“
”Markets in Focus
Timely analysis of market moves and sectors of opportunity
The two biggest events of last week — the second-quarter earnings report from Nvidia and the U.S. Federal Reserve (Fed) Chair Jerome Powell’s speech at the Fed’s annual Jackson Hole Economic Symposium — both should have provided support and enthusiasm for the near-term outlook, according to Matt Orton, CFA, Chief Market Strategist at Raymond James Investment Management.
“The earnings report far surpassed Nvidia’s already elevated earnings estimates and highlighted the potential behind the buildout of AI, while Powell managed to provide no new revelations and simply reaffirmed what we already knew,” Orton said.
On one hand, there was a hawkish tilt to the Fed chair’s speech, in particular as he noted that the improvement in the Consumer Price Index (CPI) reports for the past two months were, according to Powell, “only the beginning of what it will take” to curb inflation. But on the other, Orton noted, the Fed chair also didn’t appear to suggest that the ongoing resilience of economic growth would necessarily prompt further monetary policy tightening.
The broader market of stocks, constituting all companies in the S&P 500 Index viewed on an equal-weight basis, remained anemic last week, underperforming the market-capitalization-weighted stock market once again as a narrow set of sectors — information technology, consumer discretionary, and communication services — dominated performance. Small caps lagged and finished the week in the red, despite solid earnings results and earnings estimates for 2024 being pushed higher.
“Until we see market breadth make a comeback, I remain skeptical of rallies and would wait to put more capital to work,” Orton said. Still, he sees encouraging signs as earnings season comes to a close, and he remains optimistic about the economic backdrop. His cautionary note for investors, however, is, “Just don’t chase the market higher and be selective about asset allocation.” He noted, “The rising tide isn’t going to lift all boats into the end of the year. But there are plenty of attractive long-term opportunities.”
What is wrong with the market of stocks?
Improvement is needed in the ratio of the pricing of the equal-weighted
S&P 500 Index (SPW) to the market-weighted S&P 500 Index (SPX)
Source: Bloomberg, as of 8/25/23
While the equity market breathed a small sigh of relief after Powell’s Jackson Hole speech, interest rates remained firm. Orton believes that could be an indicator of a key risk going forward. “I still believe the market is offsides because it is pricing in meaningful interest rate cuts in 2024, and nothing in Powell’s speech indicates that will be the case,” he said.
As Orton noted, Powell, if anything, continued to emphasize the notion that rates need to remain at their current restrictive levels for some time longer, and that point was backed up by a range of other Fed speakers throughout the symposium.
Orton said, “I do think that longer-dated U.S. Treasuries are oversold right now, and a disappointing jobs report this week could be the catalyst to see some relief.” That said, he believes any relief in the short term likely won’t be durable, given the strength of economic data overall. Orton believes it’s also important not to forget about real interest rates (the rates investors earn after inflation is taken into account). These rates have surged over the past few weeks, and they now sit at their highest levels since 2009.
“While I remain optimistic about the resiliency of the economy and market, higher real rates are a problem and will further separate winners and losers,” said Orton. His advice for investors would be to manage the sizes of positions in their big winners this year and to consider cycling a portion of their profits into higher-quality areas of the market where valuations remain attractive. In Orton’s view, the gains realized last week by the higher momentum winners and the mega-cap stocks provide another good opportunity for such portfolio repositioning.
Real rates should put pressure on the equity market
and increase the dispersion of returns
Source: Bloomberg, as of 8/25/23
Looking ahead to this week, Orton noted that if the markets provide investors with some relief from oversold U.S. Treasuries, the S&P 500 could revisit the highs seen at the end of July. “Regardless of these short-term moves, further upside will require the market of stocks to make a comeback,” he said. As investors look for signs of an expansion of market breadth, Orton believes they may find opportunities in a few key areas of the market:
Orton believes Fed Chair Powell delivered a nuanced keynote speech at Jackson Hole, as he maintained a hawkish longer-run outlook and a more balanced near-term stance. “This nuanced message was important to give the market confidence that the Fed is basically done with the hiking cycle, and we can finally let the long and variable lags of monetary policy cycle through the economy,” Orton said. He noted that the jobs market remains robust, but the demand for labor is weakening. This weakening is already evident in reports that show fewer hours worked, reduced demand for temporary labor, and limited overtime work. With student loan payments resuming and a rebound in gasoline prices, Orton noted that there will be some tougher dynamics for consumer spending ahead.
Still, Orton suggested these developments could be offset by the strong state of consumer finances, which have been underestimated all year and led many investors to being caught offsides by the strength in the economy and market. Household deposits are still high compared with levels seen in 2019, and consumer spending continues to expand. Orton noted that the biggest beneficiaries of the economy’s strength have been lower- and middle-income consumers, but this group could also see the largest decline in their savings balances if the labor market weakens and as student debt payments restart, as they are scheduled to this fall. The key to maintaining high levels of consumption will be the state of the labor market, and that, Orton emphasized, will rely on whether the Fed is very careful in monitoring the impact of any additional quantitative tightening policies that could further restrict the credit available to small businesses.
“So far, the confluence of incredibly elevated fiscal spending and a robust private credit market have helped offset the challenges posed by monetary policy, but this can certainly change quickly if sentiment sours,” Orton said. “For now, it looks like the Fed is going to be able to land the plane, but there’s still a long stretch of unsettled air ahead.”
While the Jackson Hole Symposium may be over, investors won’t get a break from the news on important catalysts for economic activity. This week provides several key releases, including the Fed’s favorite inflation gauge, the Personal Consumption Expenditures (PCE) Price Index, and the August jobs report, which will be the last employment report released before the central bank’s next interest-rate-setting meeting on Sept. 20. Earnings season might also be coming to a close, but the days ahead will still provide earnings reports from key companies across the software and semiconductor industries, and in the consumer discretionary sector, as well.
Risk Information:
Investing involves risk, including risk of loss.
Diversification does not ensure a profit or guarantee against loss.
Disclosures:
Index or benchmark performance presented in this document does not reflect the deduction of advisory fees, transaction charges, or other expenses, which would reduce performance. Indexes are unmanaged. It is not possible to invest directly in an index. Any investor who attempts to mimic the performance of an index would incur fees and expenses that would reduce return.
