
What’s clear, he said, was that some weak hands were sucked into the market on the way up earlier this year, and last week some itchy fingers hovered over the sell button.
Given the focus on macroeconomic volatility, Orton said it’s easy to understand how many investors have overlooked a generally strong second-quarter earnings season. Company results have been robust: The blended year-over-year earnings growth rate for the S&P 500 stands at 10.8% (versus consensus expectations of 8.9%) with nine of 11 sectors reporting positive growth. The broadening of earnings growth seen over the past two quarters continued in the second quarter with positive surprises in sectors like healthcare, financials, utilities, and energy. Margins have also remained quite resilient at 12.2%, which is above:
the previous quarter’s net profit margin of 11.8%,
the year-ago net profit margin of 11.6%, and
the 5-year average of 11.5%.
There has been a chorus of predictions that margins would deteriorate as inflation came down or as the consumer started to slow, Orton said, but that certainly hasn’t played out.
The strength of profit margins also gives Orton increased confidence that the labor market isn’t going to deteriorate rapidly. This is further supported by overall positive guidance from corporate management teams with the percentage of companies issuing negative guidance below historical averages. Some analysts have flagged lower positive revenue surprises as a harbinger of a corporate slowdown. But Orton said this misses the fact that the current revenue growth rate of 5.2% would be the largest revenue growth rate since the fourth quarter of 2022 (5.4%) and would mark the 15th consecutive quarter of revenue growth for the S&P 500.
“We should take an increased level of confidence in the soft-landing narrative from the current earnings season rather than focusing on a few specific companies that may have been somewhat disappointing,” he said.
The market mayhem of Aug. 5 might seem like a bad dream, as an uneasy equilibrium was restored by benign U.S. unemployment claims data and the Bank of Japan stepping back from more rate hikes, which undermined the two most popular explanations for the swift drawdown. Orton expects to see continued normalization over the next few weeks as markets heal the lingering damage to sentiment and technical indicators. But he said don’t be surprised by more volatility as important macroeconomic data is reported in coming weeks: There’s the Consumer Price Index and Producer Price Index this week, the Jackson Hole Economic Symposium later in August, and a likely repricing of Fed rate-cut expectations that he believes needs to take place.
S&P 500 second-quarter earnings growth by sector
Source: Bloomberg, as of 8/9/24. 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.
“But,” Orton said, “I do think there are some attractive opportunities that exist for investors right now,” especially if they consider:
Using volatility to add to positions selectively. Earnings and guidance should not be ignored, Orton said. “The baby was thrown out with the bathwater in information technology and communication services, yet earnings across many semiconductors and a few of the mega-caps were actually quite strong with results that exceeded expectations and raised guidance from management teams,” he said. We’ve also seen continued resiliency in industrials, particularly in aerospace and defense and what Orton calls the “AI 2.0” basket of companies that are capital expenditure beneficiaries from the huge spending planned for the coming years by the artificial intelligence hyperscalers. Similarly, the money center banks were caught up in the selloff but are well positioned as the yield curve steepens and merger and acquisition activity continues to come back, he said. He is particularly focused on capital markets companies as a result. “This isn’t the time to add blanket market exposure,” he said, “but I believe there are pockets of strength where earnings catalysts have passed and we can feel more confident leaning into their fundamental strength.”
Continuing to build balance in portfolios. Orton has advocated for adding dividend growers to portfolios, and he continues to believe their resiliency over the past few weeks highlights why this cohort of companies should have a part in investor portfolios. Dividend growers, as defined by the S&P U.S. Dividend Growers Index, outperformed the S&P 500 by roughly 4% from the peak to trough (July 16 to Aug. 5, 2024). As the market becomes hyper-focused on every data point and the election season heats up, Orton suspects volatility won’t revert to where it was in July. “Valuations remain quite attractive across many of these companies, and I think this is an area where investors can consider adding exposure now,” he said. Also, he said there are pockets of strength and significant value across international markets right now. Japan was the epicenter of last week’s pullback, with the Nikkei 225 Index down 20% over the three trading days (Aug. 1, Aug. 2, and Aug. 5). Yet the fundamental picture across parts of the Japanese equities market like banks hasn’t really changed, Orton said, and he would consider using the downside opportunistically. The same goes for Europe, where economic data looks set to continue inching higher. Aerospace and defense companies held up pretty well and we’ve seen resiliency in their earnings over the past few quarters. With defense budgets continuing to increase, Orton expects this to be an area that could continue to outperform. “Still, Europe and Japan are not markets that I would want to buy in totality,” he said. “Rather, I prefer specific sector and company exposures, and this is where active management can play a good role.”
