“
”Markets in Focus
Timely analysis of market moves and sectors of opportunity
The global economic backdrop appears to be strong while investor optimism brews from central bank rate cuts materializing on the horizon.
The possibility of a pullback — which is normal in the context of a bull market — has accompanied equities that are pushing all-time highs while cyclical sectors of the market outperform.
Idiosyncratic risks have made selectivity an important part of effective investment decisions, and quality has been a key driver of the market.
Last week’s central bank meetings pointed toward a global easing of interest rates on the horizon. The Bank of England held its rates unchanged while suggesting that it was near ready for rate cuts, the European Central Bank indicated that it could start cutting rates in June, and the Swiss National Bank announced a surprise cut to its key interest rate. The U.S. Federal Reserve (Fed) also delivered a message that was unexpectedly dovish.
“The Fed was just about as dovish as one could ask in the face of still-strong economic growth and a recent flareup in inflation,” said Matt Orton, CFA, Chief Market Strategist at Raymond James Investment Management.
“We are moving toward a rate-easing cycle, which could continue to support both equities and credit,” Orton said. “With equities still pushing new all-time highs, there are certainly risks of a pullback, but that’s perfectly normal in the context of a bull market.” Orton continues to favor embracing potential pullbacks as an opportunity to consider redeploying capital that might still be sitting on the sidelines or adjusting asset allocations to lean into the broadening equity market.
“The Fed made it abundantly clear that they want to cut rates,” Orton said. Rate cuts would move the front end of the yield curve lower, consequentially bringing down money market fund yields. “Additionally, my more sanguine economic outlook was corroborated by changes to the Fed’s summary of economic projections and Fed Chair Jerome Powell’s comments supporting my base case of broadening earnings per share growth.”
“I also was able to attend the Bank of America Global Industrials Conference last week, and the takeaways — from the management teams of the 75 companies in attendance — were broadly constructive,” Orton said. “This mosaic of data reinforces the durability of the trends we’re seeing play out.” Orton believes that there are still plenty of opportunities in the market’s more cyclical areas, like energy, financials, and industrials, which have all been outperforming lately.
S&P 500 Index: Sector returns year to date
It’s not just tech anymore
Source: Bloomberg, as of 3/22/24
Orton said he finds that management teams can offer some of the most valuable insights on the real-time state of the market: “After all, they know the state of their businesses and consumers the best, and they’re watching evolving headwinds and tailwinds.” Orton found remarks at the conference to be consistent with an improving earnings outlook, particularly for companies with less exposure to China. “In fact,” Orton said, “China demand was quite weak and confirms my longer-term underweight to the country and to companies that are too levered to revenues there.”
“Demand sentiment was broadly strong, aerospace and defense companies reported strong order momentum, and U.S. construction companies are seeing better housing and infrastructure support into 2025,” Orton said. Industrials have been a bright spot in the market and one of Orton’s preferred sectors, which is why he believes that remarks from these management teams support the idea that positive earnings momentum and a strong economic backdrop underpin the bull market.
“Given the leverage of these companies to the economic cycle, I also feel good about the fact that earnings per share growth can continue to surprise to the upside in the coming quarters,” he said.
Orton said that the dovishness of the Fed was somewhat surprising and presents some risks. The positive upgrade to the economic growth forecast could support continued corporate earnings growth. But if growth remains quite robust, what happens if the recent stickier than expected inflation remains in place for the next few months?
“There is a risk that the Fed would need to make a more hawkish reassessment, which would pressure risk assets and support the front end of the yield curve,” Orton said.
When looking at financial conditions, it’s arguable that overall monetary policy remains quite loose despite more than 500 basis points of rate hikes.
“We’ll see on Friday with the core Personal Consumption Expenditures Price Index data,” Orton said. “If inflation does look to be more entrenched than expected, I don’t think that derails the bull case for equities.” Instead, he believes that supports the need to be even more selective and to lean into businesses that continue to have pricing power and are levered to economic growth. “This is where I would expect to see earnings and margin power surprise to the upside,” he said.