This document is a general communication being provided for informational purposes only. It is educational in nature and not designed to be taken as advice or a recommendation for any specific investment product, strategy, plan feature, or other purpose in any jurisdiction, nor is it a commitment from Carillon Tower Advisers or any of its affiliates to participate in any of the transactions mentioned herein. Any examples used are generic, hypothetical, and for illustration purposes only. This material does not contain sufficient information to support an investment decision, and you should not rely on it in evaluating the merits of investing in any securities or products. In addition, users should make an independent assessment of the legal, regulatory, tax, credit, and accounting implications and make their own determinations together with their own professionals in those fields. Any forecasts, figures, opinions, or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions, and are subject to change without prior notice. All information presented herein is considered to be accurate at the time of production, but no warranty of accuracy is given and no liability in respect of any error or omission is accepted. It should be noted that investment involves risks, the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements, and investors may not get back the full amount invested. Both past performance and yields are not reliable indicators of current and future results.
The views and opinions expressed are not necessarily those of the broker/dealer; or any affiliates. Nothing discussed or suggested should be construed as permission to supersede or circumvent any broker/dealer policies, procedures, rules, and guidelines.
Definitions:
The 3rd Plenum of the 20th Central Committee refers to the plenary sessions that are the mandated annual conventions of the full Central Committee of the Chinese Communist Party (CCP), as outlined in the CCP’s constitution. These meetings are bookended by the quinquennial Party Congress, the most important event in the CCP’s political calendar.
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.
Correlation is a statistic that measures the degree to which two securities move in relation to each other.
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.
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.
Equity duration is the cash-flow weighted average time at which investors can expect to receive the cash flows from their investment in a company’s stock. Long-duration stocks include fast-growing technology companies, including those that may not pay any dividends in their early years, while short-duration stocks tend to be more mature companies with higher ratios of dividend to price.
Factor investing is an approach to investing that selects securities based on characteristics associated with higher returns. These characteristics, or factors, can be macroeconomic factors or style factors. Macroeconomic factors are focused on broad risks across asset classes and include the rate of inflation: growth in gross domestic product; and the unemployment rate. Style factors include differences in growth versus value stocks; market capitalization, and industry sector. Factor performance refers to a focus on performance of securities within a particular factor or between groups of different kinds of factors.
Growth at a reasonable price (GARP) is a stock investment strategy that seeks to combine tenets of both growth and value investing in the evaluation and selection of individual stocks. GARP investors look for companies with consistent earnings growth above broad market levels but try to avoid companies with very high valuations. By trying to avoid the extremes of either growth or value investing, GARP investors often end up focusing on growth-oriented stocks with relatively low price-to-earnings multiples in normal market conditions.
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.
The Jackson Hole Economic Policy Symposium is an annual gathering of individuals to discuss central banking policies. The symposium brings together people from across the economic, financial, and governmental fields, to discuss the most pressing matters facing global economics. (Source: Investopedia)
Market capitalization, or market cap, refers to the total dollar market value of a company’s outstanding shares of stock.
Market of stocks refers to the diversity of technical or other characteristics that may exist at any given time within the overall stock market. For example, the stock market as a whole may rise or fall on the fortunes of a small number of very large and thus very influential stocks. But within the broader market of stocks, there can be many companies with performance, risk, or opportunities that vary significantly from what market participants may find at the index level.
Mega-cap tech stocks are the technology companies with market capitalizations that are in the trillions or hundreds of billions of U.S. dollars, levels that far exceed many of the other stocks in the S&P 500 Index.
Momentum investing is a strategy that aims to capitalize on the continuance of an existing market trend. It is a trading strategy in which investors buy securities that are already rising and look to sell them when they look to have peaked. It entails taking long positions on financial instruments with prices trending up and short positions on instruments with prices trending down.
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.
A real interest rate is an interest rate that has been adjusted to remove the effects of inflation. Once adjusted, it reflects the real cost of funds to a borrower and the real yield to a lender or to an investor. A real interest rate reflects the rate of time preference for current goods over future goods. For an investment, a real interest rate is calculated as the difference between the nominal interest rate, which is not adjusted for inflation, and the inflation rate.
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.
Reshoring describes the effort to bring manufacturing and other services back to the United States from overseas operations.
Seasonal effects refer to predictable changes that occur over a one-year period in a business, market, market sector, or economy based on the season, including calendar or commercial seasons.
Indices:
The S&P 500 Index measures change in stock market conditions based on the average performance of 500 widely held common stocks. It is a market-weighted index calculated on a total return basis with dividend reinvested. The S&P 500 represents approximately 80% of the investable U.S. equity market.
The S&P 500® Equal Weight Index is the equal-weight version of the S&P 500. It includes the same constituents as the capitalization-weighted S&P 500, but each company in the S&P 500 Equal Weight Index is allocated a fixed weight, or 0.2% of the index total at each quarterly rebalance.
M-421510 Exp. 12/28/2023
Healthy economic data continued to roll in last week, and earnings results from some key consumer companies painted a generally healthy picture of the American consumer.
“Unfortunately, good news isn’t always good news when it means having to accept that interest rates might actually remain higher for longer,” said Matt Orton, CFA, Chief Market Strategist at Raymond James Investment Management.
U.S. Treasury yields notched their fifth straight week of gains: the 10-year Treasury bond reached its highest level since late 2007, and the 30-year bond hit 2011 highs. Real interest rates – that is, rates that have been adjusted for inflation – have risen with bond yields, accelerating as inflation continues to come down, and Orton said the negative impact on equities is finally visible. Real rates more appropriately reflect the cost of capital, so all things equal, higher real rates imply lower equity market valuations.
Real U.S. 10-year Treasury bond rates the highest since 2009
Source: Bloomberg, as of 8/18/23
“Equities have actually been quite resilient in the face of jumping longer-dated yields, both nominal and real, over the past few weeks,” Orton said. The S&P 500 Index is down just 4.76% from its peak on July 31, and the Nasdaq Composite Index is down 7.11% from its high on July 18. Orton said he found it interesting that 10-year yields hit their summer lows at the same time, recovering around 51 basis points (bps) since then.