Watching to see whether small caps benefit from better economic data. Small caps had a strong July as we saw some positive rotation toward the broader market. However, Orton said small caps still have more work to do. “I believe that investor positioning remains incredibly offsides and small-cap valuations relative to large caps are still very attractive on an absolute and relative basis,” he said. However, small-cap earnings have not been as encouraging. We’ve only heard from about 20% of companies, and while S&P SmallCap 600® Index earnings are ahead of expectations, absolute results are still negative year over year. That said, expectations are for rapidly accelerating earnings growth over the coming quarters. If this plays out and guidance starts to improve, Orton sees “a lot of room to run given serious underperformance relative to large.” Unfortunately, he said, sentiment is quite weak and investors need to see a resumption of the upside that started last month. Despite the headwinds, he thinks the risk-reward proposition still looks favorable, and he expects any relief on the growth narrative to benefit small caps the most.
The labor market has been in focus for the last two weeks, but this week attention will move back to inflation with the Producer Price Index and Consumer Price Index readings for July due on Tuesday and Wednesday, respectively.
Retail sales on Thursday will provide an important update on the state of the consumer, as will bellwether retailer earnings reports. Quarterly results and outlooks from two big-box retailers — one focused on discount shoppers, the other on home improvement — will offer a sense of how different groups of consumers are faring in the current economy.
The future looks bright down the market-cap spectrum
Bloomberg Intelligence year over year net income growth estimates
Source: Bloomberg, as of 8/9/24.
* The S&P 493 is not a formal index but is the group of S&P 500 stocks apart from the Magnificent Seven stocks.
1 Unless otherwise indicated, all data cited is sourced from Bloomberg as of August 9, 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.
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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
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.
Blended earnings growth rates combine actual results for companies that have reported earnings growth and estimated results for companies that have yet to report.
A consensus estimate is a forecast of a public company’s projected earnings, the results of a particular industry, sector, geography, asset class, or other category, or the expected findings of a macroeconomic report based on the combined estimates of analysts and other market observers that track the stock or data in question.
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 crash is a sudden and significant drop in the value of a market. Crashes can be triggered by deteriorating or suddenly changing economic conditions as well as by investor panic over falling asset prices.
Dividend payers are the companies that distribute a portion of their profits to shareholders in the form of a dividend.
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.
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.
Headwind is a term used to describe events or market forces that hinder the prospects for performance in an individual investment or group of investments.
Hyperscaler refers to the largest cloud computing providers that can provide massive amounts of computing resources and storage at enterprise scale.
Intraday refers highs or lows reached by traded securities during regular business hours. An intraday price could be higher or lower than the closing price at the end of the day.
The Jackson Hole Economic Symposium, hosted annually by the Federal Reserve Bank of Kansas City in Jackson Hole, Wyo., brings together dozens of central bankers, policymakers, scholars, and economists to discuss economic issues, implications, and policy options.
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.
Money center banks are large banks situated in economic hubs that primarily deal with governments, other banks, and big corporations.
Net income measures income from sales after accounting for the cost of goods sold, general expenses, taxes, and interest.
A net profit margin, often shortened to net margin, measures how much net income or profit a company generates as a percentage of revenue. It can be expressed as a percentage or a decimal.
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.
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.
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.
A soft landing is a cyclical slowdown in economic growth that avoids a recession.
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 velocity crash is a crash distinguished by the velocity – as defined by the peak-to-trough percentage spot drawdown, divided by the number of days it took to get there – of the drop in prices.
The VIX — officially known as the Chicago Board Options Exchange (CBOE) Volatility Index — is a real-time market index that represents the market’s expectation of 30-day forward-looking volatility. Derived from the price inputs of the S&P 500 index options, it provides a measure of market risk and investors’ sentiments. Higher VIX values reflect higher levels of volatility.
