“
”Markets in Focus
Timely analysis of market moves and sectors of opportunity
Markets struggled last week due to strained investor sentiment and continued hawkishness from global central banks.
“We came into last week with the market screening as overbought and overvalued, and it makes perfect sense to see some healthy and orderly consolidation,” said Matt Orton, CFA, Chief Market Strategist at Raymond James Investment Management. He expects additional consolidation to occur as companies and investors head into the end of the quarter, where rebalancing flows are likely to put more pressure on equities.
Orton explained that market breadth remains weak, meaning that broader index gains are being driven by a small number of stocks, and that this dynamic could pose a challenge to capitalizationweighted indices if investors decide to take profits from their biggest year-to-date winners ahead of earnings season. Similar challenges could be posed by investors responding to U.S. Federal Reserve (Fed) decisions keeping interest rates higher for longer.
Signs of exuberance have also been creeping back into the market for the past few weeks. Orton specifically cited short-covering activity across many low quality companies, an increase in total call option volumes, and improving retail sentiment shown in the American Association of Individual Investors (AAII) Investor Sentiment Survey.
“Headlines declaring ‘the worst week since the collapse of Silicon Valley Bank’ are technically true, but such hyperbole is unhelpful and distracts from the big picture,” Orton said. The S&P 500 Index experienced its worst week since March 10, but it was down only 1.39%. Orton pointed out that unexpectedly positive earnings and economic data has been improving previously dismal investor sentiment, and increasing optimism about Artificial Intelligence (AI) is luring investors back into the market.
“I continue to believe that this is the time to be managing the position sizing of your big winners,” Orton said. He recommends leaning into higher quality, low volatility companies. “If the improvement in market breadth continues, likely fueled by good earnings and rebalancing, these are the kinds of companies that could benefit the most,” he added. If consolidation activity increases in the market, Orton expects to see outperformance from profitable, high free-cash-flow companies with stable earnings growth.
Orton noted that none of the recent market action should come as a surprise. “Some level of consolidation has been in the cards, not only from a technical and positioning standpoint, but also given the level of hawkishness from global central banks,” he said.
In the first week of June, the Reserve Bank of Australia and the Bank of Canada raised interest rates in their respective countries. The following week, the Fed and the European Central Bank (ECB) were more hawkish than markets expected. Last week, Norges Bank and the Bank of England accelerated the pace of their own rate hikes. Orton expects this shared and ongoing pursuit of sufficiently restrictive monetary policy to be reflected in central bank speeches at this week’s ECB Forum on Central Banking.
Orton continues to believe that data from the U.S. economy is good enough to avoid a “hard landing” scenario — in which the Fed tightens monetary conditions to the point where it triggers a widespread recession — and positive data could support equities into the second half of the year. He stated that some parts of the economy have already come through sector-specific downturns, and others are holding up well.
“The housing market never cratered to the degree that many economists expected, due to structural supply and demand imbalances that built up in the 15 years that followed the Global Financial Crisis,” Orton said. He noted that data in single-family housing starts, homes sold, building permits, and homebuilder confidence suggests that the market has already bottomed. “Some of the homebuilders are also trading at 52-week highs, which is not something that happens during or leading into a recession,” Orton added.
Household balance sheets remain strong:
Household debt service payments as a percentage of disposable income
Source: Bloomberg, as of 6/23/2023
Consumers have defied recessionary expectations by continuing to spend, particularly on travel and leisure activities. “Household balance sheets remain in remarkably good shape to support healthy spending in the second half of the year,” Orton said. Data from money center banks indicates that household liquid assets are currently $4.4 trillion higher than they were in 2019, which suggests a robust buffer of excess savings.
Finally, while the manufacturing economy is challenged, there is a substantial amount of government money available through the Inflation Reduction Act and CHIPS (Creating Helpful Incentives to Produce Semiconductors and Science) Act legislation. “These funds are just starting to get deployed into the economy,” Orton said. He stated that they can provide ballast to many industries as economic growth continues to slow.
How does the second half look when the S&P 500 is up over 10%?