“We knew a correction was forthcoming given the more challenging seasonal effects, increased macroeconomic uncertainty, extended momentum, and frothy bullish sentiment,” Orton said. He has previously warned investors not to chase the market higher, but he said he now believes that equities are at a crossroads ahead of the U.S. Federal Reserve’s annual Jackson Hole Economic Symposium later this week. “The move in rates is a bit extended,” he said, “and any perceived dovishness could lead to a short-term reversal in recent trends.”
Orton said he believes that there’s a good degree of stickiness to higher interest rates, and investors will be forced to reckon with them at some point.
“How the market handles itself this week will be critical,” he said. He expects investor reactions to decide whether the market has a short, healthy correction of 5% to 7% or a larger pullback that could exceed 10%.
Either way, Orton said he believes that the playbook is the same. “Investors should manage the sizes of their big winners this year, while cycling into higher-quality areas of the market where valuations remain attractive,” he said. “Once equities regain their footing, I continue to believe the market of stocks will regain strength and lead us higher.” From a tactical perspective, Orton said he hesitates to add to small-cap stock positions, preferring to wait for the current breakdown to reverse before continuing to add weight.
Orton also addressed discussions of a “no landing” scenario where the U.S. economy never really slows, and actually accelerates.
“I’ve always found the notion of a ‘no landing’ scenario somewhat preposterous, because it completely ignores the fact that the Fed would keep its foot on the brake longer and harder in such a situation, eventually causing something to break,” he said. “It also linearly extrapolates the recent decline in inflation and assumes that this would induce the Fed to cut rates.”
Although the Federal Reserve Bank of Atlanta’s GDPNowTM forecast might indicate a serious expansion, showing a 5.8% quarter-overquarter seasonally adjusted annual rate of growth for the third quarter of 2023, Orton pointed out that the Conference Board Leading Economic Index® (LEI) for the United States continues to signal a mild contraction ahead. July was the index’s 16th consecutive monthly decline, driven by weak new orders, high interest rates, a dip in consumer perceptions of the outlook for business conditions, and decreasing hours worked in manufacturing.
Leading Economic Index (LEI) points to a mild contraction
Source: Bloomberg, as of 8/18/23
“There’s a historic disconnect between GDP growth and the LEI that cannot be totally ignored,” Orton said. He said he believes that reality lies somewhere in the middle, which is why he expects to see rolling recessions where different sectors and industries are hit at different times with their own recovery schedules. “What that means is that selectivity should matter,” he said. “We’ve seen that play out over the past few months with earnings identifying the winners and losers.”
“Quality will also matter more as the sting of higher real rates begins to bite,” Orton said. He believes that the companies that have done a better job of managing their balance sheets and generating high-quality cash flow will be the winners. He said, “investors need to get real about the impact of higher real rates.”
In the short term, Orton sees heightened risks until the market reestablishes an uptrend or internal market information becomes less negative. “We will probably see a bounce over the next few days,” Orton said, “but unless such a bounce is broad and decisive, there is most likely some downside still to go.” He also said he is concerned about the performance of the market’s leading mega-cap stocks, and more importantly, the inability of small- and mid-cap equities to break through last August’s highs.
With the jump higher in interest rates, the S&P 500 earnings yield is only 75 bps above 10-year rates – the lowest equity risk premium in 20 years. “Any further increase in yields may drive an acceleration of equity downside,” Orton said. “Conversely, a reversal in rates may now be a prerequisite for downward momentum in equities to slow.” Additionally, systematic strategies have been forced to allocate a substantial amount of money to equities due to upward momentum and low volatility, which means that a continued trend lower in spot prices could add to market pressures.
Orton explained that volatility control strategies pose the most significant risk of exacerbating a market downturn, because by design, they add leverage slowly but can cut risk rapidly in ways that may cause turmoil in broader markets. “Regardless of the extent of the ultimate downside, I do continue to believe that investors should be opportunistic,” Orton said. Earnings season once again surprised to the upside – the overall economy will ultimately slow, but it has remained resilient along with the consumer, and Orton expects to see opportunities as sectors move through their business cycles at different speeds.
“It’s also worth highlighting that even if we see a correction of more than 10%, it’s not at all uncommon, and certainly not pernicious given the fundamental backdrop,” Orton said. The S&P 500 has finished the year up 10% or more 55 times since 1928. In 23 of those years, there has been a correction of 10% or more. Over the same period, there have been 34 years when the S&P 500 ended up more than 20%, and 16 of those instances included a market correction of 10% or greater.
Even though the market might be working through a period of consolidation, Orton recommends preparing for opportunities.
“Investors should have a plan for when it’s time to be more aggressive in redeploying capital,” he said. He said he sees tactical asset allocation as the key to success in a market like this, and he pointed out that leaning into the factors that are working, like quality and valuation, has worked well this month. He recommends staying lower beta in the very short term and avoiding attempts to time the market bottom, while watching:
Growth at a reasonable price (GARP). It has been out of favor for most of 2023, but Orton recommends leaning into it now. “The biggest losers of 2022 were bid at the start of the year, followed by an incredibly concentrated market after the Silicon Valley Bank failure,” he said. Orton believes that the market is transitioning away from growth and high-beta stocks toward GARP equities, and this continued to play out last week. “Profitability as a factor has bottomed, and an increased focus on valuation will only continue with the recent move in real rates,” he said. “Earnings season also led to a meaningful dispersion in performance as higher quality companies provided upbeat guidance and beat expectations.” Orton continues to like industrials, particularly in sectors like aerospace and defense and machinery. He also thinks that energy looks interesting. “You’re getting good cash flow, cheap valuations, and balance sheets that are much better set to weather higher rates,” Orton said. He even sees some interesting opportunities within information technology, but selectivity is key given their generally extended valuations.
Small caps. Orton said he continues to believe that small caps deserve an increasing weight in portfolios, and the asset class represents one of the last attractive long-term investment opportunities. However, the Russell 2000® Index has been unable to break above its highs from August 2022. “We need to follow how the index behaves on any recovery attempts,” Orton said. He said he finds that valuations have remained incredibly cheap on a historical and relative basis. “Earnings into 2024 are expected to far exceed that of large caps,” he added. “Tread carefully right now, and I would be waiting to deploy any fresh capital.”