Weak hands is a term used in finance to describe investors or traders who either lack conviction in their strategies or who don’t have the resources to carry them out. Typically, the term is used to describe investors who are “shaken out” by normal price movements in the market because, motivated by fear, they sell their positions at virtually any sign of bad news.
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.
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 dividends reinvested. The S&P 500 represents approximately 75% of the investable U.S. equity market.
The S&P SmallCap 600® seeks to measure the small-cap segment of the U.S. equity market. The index is designed to track companies that meet specific inclusion criteria to ensure that they are liquid and financially viable.
The S&P U.S. Dividend Growers Index is designed to measure the performance of U.S. companies that have followed a policy of consistently increasing dividends every year for at least 10 consecutive years. The index excludes the top 25% highest-yielding eligible companies from the index.
The Nikkei 225 Index is a price-weighted equity index that consists of 225 stocks in the first section of the Tokyo Stock Exchange, excluding exchange-traded funds, real estate investment trusts, and preferred equity contribution securities.
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-591937 Exp. 12/12/2024
Rising growth and recession risks have inspired markets to rapidly price in almost 2 full interest-rate cutsby September.
While the risks are real, this volatility also creates opportunities to redeploy capital into attractive cornersof the market.
Investors should consider staying patient and looking for signs that the de-leveraging is nearing an end.
Disappointing earnings results from mega-cap companies drove losses across the tech complex last week, leaving less than 20% of Nasdaq Composite Index constituents trading above their 10-day moving averages.1 Since then, Japanese stocks experienced their biggest one-day drop since 1987, and uncertainty has compounded across global markets.
“Jarring price action has reminded investors that nobody is immune from increasing macro uncertainty,” said Matt Orton, CFA, Chief Market Strategist for Raymond James Investment Management.
Orton said that the latest big moves carry the familiar sense of excessive disequilibrium, rapid narrative shifts, and extreme price action that has been felt several times over the past two years. “Last week’s economic data — including Friday’s payroll report — were disappointing, but not a complete disaster,” he said.
In Orton’s view, nothing stands out as a harbinger of recession for the United States. Instead, market movements are consistent with the notion that the U.S. economy is decelerating a bit more rapidly than previously thought. “A positive earnings season is also largely being ignored, and investors are focusing on weakness across the mega-caps instead,” Orton said.
Second-quarter earnings growth among S&P 500 Index companies thus far has been well ahead of expectations, showing double-digit earnings per share (EPS) growth. The net profit margin of all companies reporting to date has been 12.3%, well ahead of last quarter, last year, and the 5-year average.
“Overall, I can’t help but think the recent price action was a knee-jerk reaction to disappointing data, occurring simultaneously with stretched positioning and a market rotation that caught investors off guard,” Orton said. “Growth and recession risks are certainly real, but the spike in volatility also creates opportunities.”
Orton continues to believe that long-term investors should stand ready to put capital to work, building balance in their portfolios while watching for high-quality investments that have been thrown out with the bathwater.
“Less than a month ago, a significant rotation began based on optimism around economic growth and falling inflation,” Orton said. Small caps showed substantially improved performance amid a broader cyclical rally, and international markets were lifted by optimism around global growth. “I suspect that the rotation caught many investors off guard and led to some performance-chasing, especially as ‘good enough, but not great’ earnings reports from some of the mega-caps led to further profit-taking and rotation.”
Orton said that performance chasers have been doubly disappointed by recent price action and yet another rapid narrative shift that has temporarily sidelined investors who would normally buy the dip. “I don’t think the underlying fundamentals justified the magnitude of the rotation a few weeks ago, and they don’t justify the big moves we saw last week,” he said.
“That doesn’t mean there isn’t more room to go in this corrective process,” Orton said. “There has been significant technical damage that will take time to repair.” As a long-term investor, Orton said that he feels more comfortable putting money to work in situations where there is an extremely favorable disconnect between fundamentals and price.
Orton also said that it’s worth remembering the S&P 500 Index is down 5.66% from its July 16 peak, and the S&P 500® Equal Weight Index has held up better, down just 2.85% from its peak. “The long-term bullish trends remain intact. Dispersion remains high, and selectivity has been working because stocks are still responding to idiosyncratic drivers. We’ve been preaching ‘build better balance’ for good reason, and there are still opportunities to do so,” he said.