The message of strong growth, slightly higher inflation, and rate cuts is supportive for risk assets. “I have been bullish for quite a while and continue to believe that a broadening market provides opportunities for outperformance,” Orton said. The Magnificent Seven are now only contributing 42% of the S&P 500 Index’s year-to-date return. The top five contributors to the index, which had contributed 95% of returns at the end of January, are down to 56%. (Source: Bloomberg as of 3/22/24)
More than 70% of the S&P 500 constituents are positive in 2024, and 35% are outperforming the index. It’s an improvement that has taken time, occurring throughout earnings season as economic fundamentals continued to come in positive. “This is a great example of a stock picker’s market and I believe is a great time to build diversified portfolios for long-term success,” Orton said. The themes he sees as most important now include:
Overweight cyclicality. “We’ve been discussing for the past few weeks how energy looked particularly attractive as a complement to growing information technology exposure and rising oil prices,” Orton said. “That has been playing out nicely and I think that cyclicality should be incorporated into portfolios.”
In addition to industrials, Orton said materials look more interesting with copper and gold prices surging. Big banks have also been on a tear and look to be at a point where earnings growth is inflecting higher. “The key when looking at cyclicality is to lean into quality, which has been a key driver of the market throughout the rally off last October’s lows,” Orton said. He expects that will continue to be the case going forward.
Don’t forget about small caps. Orton believes that the resilience of the U.S. economy, coupled with the prospect for lower rates, could be a positive for small-cap equities. “We’re seeing the Russell 2000® Index make a series of higher highs and higher lows, which is encouraging from a technical standpoint,” Orton said. He believes that some of the reasons why small-cap companies have failed to lead the market higher are their continued earnings disappointments and the investment community’s divergent opinions regarding the economic outlook. “The Fed should have put the latter concern to bed last week, and I do think we’re approaching the point where small cap earnings turn positive again in the second half of this year,” Orton said.
International diversification. Japan has outperformed this year, and Orton believes that more upside remains a possibility. The STOXX Europe 600 has also posted nine straight weeks of gains. Unfortunately, the gains from international developed markets have been diminished by the strength of the U.S. dollar. Orton advocates for remaining overweight the United States, but he said that there are plenty of non-U.S. opportunities to help diversify portfolios. “Selectivity is critical to success when looking at international markets, because geographic asset allocation and stock selection are so important,” he said. Orton expects some trends to continue: Regions like the United Kingdom lagging while Japan leads, and companies with too much leverage to China lagging while banks and technology continue to do well.
Bull steepening and money market funds. “It’s clear that the Fed wants to cut this year,” Orton said. But the Fed may have opened the door for greater hawkishness in the future, reflected in its upgrades to growth in 2025 and 2026. The Fed now projects that gross domestic product will be above trend across its forecast horizon, and the median federal funds rate prediction for 2025 moved higher. “To me, that means the front end is going to move lower while there’s scope for the back end to stay in place or even drift higher over the longer term, especially if policymakers fail to rein in profligate federal spending.” He believes that investors should consider finalizing their plans for moving out of short-term cash instruments.
Economic data will slow down a bit in a holiday-shortened week, but:
The Fed’s preferred measure of inflation, the Personal Consumption Expenditures (PCE) Price Index, excluding food and energy, comes out on Friday.
Europe will get a few national price surveys ahead of the Harmonised Index of Consumer Prices released after the weekend.
Fed communications will include remarks from Fed Chair Jerome Powell and Fed Governors Lisa Cook and Christopher Waller. “I wouldn’t be surprised if the Fed tried to provide a more nuanced stance, which would tilt the risks of a first rate cut past June,” Orton said.
Risk Information:
Investing involves risk, including risk of loss.
Diversification does not ensure a profit or guarantee against loss.
Disclosures:
Index or benchmark performance presented in this document does not reflect the deduction of advisory fees, transaction charges, or other expenses, which would reduce performance. Indexes are unmanaged. It is not possible to invest directly in an index. Any investor who attempts to mimic the performance of an index would incur fees and expenses that would reduce return.