The Fed will once again take center stage as investors look to regroup after three weeks of declines from the S&P 500 and Nasdaq. “Given the emphasis that Fed Chair Jerome Powell has placed on data dependency, I don’t expect we’ll get any fireworks from Jackson Hole,” Orton said. “Just like the last two symposiums, I’m sure the refrain of ‘higher for longer’ will be the key message.” We also get global flash purchasing managers’ index (PMI) prints, U.S. durable goods orders, and European sentiment indicators. Company earnings reports later this week have the potential to push the market in either direction.
Risk Information:
Investing involves risk, including risk of loss.
Diversification does not ensure a profit or guarantee against loss.
Disclosures:
Index or benchmark performance presented in this document does not reflect the deduction of advisory fees, transaction charges, or other expenses, which would reduce performance. Indexes are unmanaged. It is not possible to invest directly in an index. Any investor who attempts to mimic the performance of an index would incur fees and expenses that would reduce return.
This document is a general communication being provided for informational purposes only. It is educational in nature and not designed to be taken as advice or a recommendation for any specific investment product, strategy, plan feature, or other purpose in any jurisdiction, nor is it a commitment from Carillon Tower Advisers or any of its affiliates to participate in any of the transactions mentioned herein. Any examples used are generic, hypothetical, and for illustration purposes only. This material does not contain sufficient information to support an investment decision, and you should not rely on it in evaluating the merits of investing in any securities or products. In addition, users should make an independent assessment of the legal, regulatory, tax, credit, and accounting implications and make their own determinations together with their own professionals in those fields. Any forecasts, figures, opinions, or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions, and are subject to change without prior notice. All information presented herein is considered to be accurate at the time of production, but no warranty of accuracy is given and no liability in respect of any error or omission is accepted. It should be noted that investment involves risks, the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements, and investors may not get back the full amount invested. Both past performance and yields are not reliable indicators of current and future results.
The views and opinions expressed are not necessarily those of the broker/dealer; or any affiliates. Nothing discussed or suggested should be construed as permission to supersede or circumvent any broker/dealer policies, procedures, rules, and guidelines.
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%.
Beta is a measure of the volatility or systemic risk of a security or portfolio compared with the market as a whole.
Consolidation is a term used in technical analysis to describe when stocks reverse previous gains (or losses) to stay within well-defined trading levels.
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.
Dovish, hawkish, 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.
Extended is a term used to describe an investment, industry, or sector with performance that has substantially moved away from a longer-term average in a short period of time.
An equity risk premium is the excess return that investing in the stock market provides over the rate of return of a risk-free asset such as a U.S. Treasury security.
Factor investing is an approach to investing that selects securities based on characteristics associated with higher returns. These characteristics, or factors, can be macroeconomic factors or style factors. Macroeconomic factors are focused on broad risks across asset classes and include the rate of inflation: growth in gross domestic product; and the unemployment rate. Style factors include differences in growth versus value stocks; market capitalization, and industry sector. Factor performance refers to a focus on performance
of securities within a particular factor or between groups of different kinds of factors.
Federal Reserve GDPNow™ is model estimate for real gross domestic product (GDP) growth (seasonally adjusted annual rate). It is produced by the Federal Reserve Bank of Atlanta, but it is not an official forecast of the Atlanta Fed. Rather, it is best viewed as a running estimate of real GDP growth based on available economic data for the current measured quarter. There are no subjective adjustments made to GDPNow. The estimate is based solely on the mathematical results of the model.
Growth at a reasonable price (GARP) is a stock investment strategy that seeks to combine tenets of both growth and value investing in the evaluation and selection of individual stocks. GARP investors look for companies with consistent earnings growth above broad market levels but try to avoid companies with very high valuations. By trying to avoid the extremes of either growth or value investing, GARP investors often end up focusing on growth-oriented stocks with relatively low price-to-earnings multiples in normal market conditions.
Market capitalization, or market cap, refers to the total dollar market value of a company’s outstanding shares of stock.
Market of stocks refers to the diversity of technical or other characteristics that may exist at any given time within the overall stock market. For example, the stock market as a whole may rise or fall on the fortunes of a small number of very large and thus very influential stocks. But within the broader market of stocks, there can be many companies with performance, risk, or opportunities that vary significantly from what market participants may find at the index level.
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.
Momentum investing is a strategy that aims to capitalize on the continuance of an existing market trend. It is a trading strategy in which investors buy securities that are already rising and look to sell them when they look to have peaked. It entails taking long positions on financial instruments with prices trending up and short positions on instruments with prices trending down.
Nominal gross domestic product (GDP) is the total value of all goods and services produced in a specified time period, typically quarterly or yearly. Real GDP is nominal GDP adjusted
for inflation.
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 real interest rate is an interest rate that has been adjusted to remove the effects of inflation. Once adjusted, it reflects the real cost of funds to a borrower and the real yield to a lender or to an investor. A real interest rate reflects the rate of time preference for current goods over future goods. For an investment, a real interest rate is calculated as the difference between the nominal interest rate, which is not adjusted for inflation, and the inflation rate.
Seasonal effects refer to predictable changes that occur over a one-year period in a business, market, market sector, or economy based on the season, including calendar or commercial seasons.
Volatility control strategies are systematic investment strategies that are linked with market volatility levels. Although funds that apply volatility control strategies can accelerate price movements in either rising or falling markets, they tend to deliver more concentrated selling pressure by reacting to accelerating volatility.
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-capitalization-weighted index calculated on a total return basis with dividends reinvested. The S&P 500 represents approximately 80% of the investable U.S. equity market.
The Nasdaq Composite Index is the market-capitalization-weighted index of over 2,500 common equities listed on the Nasdaq stock exchange.
The Russell 2000® Index measures the performance of the 2,000 smallest companies in the Russell 3000® Index, which represents approximately 10% of the total market capitalization of the Russell 3000® Index.
The Conference Board Leading Economic Index® for the United States is designed to signal peaks and troughs in the business cycle, to be highly correlated with real (adjusted for inflation) GDP, and to be a predictive variable that anticipates (or “leads”) turning points in the business cycle by around seven months. It is comprised from 10 components: Average weekly hours in manufacturing; Average weekly initial claims for unemployment insurance; Manufacturers’ new orders for consumer goods and materials; Institute for Supply Management® Index of New Orders; Manufacturers’ new orders for nondefense capital goods excluding aircraft orders; Building permits for new private housing units; S&P 500 Index; Leading Credit Index™;; Interest rate spread (10-year Treasury bonds less federal funds rate); Average consumer expectations for business conditions.