Rate expectations sharply reprice for a recession scenario
Futures-implied cuts priced in by Fed meeting, 2024 year to date
Source: Bloomberg; as of 8/2/24.
U.S. Treasuries have seen a massive rally. The July Federal Open Market Committee meeting prepared markets for a September rate cut, but weaker than expected manufacturing and employment data accelerated market expectations for a rapid easing cycle. “More than 100 basis points (bps) of cuts are now being priced by year end, culminating in 3% by mid-2025,” Orton said. “As of August 2, the implied probability of a 25-basis point cut in September had increased from 30% to 100%, with expectations for an additional 25 bps going from effectively impossible to almost a certainty.”
Now that the main narrative for investors involves the risks of a hard landing and the possibility of more substantial interest rate cuts, Orton said that market reactions will likely remain asymmetrical, responding more strongly to weaker economic data. “While I don’t advocate for fighting the trend, I do think a lot more would need to go wrong for the U.S. Federal Reserve (Fed) to cut by 50 bps in September,” Orton said. “It would require significant changes to their economic projections and the general policy narrative we just heard last week.”
Unfortunately for equity investors, heightened macro sensitivity now undermines the tailwind that risk assets were receiving from lower rates. “Weaker activity and labor data are hurting the performance of risk assets, but the key question is whether the data is as bad as the narrative and price actions make it out to be,” Orton said.
“The labor market is clearly slowing, and even the broader context of employment is on shaky ground,” Orton said. “I certainly appreciate the risks we face with an economy that has slowed while interest rates remain elevated, but there is no obvious mechanism to suggest that that the U.S. will tip into recession.”
Asset prices are still rising, the credit impulse has become less negative, and Orton believes that fiscal policy won’t be a drag on the economy. He said that the corporate sector also remains quite strong, and it has a meaningful buffer against higher interest rates. Given strong margins, Orton doesn’t anticipate a situation where layoffs start meaningfully accelerating.
“Despite all manner of falling knives across risk assets, and a distinct lack of investors willing to risk catching them, this too shall pass,” Orton said. “The price action is driving investors from parts of the market, but not the entire market.”
Much of the decline in indices has been concentrated in mega-cap and semiconductor stocks. “In most cases, there is nothing fundamentally wrong with these businesses,” Orton said. “But in these scenarios when sentiment rapidly shifts and price action becomes extreme, investors need to tread very carefully.” He believes that the next week or so is likely to remain volatile — especially for tech stocks — but he expects some attractive long-term investment opportunities on the other side. Orton recommends that investors consider staying patient and looking for signs that the de-leveraging is nearing an end. He believes these parts of the market deserve extra attention:
Dividend growth to offset market uncertainty. Unsustainably low volatility has allowed for some positioning excesses, but Orton has advocated for investors to consider building better balance in their portfolios. He favors the addition of dividend growth stocks because of their stronger fundamental profile. “Dividend growers have provided good insulation from the recent spike in volatility,” Orton said, noting that the relative performance of the S&P 500 Index has lagged that of dividend- growth focused exchange-traded funds. Volatility may become more pronounced as election season heats up, and Orton said that valuations have remained quite attractive across many dividend-growing companies.
Avoid being overweight the overpriced. The swift selloff has not impacted all parts of the market equally. “The worst of the damage has occurred across the technology complex and in artificial intelligence related names where the market is questioning their timetable for monetization,” he said. “But we’ve recently seen outperforming sectors that had been some of the biggest underperformers earlier this year, aided by their inherent interest rate sensitivity.” Utilities, real estate, health- care, and consumer staples all ended in the green last week. “Rather than reducing their general equity exposure, investors should be asking ‘Am I overweight the most expensive companies?’ and ‘Have these companies delivered on the growth needed to sustain these valuations?’ ” Investors might consider rotating out of companies showing cracks in their fundamental foundations and into the opportunities that this selloff has created.