This document is a general communication being provided for informational purposes only. It is educational in nature and not designed to be taken as advice or a recommendation for any specific investment product, strategy, plan feature, or other purpose in any jurisdiction, nor is it a commitment from Raymond James Investment Management or any of its affiliates to participate in any of the transactions mentioned herein. Any examples used are generic, hypothetical, and for illustration purposes only. This material does not contain sufficient information to support an investment decision, and you should not rely on it in evaluating the merits of investing in any securities or products. In addition, users should make an independent assessment of the legal, regulatory, tax, credit, and accounting implications and make their own determinations together with their own professionals in those fields. Any forecasts, figures, opinions, or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions, and are subject to change without prior notice. All information presented herein is considered to be accurate at the time of production, but no warranty of accuracy is given and no liability in respect of any error or omission is accepted. It should be noted that investment involves risks, the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements, and investors may not get back the full amount invested. Both past performance and yields are not reliable indicators of current and future results.
The views and opinions expressed are not necessarily those of the broker/dealer or any affiliates. Nothing discussed or suggested should be construed as permission to supersede or circumvent any broker/dealer policies, procedures, rules, and guidelines.
Sector investments are companies engaged in business related to a specific sector. They are subject to fierce competition and their products and services may be subject to rapid obsolescence. There are additional risks associated with investing in an individual sector, including limited diversification.
Investing in small cap stocks generally involves greater risks, and therefore, may not be appropriate for every investor. The prices of small company stocks may be subject to more volatility than those of large company stocks.
International investing presents specific risks, such as currency fluctuations, differences in financial accounting standards, and potential political and economic instability. These risks are further accentuated in emerging market countries where risks can also include possible economic dependency on revenues from particular commodities or on international aid or development assistance, currency transfer restrictions, and liquidity risks related to lower trading volumes.
Definitions
The Bank of America Global Industrials Conference is an annual event where industry leaders, experts, and investors come together to discuss trends, challenges, and opportunities in the industrial sector.
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%.
Bull steepening describes the change that takes place in the yield curve as short-term interest rates fall faster than long-term rates, resulting in a larger spread between the two ends of the curve. Bull steepeners are caused by falling interest rates and hence, rising bond prices.
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.
Earnings per share (EPS) is calculated as a company’s profit divided by the outstanding shares of its common stock. The resulting number serves as an indicator of a company’s profitability.
The federal funds rate, known as the fed funds rate, is the target interest rate set by the Federal Open Market Committee of the U.S. Federal Reserve. The target is the Fed’s suggested rate for commercial banks to borrow and lend their excess reserves to each other overnight.
The Federal Open Market Committee (FOMC) consists of 12 members: the seven members of the Board of Governors of the Federal Reserve System; the president of the Federal Reserve Bank of New York; and four of the remaining 11 Reserve Bank presidents, who serve one-year terms on a rotating basis. The FOMC holds eight regularly scheduled meetings per year at which it reviews economic and financial conditions, determines the appropriate stance of monetary policy, and assesses the risks to its long-run goals of price stability and sustainable economic growth.
Harmonised Index of Consumer Prices inflation readings are compiled and released by the European Union’s Eurostat office for individual European Union member states including Spain, France, Germany, and Italy.
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.
Companies that are levered to economic growth have earnings that directionally follow economic expansion, growing with an increase in gross domestic product (GDP) and shrinking as GDP decreases.
Magnificent 7 refers to the seven largest stocks by market capitalization in the S&P 500 index. Collectively they make up more than 25% of the market capitalization of the entire index. They are Alphabet, Amazon, Apple, Meta Platforms, Microsoft, NVIDIA and Tesla.
Market capitalization, or market cap, refers to the total dollar market value of a company’s outstanding shares of stock.
Companies that have margin power can grow or defend their profit margins under adverse circumstances such as increased operational costs due to inflation.