| Year | Gains through first half of year | Performance over next 6-months |
| 1929 | 12.6% | -21.7% |
| 1933 | 57.7% | -8.6% |
| 1936 | 10.5% | 15.8% |
| 1943 | 26.4% | -5.5% |
| 1944 | 11.2% | 2.3% |
| 1945 | 12.0% | 16.7% |
| 1954 | 17.7% | 23.2% |
| 1955 | 14.0% | 10.8% |
| 1958 | 13.1% | 22.0% |
| 1961 | 11.2% | 10.7% |
| 1967 | 12.8% | 6.4% |
| 1975 | 38.8% | -5.3% |
| 1976 | 15.6% | 3.0% |
| 1983 | 19.5% | -1.9% |
| 1985 | 14.7% | 10.1% |
| 1986 | 18.7% | -3.5% |
| 1987 | 25.5% | -18.7% |
| 1988 | 10.7% | 1.5% |
| 1989 | 14.5% | 11.1% |
| 1991 | 12.4% | 12.4% |
| 1995 | 18.6% | 13.1% |
| 1997 | 19.5% | 9.6% |
| 1998 | 16.8% | 8.4% |
| 1999 | 11.7% | 7.0% |
| 2003 | 10.8% | 14.1% |
| 2013 | 12.6% | 15.1% |
| 2019 | 17.3% | 9.8% |
| 2021 | 14.4% | 10.9% |
| Average | 17.6% | 6.0% |
| Median | 14.5% | 9.6% |
Source: Bloomberg, as of 6/23/2023
“It’s worth noting that such a strong first half of the year has typically led to pretty good gains in the second half,” Orton said. However, he warned that broader gains in equities are necessary for the market to sustainably push higher in the second half of the year.
Orton recommends that investors make plans to deploy their cash, currently sitting in money market funds, after the market moves through some consolidation. “There is a unique opportunity in the market today given that the gains have been so incredibly narrow,” he said.
Lagging sectors and industries where market fundamentals remain strong could benefit from an increase in market breadth. Orton has preferred industrials for the past few weeks, especially the building products, trading companies, and construction & engineering industries.
“Healthcare was the only positive sector last week, highlighting its more defensive characteristics,” Orton said. “As we head into earnings season, I think we’ll be reminded of its growth characteristics as well,” he explained. Orton sees negative overreaction in health maintenance organizations (HMOs), in response to news around an increase in non-urgent surgeries, as a perfect example of being patient and opportunistic to add exposure in high quality companies.
Orton also considered companies with medium and smaller market capitalizations. “We saw a nice reversal in performance to start the month in small vs. large, but that trade has lost some steam,” he said. Orton believes that the entry point still looks attractive from multiple perspectives, because valuations are near historic lows on a relative basis, earnings momentum has bottomed, and the percentage of companies that beat earnings estimates increased last quarter.
Although the overall calendar of economic data is slow, the Fed will release the results of its annual stress tests this week, which will likely have an impact on banks. The June Consumer Confidence Index, published on Tuesday, should be watched for signs of labor market deterioration. Earnings reports will provide a glimpse into the activities of the American consumer. Data from Jefferies will also indicate the state of mergers and acquisitions.
| Monday | Texas Manufacturing Outlook Survey; Japan Leading Economic Index |
| Tuesday | U.S. durable and capital goods orders, new home sales; June Consumer Confidence Index; Canada Consumer Price Index (CPI) |
| Wednesday | Mortgage Bankers Association (MBA) Weekly Applications; Eurozone M3 money supply; Italy CPI |
| Thursday | U.S. initial jobless and continuing claims, pending home sales; Eurozone Consumer Confidence Indicator |
| Friday | U.S. personal income and spending, Implicit Price Deflator for Personal Consumption Expenditures; UK Gross Domestic Product, exports/imports; France CPI. |
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:
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.
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.
Short covering refers to buying back borrowed securities and closing out an open short position at a profit or loss. (Short positions are normally used in strategies where investors anticipate that prices of securities will fall in the short term; they typically borrow and sell securities with plans to repurchase them later at a lower price.) Short covering entails buying the security that was initially sold short and returning the shares that were borrowed for the short sale.
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.
A credit spread is the difference in yield between a U.S. Treasury bond and another debt security with the same maturity but different credit quality. Also referred to as “bond spreads” or “default spreads,” credit spreads are measured in basis points, with a 1% difference in yield equaling a spread of 100 basis points. Credit spreads reflect the risk of the debt security being compared with the Treasury bond, which is considered to be risk-free. Higher quality securities have a lower chance of the issuer defaulting. Lower quality securities have a higher chance of the issuer defaulting.
American Association of Individual Investors (AAII) Investor Sentiment Survey is a weekly survey that asks individual investors for their thoughts on where the market is heading in the next six months.
Money center banks are large banks situated in economic hubs that primarily deal with governments, other banks, and big corporations.
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.
Consolidation is a term used in technical analysis to describe when stocks reverse previous gains (or losses) to stay within well-defined trading levels.
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.
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 Consumer Confidence Index (CCI) is a survey administered by The Conference Board that measures how optimistic or pessimistic consumers are regarding their expected financial situation.
The Federal Reserve Bank of Dallas conducts the Texas Manufacturing Outlook Survey monthly to obtain a timely assessment of the state’s factory activity. Firms are asked whether output, employment, orders, prices and other indicators increased, decreased, or remained unchanged over the previous month. Responses are aggregated into balance indexes where positive values generally indicate growth while negative values generally indicate contraction.