There is still a place for mega-cap and small-cap companies. The two ends of the market capitalization spectrum are the focus of the current selloff, but they each offer opportunities. “Some of the mega-caps are quite fairly valued: They have provided good earnings and guidance, defensive business models, and rock-solid balance sheets boasting more cash than the entire market capitalization of many S&P 500 Index companies,” Orton said.
In contrast, small-cap companies have more work to do. “I believe that investor positioning remains incredibly offsides, and valuations are still very compelling not only on an absolute basis, but also relative to large-cap companies,” Orton said. “However, down market cap earnings have not been as encouraging.” Although the S&P 600 Index companies that have reported earnings ended up being ahead of expectations, the absolute year-over-year results are still deeply negative. Small-cap sentiment also remains very weak relative to large. “I still think the risk/reward tradeoff looks favorable, and positive news about economic growth could have an outsized benefit on small caps,” Orton said.
The market narrative has changed in a matter of days; concerns now abound that the Fed has failed to ease policy quickly enough to avoid a hard landing. Consequently, investors will be watching upcoming economic data closely. On Monday, the Fed’s Senior Loan Officer Opinion Survey on Bank Lending Practices will give the latest read on credit conditions in the economy, and the Institute for Supply Management (ISM) will release the Services ISM® Report on Business® to provide insights into employment and prices. U.S. Department of Labor Data released on Thursday will also provide an update on initial jobless claims.
While earnings season is slowing down, some important reports this week will provide more insight into the health of the consumer and economic growth domestically and overseas.
1 Unless otherwise indicated, all data cited is sourced from Bloomberg as of August 2, 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
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%.
Cyclical forces are trends and changes in market conditions that occur as the economy passes through the business cycle’s stages of expansion, peak, recession, and recovery.
The daily moving average 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.
Defensive stocks provide consistent dividends and stable earnings regardless of 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.
Dispersion refers to the range of outcomes in different areas of a financial market or to the potential outcomes of investments based on historical volatility or returns.
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 exchange-traded fund (ETF) is a type of security that tracks a market index, sector, commodity, or other assets, but which can be bought or sold on a stock exchange the same way a regular stock or other security can. An ETF can be structured to track a wide variety of securities, including stocks, bonds, individual commodities, diverse aggregations of securities, and specific investment strategies.
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 term “falling knife” describes a rapid drop in the price or value of a security. Admonitions against trying to catch a falling knife suggest that investors should wait for prices to bottom before buying a security that could either rebound or lose all its value.
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.
Leverage investing refers to the use of debt to enhance returns from an investment, and de-leveraging occurs when investors sell financial assets to reduce or repay debts.
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.
A net profit margin, often shortened to net margin, measures how much net income or profit a company generates as a percentage of revenue. It can be expressed as a percentage or a decimal.
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.
Risk assets refer to investments such as equities, commodities, high-yield bonds, real estate, and currencies, where the value may rise or fall due to fluctuating interest rates, changes in credit quality, default risks, supply and demand disruption, and other factors.
Quality investing is a strategy that seeks to invest in companies with low debt, stable earnings, consistent asset growth, and strong corporate governance, as reflected in financial metrics such as ratios of return to equity and debt to equity, as well as to earnings variability.
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.
The U.S. Federal Reserve’s Senior Loan Officer Opinion Survey on Bank Lending Practices is a survey of up to 80 large domestic banks and 24 U.S. branches and agencies of foreign banks. The Federal Reserve generally conducts the survey quarterly, timing it so that results are available for the January/February, April/May, August, and October/November meetings of the Federal Open Market Committee. The Federal Reserve occasionally conducts one or two additional surveys during the year. Questions cover changes in the standards and terms of the banks’ lending and the state of business and household demand for loans. The survey often includes questions on one or two other topics of current interest.
The Services ISM® Report on Business® is produced by the Institute for Supply Management (ISM) and is based on data compiled from purchasing and supply executives in a wide variety of industries nationwide. Survey responses reflect 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.
Stretched positioning can occur when investors use leverage to increase their exposure to assets that may already be over-valued, which can cause more severe de-leveraging as those assets decrease in price.
Tailwind is a term used to describe events or market forces that exert a positive influence on an investment’s performance. The opposite of a tailwind is a headwind, which contributes to an investment’s underperformance.