Overweight describes a portfolio position in an industry sector or some other category that is greater than the corresponding weight level in a benchmark portfolio.
The 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.
Sticky is a term used to describe measured data that is slow to change, in contrast to faster-changing flexible data.
Tailwind is a term used to describe events or market forces that exert a positive influence on an investment’s performance. The opposite of a tailwind is a headwind, which contributes to an investment’s underperformance.
Underweight describes a portfolio position in an industry sector or some other category that is less than the corresponding weight level in a benchmark portfolio.
A yield curve is a line that plots yields (interest rates) of bonds having equal credit quality but differing maturity dates. The slope of the yield curve gives an idea of future interest rate changes and economic activity. Investors and market analysts watch certain yield curves for signs of inversion, when yields for longer-term debt instruments fall below yields on short-term debt with the same credit quality. Inversions are watched as potential signs of a weakening economy and in certain cases, a harbinger of recessions.
Indices
The Russell 2000® Index measures the performance of the 2,000 smallest companies in the Russell 3000® Index, which represents approximately 7% of the total market capitalization of the Russell 3000® Index.
The S&P 500 Index measures change in stock market conditions based on the average performance of 500 widely held common stocks. It is a market-weighted index calculated on a total return basis with dividend reinvested. The S&P 500 represents approximately 80% of the investable U.S. equity market.
The STOXX Europe 600 Index measures the 600 largest European stocks measured by free-float market cap.
London Stock Exchange Group plc and its group undertakings (collectively, the “LSE Group”). ©LSE Group 2024. FTSE Russell is a trading name of certain of the LSE Group companies. Russell® is a trademark of the relevant LSE Group companies and is used by any other LSE Group company under license. All rights in the FTSE Russell indexes or data vest in the relevant LSE Group company which owns the index or the data. Neither LSE Group nor its licensors accept any liability for any errors or omissions in the indexes or data and no party may rely on any indexes or data contained in this communication. No further distribution of data from the LSE Group is permitted without the relevant LSE Group company’s express written consent. The LSE Group does not promote, sponsor, or endorse the content of this communication.
M-519324 Exp. 7/25/2024
Fed Chair Jerome Powell did not appear to be overly concerned that progress on inflation was stalling.
A Fed that is more comfortable cutting rates amid stronger growth and higher inflation is arguably the most bullish outcome for risk assets.
A key takeaway was the Fed’s effective acknowledgement that we’re not going back to the pre-pandemic level of interest rates.
As expected, the U.S. Federal Reserve left the benchmark federal funds rate unchanged at the 5.25% to 5.5% target range, repeating that Fed officials are waiting for greater confidence on inflation before the first interest rate cut.
That said, Matt Orton, CFA, Chief Market Strategist at Raymond James Investment Management, noted a few meaningful changes in the Fed’s economic projections:
Higher growth and inflation forecasts: Estimated 2024 gross domestic product (GDP) growth was upgraded from 1.4% to 2.1%, well above the highest analyst expectation of 1.9%, while 2025-2026 growth remains at 2%, above the 1.8% longer-run rate.
But the Federal Open Market Committee’s median dot plot for this year remains unchanged. Median projections still anticipate three 25-basis point (bp) cuts in 2024, while the median forecast for 2025 rate cuts was actually lowered from 100 bps to 75 bps.
“Heading into the March meeting, I think some investors were worried about a more hawkish outcome given the direction of January and February economic data,” Orton said.
During the post-meeting news conference, however, Fed Chair Jerome Powell stressed the need to view the January and February inflation data in the broader context of the cooling inflation that took place in the latter half of 2023.
“Powell did not appear to be overly concerned that progress on inflation was stalling,” Orton said. “Rather, he seems to be more of the view that the path to 2% inflation will be bumpy. So it looks like we can have a sizeable upgrade to economic growth and still start to bring rates down.”
Fed holds policy rate steady for fifth consecutive meeting
U.S. 10-year Treasury yield since July 2023
Source: Bloomberg, as of 3/20/24
A Fed that is more comfortable cutting rates amid stronger growth and higher inflation is arguably the most bullish outcome for risk assets, Orton said.