Global flash purchasing managers’ indexes are early estimates of final purchasing managers’ index (PMI) numbers. Flash PMI data is based on a portion of total PMI responses that have been received each month.
London Stock Exchange Group plc and its group undertakings (collectively, the “LSE Group”). © LSE Group 2023. 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-419352 Exp. 12/21/2023
On the surface, it didn’t look like much happened last week with the S&P 500 Index virtually unchanged (down 0.27%). But you don’t have to dig very deep to see important changes taking place, said Matt Orton, CFA, Chief Market Strategist at Raymond James Investment Management.
Significantly, he said, the expansion of market breadth continued as interest rates ticked higher and weighed on high-duration stocks, including the mega-cap complex, which had so far been this year’s biggest winners. The year’s laggards like energy, healthcare, and industrials outperformed while information technology weighed on broader indices.
“These changes beneath the surface are quite encouraging,” Orton said, “and recent macroeconomic data continues to support the outperformance of higher-quality, cyclical parts of the market. There is, however, increasing evidence of more volatility ahead.”
Rates have been on a roller coaster over the past few weeks, particularly at the back end of the yield curve, but even the yield on the two-year U.S. Treasury note ended more than 10 basis points higher despite signs of further cooling of core inflation in July’s Consumer Price Index (CPI) data. In the equity market, Thursday marked the third week in a row with a sharp intraday reversal to the downside, a signal of exhaustion on the part of buyers, Orton said. We also still need to digest a breakout in real interest rates, a stronger dollar, and a break lower in copper.
July CPI: Good enough for a pause, but a long way from a cut
Source: Bloomberg, as of 8/11/2023
Higher for longer? Orton says current market pricing for rate cuts still looks offsides
Source: Bloomberg, as of 8/11/2023
“This increase in macroeconomic uncertainty will be a headwind for equities, which is why this is not a market to chase higher,” he said. “The S&P 500 is only down 2.7% off its recent highs and I would prefer to see a further pullback of 5% before redeploying capital.”
Orton added that it’s still not too late to manage the sizes of your big winners so far this year and cycle into higher-quality areas of the market where valuations remain attractive. He said he expects the market of stocks to continue to outperform the stock market over the coming weeks. Also, he said, “don’t forget about small-cap equities, which remain quite attractive despite some nice outperformance over the last two months.”
Last week’s inflation data brought another welcome moderation in headline and core inflation that masked the more resilient categories within services that exclude shelter. Services categories that include so-called “revenge spending” – as when consumers try to make up for lost time after an event like the pandemic lockdown – declined for the fourth straight month, with airfares leading the way and delivering another outsized decline (down 8.1%) like we saw in June.
Yet non-housing services inflation excluding revenge spending categories remained resilient, actually ticking up to 0.5% month over month from 0.4% in June. It’s worth noting that despite non-housing services inflation being off its peak, the year-overyear rate still ticked higher, Orton said. There’s one more CPI report in August before the September meeting of the Federal Open Market Committee.
“While rising gas prices should lift month-over-month headline inflation, I would expect a similar upward trajectory in core inflation, keeping the Fed on track for a pause in September,” Orton said. “However, I expect to hear a hawkish tone as it’s much too early for the Fed to declare victory on inflation. The Fed will need to see more progress in non-housing services inflation before beginning to consider cuts, and I don’t expect that to happen meaningfully until there’s more slack in the labor market. The market’s persistent pricing of interest rate cuts has been offsides all year, and it’s still offsides today.”
Simply put, markets are extrapolating the disinflation trend onto a straight line and are not priced for the difficult work that remains, Orton said. This is another reason to be mindful of positioning in high-duration winners that are priced for perfection, he said, and to consider moving into higher-quality parts of the market that will benefit from an expansion of breadth and are likely to be resilient if we see weakness in equities as this adjustment takes place.
Even as we head into a weaker seasonal period when increased volatility is likely, Orton said there are still plenty of opportunities if you look. While sentiment got ahead of itself, we’re seeing that reset with sideways movement in the market. The cash that had been built up in money market funds has only started to move back into the market, which he said has the potential to be a meaningful and growing tailwind. Not much has changed since last week, except that we’re seeing continued strength in the energy complex. Since the market started to broaden at the end of May, energy has gone from being one of the worst-performing sectors in the S&P 500 (down 11.4%) to a respectable performer outside of the mega-caps (up 4.2%). Here are three areas Orton said he likes:
While the downward trajectory of inflation is encouraging, Orton said he can’t help but think that the market has largely overlooked the issue of rising real interest rates – that is, rates adjusted for inflation.
“As inflation comes down and rates remain elevated, the real rate will keep pushing higher and will remain elevated,” he said. “In particular, we’ve seen longer-maturity real rates push higher this month, and all things equal, higher real interest rates imply lower equity market valuations.”
It also has only been a few months since the federal funds rate exceeded the realized CPI, highlighting that the economy remains in the early stages of absorbing tight monetary policy. Just looking to the credit market, of $16 trillion of global corporate bonds outstanding, only 11% have reset their coupons since last September, the last time rates were at this level. There is an increasing percentage of maturities coming due in the next few years, and while not a near-term risk, Orton said, companies having to take on more expensive debt highlights the lagged impact of tighter monetary policy. It also underscores why quality is so important.
In addition to the increasing levels of macroeconomic uncertainty, one interesting aberration adds another element of risk, Orton said. Implied correlations are near record lows, and low levels of correlation generally reflect high confidence. Correlation tends to revert to the mean, and the three-month implied correlation for the S&P 500 Top 50 is currently sitting at about 11.9%. That’s near its lowest level over the past decade and right around the level it was at before it started to reverse itself at both the start and end of 2018.
“None of this changes my view that equities can continue to push higher into the end of the year, but it does further corroborate the idea that volatility is likely to increase and that it makes sense to be patient for a better entry point,” Orton said.