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 dividends reinvested. The S&P 500 represents approximately 75% 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 S&P 600 Index is an index of small-cap stocks managed by Standard and Poor’s. It tracks a broad range of small-sized companies that meet specific liquidity and stability requirements.
The Nasdaq Composite Index is the market capitalization-weighted index of over 2,500 common equities listed on the Nasdaq stock exchange.
M-588816 Exp. 12/5/2024
The U.S. Federal Reserve (Fed) set the stage for a September interest rate cut. But traders may be getting ahead of themselves by pricing almost three cuts in before year’s end.
There is no obvious mechanism to suggest that the United States is teetering on the edge of a recession.
Stay balanced and watch for areas in the market that offer broad exposure to where earnings are inflecting and accelerating higher.
It was no surprise that the U.S. Federal Reserve left interest rates unchanged between 5.25% and 5.50%.1
“The key takeaway is that Fed Chair Jerome Powell’s post-meeting statement and Q&A session reaffirm an easing bias and set the stage for a September rate cut,” said Matt Orton, CFA, Chief Market Strategist at Raymond James Investment Management.
In particular, Orton said nods to progress on inflation and a somewhat lower job market outlook provided a largely balanced update that should allow Powell to continue building toward a September rate cut at this month’s annual Jackson Hole Economic Symposium. There was a lot of emphasis on the balance of risks throughout the press conference, echoing the change in the statement. Powell assessed the labor market as “strong, but not overheated” — and characterized a range of indicators as consistent with rebalancing, not deterioration. However, he stated “the downside risks to the employment mandate are real now” and that the Fed is closely monitoring conditions.
“All of this sets a pretty low bar for September,” Orton said, “so long as the ’totality’ of the data and balance of risks cooperates.”
Overall, Orton saw Powell’s statement as in line with market expectations, while the press conference leaned more dovish. There remains a chorus of investors who believe that the Fed is late to the game and that by continuing to focus on the “totality” of the data we will miss the opportunity for a soft landing.
“I disagree and do not think that ‘totality’ will become the new ‘transitory’ — that is, another monetary policy mistake,” Orton said.
Powell indicated that incoming data suggested that the economy and labor markets were cooling gradually, but he did not signal a heightened fear that the economy was at risk of slowing more rapidly than desired. Orton said he appreciates the risks of an economy that has slowed with interest rates still elevated. But he said there is no obvious mechanism to suggest that the United States will tip into recession. Fiscal policy certainly won’t be a drag, asset prices are still rising, and the credit impulse has become less negative, he said. The corporate sector also remains quite strong and has a meaningful buffer against higher rates.
Fed holds policy rate steady for eighth consecutive meeting
10-year U.S. Treasury yield since July 2023
Source: Bloomberg; as of 7/31/24.
“Given strong corporate profit margins, I also don’t see a situation where layoffs will start to meaningfully accelerate,” he said. “Recession risks are real, but I think they might be overstated.”
Orton said investors also should be encouraged that the Fed’s easing bias remains in place and the stage is being set for a September cut, which would be the start of a cutting cycle. Powell alluded to the fact that one single cut is unlikely to do much and that we should view this as a process of easing the level of restriction in the economy. Again, Orton said, it’s key to remember that this is a normalizing process. And critically, this normalization of restrictive policy is not being necessitated by a rapidly weakening economy, which should support equities. That said, he does think the market is “a bit ahead of itself by pricing in a November rate cut.” With an economy that is normalizing, not deteriorating, Orton doesn’t see why the Fed would rush to cut in back-to-back meetings rather than follow an every other meeting course.
Focusing on employment, Orton noted that the statement downgraded the labor-market assessment slightly, saying job gains “have moderated” from the previous assessment of “remain strong,” while noting that the unemployment rate has “moved up but remains low.” While Powell was very careful with his language, Orton thinks it was clear that there is an increased focus on the risks to the labor market. Wage inflation has been a challenge for the Fed, but the last two jobs reports have finally provided some much-needed cover with Powell remarking that labor market dynamics aren’t likely to pose an inflationary impulse. Powell stated that “I would not like to see material further cooling in the labor market,” though he did later say that doesn’t mean he won’t tolerate any further cooling. This, coupled with his comments around downside risks to employment, provided the market with even more confidence that a September cut is coming.