“So it’s no surprise that equities rallied to all-time highs and U.S. Treasuries saw a bull-steepening,” with short-term interest rates falling faster than long-term rates. “And,” he said, “there is scope for this to continue.”
The upgrade to growth forecasts continued to give more confidence around the ability for equity earnings to surprise to the upside, Orton said. Additionally, he noted the sharp fall in the real bond yield (i.e., the discount rate for equities), which further adds to the upside for risk assets.
“I believe a big takeaway from the meeting is the slight uptick in the long-run rate, where the Fed is effectively acknowledging that we’re not going back to the pre-pandemic level of interest rates,” Orton said. At the same time, he noted that Fed officials still want to cut interest rates, which is why they stood their ground on the 2024 dot plot projecting 75 bps of cuts. That allows for a steeper yield curve where front-end yields could rally as the Fed starts cutting in June and the long end stays sticky and potentially even rises on stronger growth.
“I remain optimistic on the market,” Orton said. “The changes to the Fed’s summary of economic projections and Powell’s comments during the news conference give me further confidence in the upside potential for earnings.”
The resilience of the U.S. economy, coupled with the prospect for lower rates, should also be a positive for small-cap equities, which have underperformed lately, he said. He expects that additional rotation into small caps and the more cyclical sectors that have outperformed lately would give more longevity to the current bull market.
“Powell had an opening to talk down the recent rallies across risk assets and didn’t take it — he didn’t even acknowledge a questioner’s characterization of financial conditions as having eased,” Orton said. “This sends yet another clear signal this is not a bubble, but a healthy and broadening bull market.”
With a clear signal that the front end is going to be moving lower, Orton said it’s more important now — “more than ever” — to have a plan for redeploying some of the cash now sitting on the sidelines simply to receive a 5%-plus cash yield.
“Those days,” Orton said, “are coming to an end.”
Risk Information:
Investing involves risk, including risk of loss.
Diversification does not ensure a profit or guarantee against loss.
M-517242 Exp. 7/21/2024
The drivers of 2024’s equity market gains likely will look different than those last year. Think constantly about changing growth fundamentals and where this market is going.
Selectivity has mattered as the stock market has grown broader. Expect this to continue.
Important themes right now: Potential diversification benefits of commodities. Quality within small caps. Dividend growth. Japan and emerging markets in Asia (excluding China).
There seems to be a growing divergence between two competing narratives in the market. The bulls believe everything is awesome, especially artificial intelligence (AI). The skeptics see cracks in the economy and believe we’re in an AI bubble that shows signs of popping.
“I believe reality lies somewhere in the middle, though I remain firmly in the bull camp and see the potential for further upside driven by inflecting earnings growth,” said Matt Orton, CFA, Chief Market Strategist at Raymond James Investment Management.
Without question, some parts of the market are quite extended, and Orton said it’s healthy to see them take a breather. The bears treat the market as a monolith and forget that quality, not just momentum, has driven recent gains. We’ve seen increased divergences even within the key secular trade of AI over the past two weeks: Companies that have delivered strong earnings and guidance have been rewarded while low-quality stocks that previously had traded up along with their peers have been chopped down to a more appropriate size. So to the bulls Orton warns that everything isn’t necessarily awesome across the entire market. Selectivity has mattered, and he said he believes portfolio weighting will be increasingly important going forward.
“This is why discipline matters,” he said. “Nobody should expect the gains over the past few months to continue on a straight line. Respect momentum, yes, but also think constantly about changing growth fundamentals and lean into where the market is going.”
This week will be important for which narrative wins in the short term. The Bank of Japan and U.S. Federal Reserve (Fed) meet this week, but what matters the most to sentiment may be the Nvidia GTC 2024 conference exploring the state and future of AI. This might be a time, Orton said, when it makes sense just to wait, to be ready to use downside opportunistically, and to continue to lean into the broadening that has been taking place across the market.