The Japan Leading Economic Index, released by the Cabinet Office of the national government of Japan, tracks economic indicators in more than a dozen categories, including inventories, new job offers, machinery orders, housing construction, consumer confidence, stock prices, money supply, the investment climate, operating profits in manufacturing, government bond yields, and sales forecasts for small business.
The Canada Consumer Price Index (CPI), released by Statistics Canada, represents changes in prices as experienced by Canadian consumers. It measures price change by comparing, through time, the cost of a fixed basket of goods and services that are divided into eight major components: Food; Shelter; Household operations, furnishings and equipment; Clothing and footwear; Transportation; Health and personal care; Recreation, education and reading; and Alcoholic beverages, tobacco products and recreational cannabis. CPI data are published at various levels of geography including Canada; the 10 provinces; Whitehorse, Yellowknife, and Iqaluit; and select cities.
The Mortgage Bankers Association (MBA) Weekly Applications covers mortgage application activity that includes purchase, refinance, conventional, and government application data, weekly data on mortgage rates, and indices covering fixed-rate, adjustable, conventional, and government loans for purchases and refinances.
The Italy Consumer Price Index (CPI), released monthly by the Italian National Institute of Statistics (ISTAT), measures changes over time in prices for a representative basket of goods and services consumed by Italian households.
The Eurozone Consumer Confidence Indicator is conducted by the Directorate General for Economic and Financial Affairs to measure consumer confidence within different sectors of the economies in the European Union and in the applicant countries.
The Implicit Price Deflator for Personal Consumption Expenditures, also known as the PCE deflator, is published by the U.S. Bureau of Economic Analysis and provides a price measure reflecting aggregate consumption inflation. Deflators are calculated by dividing the current-dollar value of an aggregate or component of a selected price index by its corresponding chained-dollar value, and then multiplying by 100. For all periods, the values of the deflator are very close to the values of the corresponding chain-type price index.
The France consumer price index, published by the National Institute of Statistics and Economic Studies, is the instrument used to measure inflation. It allows the estimation of the average variation between two given periods in the prices of products consumed by households. It is based on the observation of a fixed basket of goods updated every year. Each product has a weight in the overall index that is proportional to its weight in household expenditure.
M-397762 Exp. 10/26/23
The stock market rally from the regional bank lows in March has been spectacular. It also has been spectacularly frustrating for many investors given a persistent tug-of-war around the economic outlook, negative investor sentiment, and extreme narrowness in market leadership.
Many bears have started to go into hibernation as the recessionary narrative has faded, further fueling gains over the past two weeks and pushing the S&P 500 Index into a bull market. But Matt Orton, CFA, Chief Market Strategist at Raymond James Investment Management, cautioned that it simply means the index is up more than 20% since the low on Oct. 12, 2022.
“I can sympathize with the convenience in using this common shorthand definition to contextualize market action,” he said, “but describing the current run in the S&P 500 as a ‘bull market’ or generalizing the meteoric rise in artificial intelligence-related companies as a ‘bubble’ are oversimplifications that ignore the many cross-currents that investors must navigate going forward.”
While market breadth has increased over the past few weeks, the top eight companies still account for more than 80% of the gains in the S&P 500 in 2023 (down from 100% at the start of the month) and are up an average of 83.7% versus gains of 5.4% for the rest of the index. To credibly call this a bull market, there must be broader sponsorship of the index gains. Orton said he also worries that the gains that have accrued to those elite eight companies dominating the market might start to moderate in the face of extended price momentum, a U.S. Federal Reserve (Fed) that remains hawkish, and the upcoming second-quarter earnings season where expectations are quite high.
“That is why I believe now is the time to manage position sizes among big winners and to lean into higher quality and low volatility companies,” Orton said. “If the improvement in breadth continues, these companies will benefit the most as the market of stocks catches up to the market. And if the market starts to consolidate, I would expect profitable, high free-cash-flow companies with stable earnings growth to outperform.”
Breadth has improved, but not enough
The gap in index performance remains at the highs of the year
Source: Bloomberg, as of 6/16/2023
Orton said he remains constructive on the economic outlook, but does not find the risk-reward setup very attractive in the short term. Frankly, he said, some consolidation would be healthy for the market, but the nature of that pullback will be critical in setting the market direction. A benign pullback of, say, 5% would allow sentiment and momentum to reset and build a base upon which the market could continue to move higher, he said. However, anything nearing 7 to 10% likely would put the market back into the frustrating range that has prevailed all year.
“Bull markets not only shrug off overly bullish sentiment and overbought momentum, but pullbacks tend to be short-lived and shallow,” he said. “This must be the case if we are to believe that this is in fact a bull market.”