Even though earnings season has slowed, the retail sector will be in the spotlight with three big-box retailers scheduled to report this week. Orton said he is watching for insights into the state of the American consumer, particularly if the trends for “trading down” – buying cheaper or less premium products, or simply buying less to save money – remain in place, and for any pullback on discretionary spending. We’ll also get the July Retail Sales Report from the U.S. Census Bureau, which is forecast to show a slight acceleration from the pace seen in June. It’s worth noting that the consumer has held up quite well, and Orton said he expects this resilience to continue into the end of the year. Credit and debit card spending actually picked up in July as shown by bank data. Gasoline certainly factored into this, but general merchandise and airline tickets also showed growth month over month. August is off to a strong start, but Orton said it will be important to watch now that a resumption in student loan payments may impact spending in the fall.
Risk Information:
Investing involves risk, including risk of loss.
Diversification does not ensure a profit or guarantee against loss.
Disclosures:
Index or benchmark performance presented in this document does not reflect the deduction of advisory fees, transaction charges, or other expenses, which would reduce performance. Indexes are unmanaged. It is not possible to invest directly in an index. Any investor who attempts to mimic the performance of an index would incur fees and expenses that would reduce return.
This document is a general communication being provided for informational purposes only. It is educational in nature and not designed to be taken as advice or a recommendation for any specific investment product, strategy, plan feature, or other purpose in any jurisdiction, nor is it a commitment from Carillon Tower Advisers or any of its affiliates to participate in any of the transactions mentioned herein. Any examples used are generic, hypothetical, and for illustration purposes only. This material does not contain sufficient information to support an investment decision, and you should not rely on it in evaluating the merits of investing in any securities or products. In addition, users should make an independent assessment of the legal, regulatory, tax, credit, and accounting implications and make their own determinations together with their own professionals in those fields. Any forecasts, figures, opinions, or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions, and are subject to change without prior notice. All information presented herein is considered to be accurate at the time of production, but no warranty of accuracy is given and no liability in respect of any error or omission is accepted. It should be noted that investment involves risks, the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements, and investors may not get back the full amount invested. Both past performance and yields are not reliable indicators of current and future results.
The views and opinions expressed are not necessarily those of the broker/dealer; or any affiliates. Nothing discussed or suggested should be construed as permission to supersede or circumvent any broker/dealer policies, procedures, rules, and guidelines.
Definitions:
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.
Equity duration is the cash-flow weighted average time at which investors can expect to receive the cash flows from their investment in a company’s stock. Long-duration stocks
include fast-growing technology companies, including those that may not pay any dividends in their early years, while short-duration stocks tend to be more mature companies
with higher ratios to dividend to price.
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.
Cyclical stocks have prices influenced by macroeconomic changes in the economy and are known for following the economy as it cycles through expansion, peak,
recession, and recovery.
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.
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%.
The U.S. Consumer Price Index (CPI) measures the monthly 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.
Headline CPI inflation includes food and energy, while “core inflation,” as measured by the “Consumer Price Index for All Urban Consumers: All Items Less Food & Energy” is an
aggregate of prices paid by urban consumers for a typical basket of goods, that does not include food and energy. Core CPI is widely used by economists because food and
energy typically have very volatile prices.
Market of stocks is a term market participants use when referring to the diversity of technical or other characteristics that may exist at any given time within the overall stock
market. For example, the stock market as a whole may rise or fall on the fortunes of a small number of very large and thus very influential stocks. But within the broader market
of stocks, there can be many companies with performance, risk, or opportunities that vary significantly from what market participants may find at the index level.
A real interest rate is an interest rate that has been adjusted to remove the effects of inflation. Once adjusted, it reflects the real cost of funds to a borrower and the real yield to a
lender or to an investor. A real interest rate reflects the rate of time preference for current goods over future goods. For an investment, a real interest rate is calculated as the
difference between the nominal interest rate, which is not adjusted for inflation, and the inflation rate.
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.
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.
Extended is a term used to describe an investment, industry, or sector with performance that has substantially moved away from a longer-term average in a short period of time.
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.
A market-implied policy rate is an estimate of the policy rate that reflects the difference between the current policy rate and an estimated forward or futures rate.
Conviction represents a market participant’s confidence in particular investments. High-conviction investments represent what participants consider to be their best bets for
performance for a given outlook or period.
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.
Reshoring describes the effort to bring manufacturing and other services back to the United States from overseas operations.
Consolidation is a term used in technical analysis to describe when stocks reverse previous gains (or losses) to stay within well-defined trading levels.
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.
The maturity date is when a debt comes due and all principal and/or interest must be repaid to creditors.
Realized CPI inflation represents the measured rate of inflation reflected by data within the Consumer Price Index.
Correlation is a statistic that measures the degree to which two securities move in relation to each other.
Implied correlation is a measure of how closely the components of a given index track against one another.
The U.S. Census Bureau’s Retail Sales Report is a monthly report that seeks to provide current estimates of sales at retail and food services stories and inventories held by retail
stores, based on a survey of about 13,000 retail businesses, supplemented by estimates for other employers.
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-capitalization-weighted index calculated on a total return basis with dividends reinvested. The S&P 500 represents approximately 80% of the investable U.S. equity market.
The S&P 500 Top 50 consists of 50 of the largest companies from the S&P 500, reflecting U.S. mega-cap performance. Index constituents are weighted by float-adjusted
market capitalization.
The Nasdaq Composite Index is the market-capitalization-weighted index of over 2,500 common equities listed on the Nasdaq stock exchange.
The Russell 2000® Index measures the performance of the 2,000 smallest companies in the Russell 3000® Index, which represents approximately 10% 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 2023. 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-416238 Exp. 12/14/2023
The U.S. government debt downgrade by Fitch Ratings, from AAA to AA+, dominated the headlines last week, but it’s only a small part of the mosaic of factors contributing to the jump in yields and bond market volatility, said Matt Orton, CFA, Chief Market Strategist at Raymond James Investment Management.
Yields on 30-year Treasury bonds rose nearly 20 basis points (bps) last week while the 10-year yield went on a wild ride, peaking above 4.2% on Friday morning before falling nearly 20 bps intraday after the U.S. payrolls report from the Bureau of Labor Statistics was slightly softer than expected. The 2s10s curve, reflecting the difference in yields on 10-year and 2-year U.S. Treasuries, has also rapidly steepened, jumping from -105.1 bps on July 24 to a peak of -70.8 bps on Friday morning. That’s a nearly 33% move in less than two trading weeks!