As breadth has increased, sectors like energy, materials, industrials, and financials have taken the lead over the past month. In fact, energy is now the S&P 500’s third-best performing sector year to date after meaningfully lagging. (Information technology and financials are first and second.) The market is rewarding earnings growth, particularly where we’re seeing inflection points similar to what took place in information technology last year. And while Orton supports embracing these changes beneath the surface, he also says not to forget that there is durability to the AI theme. It’s all about being disciplined with respect to asset allocation and ensuring that portfolios are properly balanced going forward, he said. Investors should consider having exposure to the mega-caps, but shouldn’t forget about risk management and position sizing, using some profits from the biggest winners to increase exposure to areas where growth is accelerating.
“Unless there’s an earnings scare like in 2022, I believe the market should move higher, but the drivers of those gains likely will look different than the past year,” he said. “The market is so much more than AI.”
The Fed will play a role in how we see increased market breadth unfold, Orton said. Lower rates and easier financial conditions would accelerate the changes we’re seeing under the surface, but it’s not a prerequisite as we’ve seen this year with 10-year yields up nearly 50 basis points (bps). It is all but certain that the Fed will leave policy rates unchanged at its March meeting this week, but the Fed’s dot plot showing committee member expectations will be in focus. It would only take two officials moving from three rate cuts to two to shift the median expectation for 2024. Orton said it’s unclear what impact that ultimately would have on the market, since rates already have been repriced meaningfully toward the medians: 2-year yields have sold off about 30 bps since the Fed’s December decision, with current pricing ascribing clear risk to fewer than three cuts this year. There is always a risk that a strong move of the dots — such as more than two or three officials making changes — would raise real questions about whether the Fed will cut rates at all this year and lead to a strong market reaction. Orton still expects the first rate cut in June with the Fed remaining data-dependent on further cuts after that.
The macro consensus has shifted from worrying about too little economic growth to worrying about too much, Orton said. As usual, the most likely outcome remains somewhere in between, which is why he said it’s important to consider a disciplined approach to rebalancing and diversifying portfolios. Mega-cap tech largely continues to satisfy the conditions for further upside, but he believes there are plenty of areas that are still attractive to lean into a broadening market.
“We still haven’t had any sort of pullback that helps reset some of the frothiness in the market, and until that point I would be very strategic about adding any risk into portfolios,” he said.
Last two weeks’ performance show a clear shift in investor positioning
S&P 500 sector returns 3/1/24 – 3/15/24
Source: Bloomberg, as of 3/15/24
The S&P 500 is currently in its longest stretch since 2018 without having a daily 2% decline, and we’re in one of the longest stretches without seeing any meaningful volatility event. There are plenty of catalysts this week, so Orton said it’s important to have a shopping list ready. The themes he sees as most important now include:
Diversification via commodity-linked equities. Part of the market’s increased breadth has been driven by a broadening of the commodity rally. Oil has trended higher since December while gold has spiked over the past month, with further recent gains in copper, aluminum, and nickel. Orton sees this as a positive statement on the state of global growth (even Chinese data is starting to come in better than expected), but it also reflects sticky inflation in many developed economies. Orton has highlighted energy as a diversifier to tech exposure for the past few weeks but also sees commodity-related equities broadly as a potential way to diversify portfolios, particularly in light of the central bank risks that are in focus this week.
Small caps are not a monolith. “I hear all too often that small caps have too much debt, or that too much of their debt is revolving, or that they’re too unprofitable, and so on,” Orton said. “None of these statements are incorrect, but they’re devoid of any nuance and ignore the fact that there are many high-quality companies within the small-cap universe.”
Many small-cap companies have solid balance sheets and strong cash positions. The broad Russell 2000® Index is full of loss-makers, but he said there are plenty of companies that make profits or have earnings that are starting to inflect. The technical setup continues to feature a series of higher highs and higher lows, and the Russell 2000 remains almost 20% below the highs in 2021, even after a 25% run over the past few months.