Recent improvements from small caps, bellwether stocks, and factor performance are encouraging but depend on economic surprises and the continued narrowing of credit spreads. The nature of any coming pullback will tell us more than the recent upside price action has. And the recent price action does give Orton a few reasons for pause. Highly risky stocks are back in vogue with the rising artificial intelligence tide lifting unprofitable tech. The lowliest of benchmarks, the UBS Profitless Tech Index, is up more than 40% year to date. That’s all the more reason, Orton said, to lean into higher quality companies, but that doesn’t mean avoiding risk or investing in growth. It just means owning stable earnings growth, profitability, and free cash flow.
“Overall, I believe it’s important to refrain from getting sucked into extremes,” he said. “Just as those who were extremely pessimistic at the start of the year and after the collapse of Silicon Valley Bank were caught flat-footed by the rally, those who fail to recognize the risks ahead will be offsides when we see a pullback.”
There is a lot to be excited about, and it can be difficult to fight the fear of missing out in the current market environment, but Orton said he wouldn’t chase this market higher. Instead, he said investors should think about how to reinvest the gains harvested from their biggest winners this year. And critically, he said, investors need to have a plan for what to do with cash that’s still sitting in money market funds that can deployed when we do eventually go through a period of consolidation. That means looking at lagging sectors and industries – such as healthcare, health maintenance organizations, and pharmaceuticals – where he said fundamentals remain quite strong and that will benefit should the breadth continue to increase. Industrials have been an area of strength and Orton said he still likes the sector, especially building products, trading companies, and construction and engineering, which are all showing some leadership. Even some software and tech hardware companies still look attractive. Down market-cap, he said small caps deserve a very serious look.
“I turned positive on the space a few weeks ago and I believe the reversal in performance can continue, especially as we enter earnings season where expectations are much lower down the market-cap spectrum,” he said.
Last year was incredibly painful for most investors, but Orton said the good news is that this year diversification has worked well. Despite a massive performance reversal during the regional banking crisis, small and mid caps have been a source of strength recently. International developed markets also have outperformed – Europe has surprised to the upside and Japanese equities have gone parabolic – while emerging markets look to be building a base with regional sources of strength such as Asia excluding China, Latin America, and India. Anyone fearful of taking risk and hiding in money markets will be sorely disappointed when they look at their statement at the midpoint of 2023, he said. You didn’t need to own the Nasdaq Composite Index or even the S&P 500 to have been successful this year. And going forward, Orton said he expects that well-diversified portfolios will continue to provide solid risk-adjusted returns that investors seek. He said, however, that it’s important to be tactical with your asset allocation since we burned through market narratives this year and inevitably there will be more periods when the bulls and the bears fight for command of the narrative.
Diversification has worked pretty well in 2023
Money markets, not so much
Source: Bloomberg, as of 6/16/23
Fed policy will be the focus this week with Fed Chair Jerome Powell in the spotlight. A hawkish-tilted slate of other Fed speakers could emphasize the need for further hikes while Orton said he expects Powell to stay on the message that the Fed remains data-dependent and that the dots are not a plan. Investors also will watch to see if the momentum rallies for highly shorted stocks can extend.
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:
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.
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.
A bellwether stock is a one whose share prices and reported earnings are watched as measures of the performance of the market or the economy more generally. Bellwether stocks typically are mature, large-cap, blue-chip companies.
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.
A credit spread is the difference in yield between a U.S. Treasury bond and another debt security with the same maturity but different credit quality. Also referred to as “bond spreads” or “default spreads,” credit spreads are measured in basis points, with a 1% difference in yield equaling a spread of 100 basis points. Credit spreads reflect the risk of the debt security being compared with the Treasury bond, which is considered to be risk-free. Higher quality securities have a lower chance of the issuer defaulting. Lower quality securities have a higher chance of the issuer defaulting.
Investment-grade refers to fixed-income securities rated BBB or better by Standard & Poor’s or Baa or better by Moody’s.
High-yield bonds pay higher interest rates because they have lower credit ratings than investment-grade bonds. High-yield bonds have credit ratings below BBB- from Standard & Poor’s or below Baa3 from Moody’s.
The U.S. Federal Reserve dot plot is a chart summarizing the Federal Open Market Committee’s (FOMC) outlook for the federal funds rate. Each dot represents the interest rate forecasted by one of the 12 members of the committee.
Short is a term used to describe a strategy in which investors anticipate that prices of securities will fall in the short term, so, typically, they sell securities with plans to repurchase them later at a lower price.
Indices:
The S&P 500 Index measures change in stock market conditions based on the average performance of 500 widely held common stocks. It is a market-weighted index calculated on a total return basis with dividend reinvested. The S&P 500 represents approximately 80% of the investable U.S. equity market.