A sudden steeping of the yield curve
U.S. 2-year/10-year yield curve
Source: Bloomberg, as of 8/4/2023
These large moves weren’t caused solely by the Fitch downgrade. Orton said they are rather the result of the intersection of three factors. The first is last week’s U.S. Federal Reserve (Fed) meeting when Chair Jerome Powell’s emphasis on the lagged effects of policy tightening curtailed some of the potential risks of overtightening and shifted the pressure from better economic news further out the curve than seen over the past year. The second factor is the ongoing shift toward higher yields globally, with last week’s adjustment in the Bank of Japan’s (BoJ’s) yield curve control (YCC) policy the most recent development in an upward migration in non-U.S. yields relative to the low levels seen in the last cycle. The third and final factor is the U.S. Treasury bumping up its schedule for the issuance of new debt for the first time in 2.5 years to help finance a surge in budget deficits. (The Fitch downgrade should ultimately call attention to this third factor.)
Equities had been relatively resilient in the face of these moves, but Orton said another intraday breakdown on Friday afternoon, following a breakdown the prior week, highlights the extended nature of this rally and the need to exercise caution in the near term. The S&P 500 is down only 2.4% from its peak on July 31, and there could be some additional weakness in equities and bonds if this week’s reports on inflation, both from the latest Consumer Price Index (CPI) and Producer Price Index (PPI) data, surprise to the upside.
“Frankly, we’re in need of some healthy market consolidation to reset overextended sentiment and momentum,” Orton said.
Consequently, Orton said he continues to believe this isn’t a market for investors to chase higher. The better option may be to wait for a 5% or more pullback to redeploy capital. Investors may also want to consider trimming their positions in their big winners and cycling into higher quality areas of the market where valuations remain attractive, he said.
“We’re seeing higher quality, more reasonably valued companies outperform as they catch up to the gains the mega-caps and other stocks posted earlier this year,” he said, “and their gains have been fueled by the enthusiasm generated from strong second-quarter earnings results.”
If the broad market does provide some much needed consolidation, Orton said he would expect that profitable, high free-cash-flow companies with stable earnings growth could outperform. We already saw some evidence for this last week.
Despite the weakness across both equities and fixed income last week, economic data continued to show a “good enough” economic backdrop, particularly with respect to the labor market. The ADP National Employment Report meaningfully surprised to the upside once again while the headline Nonfarm Payroll report was weaker than expected. However, both continue to paint a picture of a decelerating but still tight labor market. The details of the ADP report also showed robust hiring among small firms and weakness at larger firms. That development is seemingly at odds with the notion that smaller firms would be starved of capital as regional banks pulled back on providing credit. Initial jobless claims also continue to hold at low levels, a signal that this is not a summer of widespread layoffs. At the same time, hiring intensity seems to have slowed markedly, with job openings and quit rates dropping, according to the Job Openings and Labor Turnover Survey released earlier last week. The strength of the labor market is critical to supporting a more benign economic environment for risk assets, Orton said, and the data last week was encouraging. It’s also a reminder that while the Fed could pause from its rate hiking cycle in September, rates will remain at their current elevated levels for a while. Wage inflation remains a challenge, and the increase in average hourly earnings is certainly a reminder of that.
A better (ADP) and weaker (NFP) than expected jobs report both show a decelerating but still tight labor market
Source: Bloomberg, as of 8/4/2023
From an investment perspective, Orton said caution is still warranted in the short term.
“We may not have seen the end of the rise in real rates, and that trend will ultimately weigh heavily on overextended parts of the market,” he said. “The erratic spikes in some of the meme stocks – whose gains have been driven largely by weekly call option volume – cannot be ignored and are symptoms of both the speculative excesses that have built up as well as the general lack of participation in this year’s rally by most investors.”
Cash on the sidelines remains historically elevated, and money market funds have continued to see inflows, with their assets under management now sitting at $5.5 trillion. The equity rally that occurred after the shutdown of Silicon Valley Bank hasn’t been tested. If we do get a healthy 5% to 7% pullback in stocks, some of the excess cash investors have been holding could come back into the market. However, Orton said, the best opportunities going forward aren’t likely to be in the biggest winners so far this year, but rather in the parts of the market that have lagged year to date and are finally catching a bid.
Orton said he continues to believe the market will broaden. The S&P 500® Equal Weight Index held up better than the broader market last week, and it has outperformed the market-capitalization-weighted S&P 500 Index by 152 bps since the end of May. Earnings strength has reminded investors of the significant value across most parts of the market that aren’t artificial intelligence plays or the mega-cap stocks, and even most of these names still managed to surprise to the upside. Orton’s list of investment themes to watch includes:
At a sector level, industrials have been a prime beneficiary of the recent market rotation, and Orton said investors could benefit from leaning into select industries like machinery and aerospace and defense. Earnings growth in industrials has surprised to the upside, and there are many names that can continue to benefit if data keeps supporting the soft landing narrative. Earnings in consumer staples have also been quite strong. While this sector always trades at a premium, Orton said he believes there are some selective opportunities among the companies whose earnings and margins continue to surprise to the upside. Investors could also benefit from the more defensive characteristics of the consumer staples sector to balance their cyclical exposure elsewhere.
One of the most compelling opportunities right now remains in small caps, even after some strong outperformance over the past two months with the Russell 2000® Index up 12.14% versus 7.39% for the S&P 500 and 7.26% for the Nasdaq Composite Index. Valuations relative to large caps remain close to their lowest levels over the past 20 years, and we’re seeing earnings and sales revisions increase among the smaller of the small caps. While second-quarter earnings results for this group aren’t great so far, Orton said it appears that the quarter could prove to be the trough in a nearly two-year earnings contraction. Earnings forecasts for the second half of 2023 and for 2024 are starting to increase, and we’re seeing the same trend in companies’ profit margins. Small caps should also benefit from increased capital expenditures, which have remained more robust than anticipated, driven by years of underinvestment, as well as by trends like the reshoring of vendor relationships, fiscal stimulus, and a tight labor market.