“From a market perspective, I continue to believe that balance is the best course going forward,” Orton said. Some stocks that have rallied purely on rate cut expectations are probably overdone given that market pricing is likely a bit ahead of itself right now, he said, and the selloff across the information technology complex has left some very high-quality names oversold.
The disinflationary trend holds
Core Personal Consumption Expenditures (PCE) Price Index, since 2019
Source: Bloomberg; as of 7/31/24. The green dotted line represents the Fed’s 2% target for inflation.
“Second-quarter earnings have been quite strong and we continue to see strong margins with earnings being revised up faster than sales,” Orton said. “It’s encouraging that the breadth in earnings growth has continued and also has finally expanded into increased price breadth. We now have the opportunity to evaluate our portfolios and ensure that we have broad exposure to where earnings are inflecting and accelerating higher.”
1 Unless otherwise indicated, all data cited is sourced from Bloomberg as of July 31, 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
Annualized estimates represent short-term calculations or rates that have been converted into annual rates.
Breadth describes the relationship between the median and the mean of a set of data, such as corporate earnings or asset prices, being compared. 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 set is being driven by a “narrow” selection of values. A market index supported by “broad” market movements is one where the median is closer to the mean.
Core PCE, officially known as the Personal Consumption Expenditures (PCE) excluding Food and Energy, 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.
Credit impulse measures the change in new credit issued by the private sector as a percentage of gross domestic product. A positive impulse suggests that new credit is growing. A negative impulse reflects a contraction of new credit and, possibly, a slowdown in the larger economy.
Disinflation refers to the temporary slowing of the pace of price inflation and describes what happens when the inflation rate is marginally lower over the short term. Disinflation refers only to the rate of change in the rate of inflation. In this, it is distinct from inflation and deflation, which describe the direction of prices.
Dovish, hawkish, and centrist are terms used to describe the monetary policy preferences of central bankers and others. Doves tend to support maintaining lower interest rates, often in support of stimulating job growth and the economy more generally. Hawks prioritize controlling inflation and may favor raising interest rates to reduce it or keep it in check. Centrists tend to occupy the middle of the continuum between tight (hawkish) and loose (dovish) monetary policy.
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 employment mandate of the U.S. Federal Reserve is one of two overarching goals, known as the “dual mandate,” that drive the Fed’s monetary policy. Those goals are maximum employment and stable prices. Maximum employment is defined as the highest level of employment or lowest level of unemployment that the economy can sustain while maintaining a stable inflation rate.
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 inflation target rate of the U.S. Federal Reserve is the rate of price increases that the Fed prefers to see to ensure the economy will remain stable. Generally, the Fed’s target rate is 2%, as measured by the Personal Consumption Expenditures (PCE) Price Index.
The Jackson Hole Economic Symposium, hosted annually by the Federal Reserve Bank of Kansas City in Jackson Hole, Wyo., brings together dozens of central bankers, policymakers, scholars, and economists to discuss economic issues, implications, and policy options.
The jobs 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.
Oversold is a term used to describe a security or group of securities believed to be trading at a level below its or their intrinsic or fair value.
The Personal Consumption Expenditures (PCE) Price Index, excluding food and energy, known as the core PCE index, is a measure of the prices that people living in the United States, or those buying on their behalf, pay for goods and services. The PCE price index, released monthly by the U.S. Department of Commerce Bureau of Economic Analysis, is known for capturing inflation or deflation across a wide range of consumer expenses and reflecting changes in consumer behavior. Headline PCE inflation includes good and energy prices, which are considered to be more volatile and thus less reliable as indicators of long-term trends.
A policy rate is an interest rate set by a central bank or other monetary authority to influence the evolution of an economy’s monetary variables such as consumer prices, exchange rates, or credit expansion.
Quality investing is a strategy that seeks to invest in companies with low debt, stable earnings, consistent asset growth, and strong corporate governance, as reflected in financial metrics such as ratios of return to equity and debt to equity, as well as to earnings variability.
A soft landing is a cyclical slowdown in economic growth that avoids a recession.
M-587288 Exp. 12/1/2024