The S&P 500® Equal Weight Index is the equal-weight version of the S&P 500. It includes the same constituents as the capitalization-weighted S&P 500, but each company in the S&P 500 Equal Weight Index is allocated a fixed weight, or 0.2% of the index total at each quarterly rebalance.
The UBS Profitless Tech Index tracks the performance of emerging high growth tech and tech-enabled companies which have yet to compete a full year with positive earnings.
The Nasdaq Composite Index is the market capitalization-weighted index of over 2,500 common equities listed on the Nasdaq stock exchange.
The JPMorgan Prime Money Market Fund invests in high-quality, short-term obligations that present minimal credit risk including, securities issued by the U.S. government and its agencies; floating-rate and variable-rate demand notes of U.S. and foreign corporations; commercial paper in the highest category by Moody’s Investor Services (P1) and Standard & Poor’s (A1); certificates of deposit and time deposits; asset-backed securities; and repurchase agreements.
The MSCI EAFE® (Net) Index measures the performance of performance of large and mid-cap securities across 21 developed markets, including countries in Europe, Australasia and the Far East, excluding the U.S. and Canada. The MSCI EAFE® (Net) Index subtracts any foreign taxes applicable to US citizens but not applicable to citizens in the overseas country.
The MSCI Emerging Markets Index captures large and mid-cap representation across emerging markets countries that include Brazil, Chile, China, Colombia, Czech Republic, Egypt, Greece, Hungary, India, Indonesia, Korea, Kuwait, Malaysia, Mexico, Peru, Philippines, Poland, Qatar, Saudi Arabia, South Africa, Taiwan, Thailand, Turkey, and United Arab Emirates.
The MSCI Emerging Markets Asia ex China Index captures large and mid-cap representation across India, Indonesia, Korea, Malaysia, the Philippines, Taiwan, and Thailand.
The Russell 2000® Index measures the performance of the 2,000 smallest companies in the Russell 3000® Index, which represents approximately 7% of the total market capitalization of the Russell 3000® Index.
The Russell Midcap® Index measures the performance of the mid-cap segment of the U.S. equity universe. It includes approximately 800 of the smallest securities of the Russell 1000® Index based on a combination of their market capitalization and current index membership and represents approximately 27% of the total market capitalization of the Russell 1000® 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. 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.
395517-2023-06-21 Exp. 10/20/23
It appears the bulls are quickly chasing away the bears, who have been a fixture of the stock market for the past 18 months. It was impossible to have missed the headline that the S&P 500 Index last Thursday, June 8, finally exited its longest bear market since 1948 by advancing 20% above its October 2022 low.
As Matt Orton, CFA, Chief Market Strategist at Raymond James Investment Management, noted, “There has been strong technical momentum behind this rally, fueled by a capitulation of the permabears, whose dire predictions seem just as ill-founded now as the crazy bulls’ optimism did at the start of the year when they had price targets for the S&P 500 of 4400.” He added, “We’re not even at the halfway point of the year, and, if anything, we’ve learned that this market has no problem rapidly changing narratives based on only a few pieces of data.”
As a wider range of stocks participate in this rally, market breadth is slowly starting to improve. The bullish sentiment among retail investors has also notably increased. Still, Orton believes there needs to be more evidence that this optimism will be sustainable, especially as the freight train that has driven the rally in mega-cap technology stocks starts to sputter.
“This is the time to fight the feeling of FOMO [fear of missing out] and resist being sucked in by the high-flying stocks,” says Orton. He believes the recent surge in investor bullishness may be premature and too extreme. Still, when a prevailing optimism seems to have gotten ahead of the markets, there have historically been opportunities for selective investors to put money to work. Orton said now may be the time to adjust the size of positions in big winners and lean into higher-quality and low-volatility companies.
“If the improvement in the breadth of performance continues, these companies will benefit the most as the rest of the market catches up to the surge that the mega-cap tech stocks propelled,” Orton said. “If the market later starts to consolidate, I would expect the profitable, high free-cash-flow companies with stable earnings growth to outperform.”
Orton notes that the upward trend of U.S. equities from their March lows has been quite powerful despite the heightened concerns of a recession as a result of the regional bank crisis. He acknowledged that many of the worries over slowing U.S. and global growth, along with concerns about the still unknown full impact of rapid monetary tightening, are valid. Still, he thinks the ultimate negative shock of these conditions on the market seems to have been overstated.
“Many of the recessionistas are relearning that the profit machine that is corporate America isn’t the same thing as the economy,” Orton said. “Many companies – particularly the mega-cap tech stocks – showed in their first-quarter results that despite slowing top-line growth, they have significant levers to pull that can drive greater efficiencies and propel their earnings growth.”