Overseas, Orton said he continues to have conviction in emerging market (EM) equities. China has started to show some signs of life, led by major rallies in their mega-cap stocks and automakers. He believes investors might also find benefits in leaning into South Korea and Taiwan for Asia ex-China exposure, as these markets have continued to perform well, and the breadth of that performance has been expanding across sectors. Latin America has benefitted from a commodity rally, and central banks across the region are starting to cut rates. India remains one of the most attractive long-term growth regions within EM, and recent consolidatio
At the start of the week, Orton said it will be important to monitor how the market follows up the negative divergence that occurred on Friday afternoon. Last week was the second week in a row when there was a meaningful intraday breakdown, and the price action wasn’t encouraging. Does this ultimately lead to some much needed market consolidation? Orton says we’ll see this week.
On the earnings front, nearly 90% of the S&P 500, by market cap, has reported, and the pace of earnings growth has slowed. That said, there are still some important second-quarter earnings reports across sectors that will still be released. The economic calendar also features some important upcoming reports on inflation, with the July Consumer Price Index report due on Thursday and Producer Price Index due on Friday. The University of Michigan Index of Consumer Sentiment will also be released on Friday, and it will be important to see whether the rise in gas prices has put upward pressure on inflation expectations. Given recent volatility in rates, the possibilities of the 3-year, 10-year, and 30-year Treasury auctions going off at higher amounts than originally forecast will be closely followed.
Risk Information:
Investing involves risk, including risk of loss.
Diversification does not ensure a profit or guarantee against loss.
Disclosures:
Index or benchmark performance presented in this document does not reflect the deduction of advisory fees, transaction charges, or other expenses, which would reduce performance. Indexes are unmanaged. It is not possible to invest directly in an index. Any investor who attempts to mimic the performance of an index would incur fees and expenses that would reduce return.
This document is a general communication being provided for informational purposes only. It is educational in nature and not designed to be taken as advice or a recommendation for any specific investment product, strategy, plan feature, or other purpose in any jurisdiction, nor is it a commitment from Carillon Tower Advisers or any of its affiliates to participate in any of the transactions mentioned herein. Any examples used are generic, hypothetical, and for illustration purposes only. This material does not contain sufficient information to support an investment decision, and you should not rely on it in evaluating the merits of investing in any securities or products. In addition, users should make an independent assessment of the legal, regulatory, tax, credit, and accounting implications and make their own determinations together with their own professionals in those fields. Any forecasts, figures, opinions, or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions, and are subject to change without prior notice. All information presented herein is considered to be accurate at the time of production, but no warranty of accuracy is given and no liability in respect of any error or omission is accepted. It should be noted that investment involves risks, the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements, and investors may not get back the full amount invested. Both past performance and yields are not reliable indicators of current and future results.
The views and opinions expressed are not necessarily those of the broker/dealer; or any affiliates. Nothing discussed or suggested should be construed as permission to supersede or circumvent any broker/dealer policies, procedures, rules, and guidelines.
Definitions:
The “2s/10s” is a bellwether indicator that tracks the spread between the 10-year U.S. Treasury bond and the 2-year Treasury note.
The ADP® National Employment Report™ is published monthly by the ADP Research Institute® in close collaboration with Moody’s Analytics. The ADP® National Employment Report™ provides a monthly snapshot of U.S. nonfarm private sector employment based on actual transactional payroll data.
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.
Consolidation is a term used in technical analysis to describe when stocks reverse previous gains (or losses) to stay within well-defined trading levels.
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.
Cyclical stocks have prices influenced by macroeconomic changes in the economy and are known for following the economy as it cycles through expansion, peak, recession, and recovery.
Defensive stocks provide consistent dividends and stable earnings regardless 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.
Divergence occurs when the price of an asset is moving in the opposite direction of a technical indicator. Divergence warns that the current price trend may be weakening, and in some cases may lead to the price changing direction. There is positive and negative divergence. Positive divergence indicates a move higher in the price of the asset is possible. Negative divergence signals that a move lower in the asset is possible.
Fiscal stimulus is an attempt by a government to increase economic activity by reducing taxes or increasing government spending, or both.
The Job Openings and Labor Turnover Survey (JOLTS) is a monthly report by the Bureau of Labor Statistics of the U.S. Department of Labor that counts job vacancies and employment separations, including the number of workers voluntarily quitting employment.
Market capitalization, or market cap, refers to the total dollar market value of a company’s outstanding shares of stock.
A meme stock refers to the shares of a company that has attained viral popularity due to heightened social sentiment, typically after being featured or heavily discussed on social media or other online platforms.
Nonfarm Payroll measures the number of workers in the U.S. except those in farming, private households, proprietors, non-profit employees, and active military. The Bureau of Labor Statistics (BLS) surveys private and government entities throughout the U.S. to obtain information about their payrolls. The nonfarm payroll numbers are reported monthly to the public through the closely followed Employment Situation summary.
Policy tightening is a course of action by a central bank, like the U.S. Federal Reserve, to contract monetary policy in an effort to slow down overheated economic growth, to constrict spending in an economy that is seen to be accelerating too quickly, or to curb inflation when it is rising too fast.
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.
Real rates are the returns an investment delivers after inflation is taken into account.
Reshoring is the process of returning the production and manufacturing of goods back to the company’s original country. It is the opposite of offshoring, which is the process of manufacturing goods overseas to try to reduce the cost of labor and manufacturing.
Risk assets are investments that carry higher levels of risk, such as equities, high-yield bonds, commodities, or real estate.
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 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.
Valuation refers to measures of a stock’s value. One of the most used stock valuation metrics is the price-to-earnings ratio, which measures a stock’s current price in relation to its earnings per share of outstanding stock.
Yield curve control occurs when a central bank targets a longer-term interest rate and then buys or sells as many bonds as necessary to hit that targeted rate.
A yield curve is a line that plots the yields 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. A bond’s yield is the interest it pays divided by its current price in the secondary market.
Indices:
The S&P 500® Equal Weight Index is the equal-weight version of the S&P 500. It includes the same constituents as the market-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 500 Index measures change in stock market conditions based on the average performance of 500 widely held common stocks. It is a market-capitalization-weighted index calculated on a total return basis with dividends reinvested. The S&P 500 represents approximately 80% of the investable U.S. equity market.
The Nasdaq Composite Index is the market-capitalization-weighted index of over 2,500 common equities listed on the Nasdaq stock exchange.
The Russell 2000® Index measures the performance of the 2,000 smallest companies in the Russell 3000® Index, which represents approximately 10% 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 2023. 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-414871 Exp. 12/08/2023