As he noted, first-quarter earnings came in well above expectations, and earnings estimates have started to stabilize for both the second quarter and second half of 2023. But heading into second-quarter earnings season, the bar has been set higher, in Orton’s view.
“I would expect to see increased dispersion of performance, as earnings need to grow into the prices of stocks to offset some of the incredible expansion of price-to-earnings (P/E) ratios that has occurred across the market, but particularly in many artificial intelligence-related stocks,” he says. “Hopefully, the coming weeks will provide investors with a reminder that fundamentals do count, and faced with a U.S. Federal Reserve that might not be done hiking rates, it matters what you own.”
Orton believes there is still more room to run for the long-term trends that have driven the surge in mega-cap technology stocks. Still, he thinks there may be opportunities for investors to redeploy some of those gains into lagging sectors and industries where the fundamentals have been strong. If the rally in market performance continues to broaden, he believes the sectors that stand to benefit include healthcare, particularly among the health maintenance organization and pharmaceutical companies, and industrials, specifically companies in the building products, trading, and construction and engineering industries. With the technology sector, he also believes some software and hardware companies still look attractive.
The main catalysts this week will be the latest Consumer Price Index (CPI) number and the Federal Open Market Committee (FOMC) meeting on June 13 to 14. Orton said he expects the Fed to skip its rate-hiking schedule at this latest meeting, while leaving open the possibility for further tightening in July and beyond. Recent actions by the Reserve Bank of Australia and Bank of China serve as reminders that a pause doesn’t portend the end of a hiking cycle. He said he believes statements from the Fed indicating that it intends to continue combatting inflation should be taken at face value.
High bullishness is not always a good market predictor
[American Association of Individual Investors (AAII) bull/bear ratio]
S&P 500 Index
Source: Bloomberg, as of 6/9/2023. For the AAII bull/bear ratio, a ratio of 1 means there is an equal number of bulls and bears. A ratio above 1 indicates bulls outnumber bears. Below 1 shows there are more bears than bulls.
As a result, Orton said he believes there are risks that U.S. rates could still climb, with that possibility offset only if the CPI number comes in at a much cooler level than expected. Equity-risk premium is already at a new 20-year low, and any further increase in rates could provide another reason for investors to be careful about chasing the crowded technology trade any higher. Orton also highlights that the backdrop of this bull market is quite different from any in the recent past, notably that interest rates aren’t near 0%. As a result, in a higher for longer environment, investors should be looking to broaden past the secular growth winners that have dominated both up to this point and in bull markets of the past.
Orton emphasized that economic fundamentals continue to support the notion of interest rates remaining higher for longer. The Consumer Checkpoint report issued in May by the Bank of America Institute showed that consumer spending for May was robust, particularly for big-ticket service purchases such as travel, and there were few signs of strain among consumers. Lower-income households also continue to outperform higher-income households in spending growth. Critically, for the economy and household budgets, lower- and middle-income consumers aren’t relying more on credit cards, either. In fact, the ratio of credit card to debit card spending was below pre-pandemic levels for these groups.
As we head into the middle of the year, Orton believes many investors could be sorely disappointed when looking at their latest investment statements. The exceptions might be those who were overweighted in the eight mega-cap stocks that have driven 100% of the S&P 500 Index’s return year-to-date. Investors will also likely be quite disappointed when they see that their cash stockpile sitting in a money market fund has only returned 2.0% to 2.25% (especially given the fact that these yields aren’t merely temporary, but annualized).
While this year’s market has been quite narrow by historical standards, Orton notes that diversification has proven to be effective for investors year to date. Small-cap stocks have started to show signs of life and have posted returns nearly double those of the equal-weighted S&P 500 Index. International equities have also provided support to well-diversified portfolios. While the rally in Europe is starting to sputter, Japan is taking off and emerging markets ex-China are also performing well.
“The theme of quality will be critical to investors’ success,” said Orton, while acknowledging that might not be apparent now. “There are many parts of the market where high-quality companies have been left in the dust because of the rush to AI and AI-derivatives.”
He emphasized that the focus on quality by selective investors will be particularly important in the small-cap space, given that the broad indices for this category, like the Russell 2000® Index, contain so many unprofitable companies.
This will be a busy week, starting with U.S. CPI release on Tuesday, followed by June’s FOMC interest rate decision on Wednesday. Decisions on monetary policy will also be issued from the European Central Bank (ECB) on Thursday and from the Bank of Japan on Friday. Throughout the week, we will also hear from other central bankers and receive final CPI reports from a number European countries. Additionally, this Friday, we will obtain the latest insights on consumers’ mood with the release of the University of Michigan’s Index of Consumer Sentiment. The consensus is that the ECB will lift interest rates by a quarter point (0.25%), and the Federal Reserve will stand pat.
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 University of Michigan Index of Consumer Sentiment is based on monthly telephone surveys of at least 500 U.S. consumers who are asked what they think now and what their expectations are for their personal finances, business conditions, and buying conditions. Survey answers are compared to a base value of 100 set in 1966.
The U.S. Consumer Price Index (CPI), published monthly by the U.S. Bureau of Labor Statistics, measures the change in prices paid by consumers for goods and services that include food, clothing, shelter, fuels, transportation, doctors’ and dentists’ services, drugs, and other goods and services that people buy for day-to-day living.
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.
Dispersion of performance refers to how much the returns of individual stocks vary from their collective average. It increases as the spread between highs and lows widens.
Indices:
The S&P 500® Index measures change in stock market conditions based on the average performance of 500 widely held common stocks. It is a market-weighted index calculated on a total return basis with dividend reinvested. The S&P 500 represents approximately 80% of the investable U.S. equity market.
The S&P 500® Equal Weight Index is the equal-weight version of the S&P 500. It includes the same constituents as the capitalization-weighted S&P 500, but each company in the S&P 500 Equal Weight Index is allocated a fixed weight, or 0.2% of the index total at each quarterly rebalance.
The 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 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. 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.
394750-2023-06-16 Exp. 10/12/23
Markets responded positively to good news last week: A “Goldilocks” jobs report that was not too strong and not too weak boosted cyclical stocks and sent the Chicago Board Options Exchange Volatility Index to its lowest level since before the March 2020 pandemic crash.
Matt Orton, CFA, Chief Market Strategist at Raymond James Investment Management, pointed out that small caps surged on Friday as expectations increased for a Fed pause in June. Investors appear to be recalibrating their recession expectations, and last week Federal Reserve Bank of Philadelphia President Patrick Harker said he was inclined to “skip” an increase in interest rates at the next U.S. Federal Open Market Committee (FOMC) meeting.
Bond yields pushed higher across the yield curve, and markets are finally pricing out rate cuts this year. “I’ve been expecting this normalization for some time now, but it’s surprising that the increase in yields has had almost no impact on equities that are most sensitive to higher rates,” Orton said. Consumer discretionary and information technology were still among the best performing sectors last week. Orton noted that outside of Friday’s cyclical bounce, most sectors underperformed the broader market, continuing the trend of narrow leadership.
Orton warned that poor breadth in rising markets doesn’t necessarily mean an immediate decline in broader market indices, which has been evident over the past few months. “But it does represent an unhealthy environment and a market that’s out of gear,” he said. It’s the reason why he recommends leaning into higher quality and low volatility companies, because they should benefit the most as the market of stocks catches up to the performance of the indices. If the market starts to consolidate, he expects that profitable, high free cash flow companies with stable earnings growth should outperform.
Orton finds it impressive that the S&P 500® Index is now up more than 12% year to date despite continued Federal Reserve interest-rate hikes, sticky inflation, and the threat of a recession and a banking crisis. Speculative short positioning – not only in Treasuries, but also the S&P 500 – sits at record levels, which means that any unwinding of those positions could put further upward pressure on the market.
Longer-term, Orton continues to believe that broader market participation is necessary to sustain these advances. He explained that the S&P 500® Equal Weight Index is up more than 2% year to date, and there is nearly a 45% difference between the best- and worst- performing sectors in the capitalization-weighted index.
Historically, narrow market breadth is risky,
but the trend can continue in the near-term.
Source: Bloomberg, as of 6/2/2023
“If you weren’t fortunate enough to have hopped onto the Artificial Intelligence (AI) narrative freight train, you may well be looking at your equity portfolio and wondering where the rally is,” Orton said. He suggested that investors may be uncomfortable heading into the mid-point of the year, watching indexes show substantial gains, while holding a portfolio stuffed with laggards. “It’s important to resist the urge to chase this trade higher,” he said. “Being well diversified and leaning into what I consider quality pockets of the market has certainly helped mitigate underperformance.”
Although some investors may feel incentivized to add risk to investments that are working, no matter how bloated valuations may seem, Orton argues that the risk/reward tradeoff is skewed the other way. He remains fairly optimistic about the economy, pointing out that the lagged impact of the most rapid interest-rate tightening cycle in more than 40 years seems to have been forgotten and replaced by AI enthusiasm.
“It’s hard to argue that winning stocks’ immunity to higher rates will continue in perpetuity,” Orton said. He recommends managing position sizes for big portfolio winners in 2023 and re-deploying that capital into higher-quality parts of the market that have lagged.
Orton expects that as more investors embrace a “soft landing” narrative – where a cyclical slowdown in economic performance falls short of becoming an actual recession – it should benefit more than just AI and AI-derivative investments. He believes that software and tech hardware offer the most attractive possibilities, given superior earnings momentum and somewhat less exposure to the global economic cycle, but Orton also noted that there are plenty of other opportunities outside of technology.
Orton believes that it’s a good time to look at healthcare. “It has been a big drag in 2023, but it has strong fundamentals and valuations that keep getting more appealing,” he said. Orton still likes health maintenance organizations and pharmaceuticals within the healthcare sector; he finds that these industries screen highly for quality and low volatility.
Orton observed that international diversification has worked well this year, especially for investors who have been selective. He currently prefers emerging markets, particularly India and Asia ex-China. Orton explained that Indian equities are approaching their highs, and they are supported by a broad market, including a financials sector where banks are able to increase net interest margins and returns on equity. He stated that Asia ex-China – Taiwan and South Korea in particular – are benefitting from a turn in the semiconductor cycle and AI enthusiasm, but they are simultaneously seeing broader cyclical strength.
Emerging markets ex-China
Source: Bloomberg, as of 6/2/23
Elsewhere in equity markets, Orton said “It’s time to start giving U.S. small-caps a look once again.” He believes that the asset class is historically cheap, and it should benefit from a sentiment boost as the economic narrative improves. “Earnings season went pretty well, and downward revisions are starting to stabilize,” he said.
A Fed pause in June and benign economic data could lay the groundwork for a catch-up trade in companies with smaller market capitalizations. Orton pointed out that mega cap companies are so large that it won’t take very much of a rotation out of current winners – or out of cash and money market investments – and into small caps for a meaningful impact. “After all, the market cap of Apple is larger than the entire Russell 2000® Index,” he said. Even a small rotation into larger S&P 500 names could have a meaningful impact.
Investors head into this week with the debt ceiling debate resolved for the near-term and a published U.S. Bureau of Labor Statistics payroll report for May. U.S. Federal Reserve speakers are in the FOMC blackout period, and the economic calendar is pretty light, so Orton expects that optimism from the jobs report will continue to permeate into the market.
“We’ll get an update on factory orders, consumer credit, and initial jobless claims, but it’s unlikely any of these points will impact the ultimate June Fed decision,” Orton said. Outside of that, he said it might be possible to see some fluctuations in the energy market after the June 4–5 meeting for the Organization of the Petroleum Exporting Countries.
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:
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.
Rotation describes the movement of investments in securities from one industry, sector, or asset class to another as market participants react to or try to anticipate the next stage of the economic cycle.
The U.S. Bureau of Labor Statistics (BLS) payroll report, known as the Employment Situation Summary, is a monthly report tracking nonfarm payroll employment and the national unemployment rate, with data on 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) blackout period is considered to be the period between a week prior to the Saturday preceding a committee meeting and the Thursday following that meeting. Federal Reserve staff generally do not speak publicly during that time.
Indices:
The Chicago Board Options Exchange (CBOE) Volatility Index, or VIX, 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.
The S&P 500® Index measures change in stock market conditions based on the average performance of 500 widely held common stocks. It is a market-weighted index calculated on a total return basis with dividend reinvested. The S&P 500 represents approximately 80% of the investable U.S. equity market.
The S&P 500® Equal Weight Index is the equal-weight version of the S&P 500. It includes the same constituents as the capitalization-weighted S&P 500, but each company in the S&P 500 Equal Weight Index is allocated a fixed weight, or 0.2% of the index total at each quarterly rebalance.
The Nasdaq 100 Index consists of 101 equity securities issued by 100 of the largest non-financial companies listed on the Nasdaq stock exchange.
The Nasdaq 100 Equal Weighted Index is an equal weighted version of the Nasdaq 100. It includes 100 of the largest non-financial companies listed on the Nasdaq stock market based on market capitalization and is rebalanced quarterly.
The MSCI Emerging Markets Index captures large and mid-cap representation across emerging markets countries that include Brazil, Chile, China, Colombia, Czech Republic, Egypt, Greece, Hungary, India, Indonesia, Korea, Kuwait, Malaysia, Mexico, Peru, Philippines, Poland, Qatar, Saudi Arabia, South Africa, Taiwan, Thailand, Turkey, and United Arab Emirates.
The MSCI EAFE® (Net) Index measures the performance of performance of large and mid-cap securities across 21 developed markets, including countries in Europe, Australasia and the Far East, excluding the United States and Canada. The MSCI EAFE® (Net) Index subtracts any foreign taxes applicable to U.S. citizens but not applicable to citizens in the overseas country.
The MSCI Emerging Markets Asia ex China Index captures large and mid-cap representation across India, Indonesia, Korea, Malaysia, the Philippines, Taiwan, and Thailand.
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.
M-390901-2023-06-06 Exp. 10/5/23