“I believe this is an under-owned part of the market by investors broadly,” Orton said, “and if you believe in the benign economic backdrop and we don’t see rates back up too much this week, I believe small caps still look quite attractive.”
Dividend growth remains attractive. Dividend-paying companies had one of their widest performance gaps relative to the market last year, and their underperformance seems to be continuing in 2024. But Orton said concentration at the top in names that do not pay a dividend masks the generally strong performance of dividend payers and particularly of dividend growers. As we get more clarity on the timing of the Fed’s first rate cut, Orton expects to see many yield-seeking investors start to rotate back into a combination of fixed income and equity income assets, providing a catalyst for upside. He said he prefers dividend growers within the equity income space given their high-quality characteristics and that inflation remains an important consideration.
Japan and emerging markets in Asia, excluding China. Orton doesn’t expect to see the Bank of Japan interest rate decision have too much of an impact on equities, which already have moved in anticipation of the policy change. Regardless, Japan’s fundamental narrative remains firmly in place: improving corporate governance, the potential for continued growth in earnings per share, and increasing pricing power for companies. The most recent wage growth data highlights increased capacity for consumers to spend, which should further support equities. Within emerging markets, China has been improving but Orton still prefers to look to areas like India for growth. We’re seeing strength in Asia ex-China as well, particularly in Taiwan, Indonesia, and South Korea.
“None of the revisions or underlying weaknesses point to impending issues with respect to the broader economy,” Orton said. “If anything, the data takes a bit of the edge off of January’s numbers, which showed an unexpected surge in inflation data.” In Orton’s opinion, it reaffirms what investors have heard from the U.S. Federal Reserve (Fed) and decreases the probability of a surprise at its March meeting.
Don’t fear a correction, welcome it
Consecutive trading days without a 2% drop in the S&P 500
Source: Bloomberg, as of 3/15/24
More than half of the Group of 10 central banks announce interest rate decisions this week. Last week’s hotter than expected U.S. Consumer Price Index report makes it all but certain that the Fed will keep U.S. interest rates on hold. The Federal Open Market Committee also is expected to discuss plans to slow the pace of quantitative tightening later this year, though we will probably have to wait for the meeting minutes for details on the committee’s current thinking.
It will also be a critical week for AI stocks given the Nvidia GTC conference.
There will also be new housing data and earnings from consumer discretionary companies that will continue to give a read on the state of the American consumer.
Risk Information:
Investing involves risk, including risk of loss.
Diversification does not ensure a profit or guarantee against loss.
Disclosures:
Index or benchmark performance presented in this document does not reflect the deduction of advisory fees, transaction charges, or other expenses, which would reduce performance. Indexes are unmanaged. It is not possible to invest directly in an index. Any investor who attempts to mimic the performance of an index would incur fees and expenses that would reduce return.
This document is a general communication being provided for informational purposes only. It is educational in nature and not designed to be taken as advice or a recommendation for any specific investment product, strategy, plan feature, or other purpose in any jurisdiction, nor is it a commitment from Raymond James Investment Management or any of its affiliates to participate in any of the transactions mentioned herein. Any examples used are generic, hypothetical, and for illustration purposes only. This material does not contain sufficient information to support an investment decision, and you should not rely on it in evaluating the merits of investing in any securities or products. In addition, users should make an independent assessment of the legal, regulatory, tax, credit, and accounting implications and make their own determinations together with their own professionals in those fields. Any forecasts, figures, opinions, or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions, and are subject to change without prior notice. All information presented herein is considered to be accurate at the time of production, but no warranty of accuracy is given and no liability in respect of any error or omission is accepted. It should be noted that investment involves risks, the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements, and investors may not get back the full amount invested. Both past performance and yields are not reliable indicators of current and future results.
The views and opinions expressed are not necessarily those of the broker/dealer or any affiliates. Nothing discussed or suggested should be construed as permission to supersede or circumvent any broker/dealer policies, procedures, rules, and guidelines.
Sector investments are companies engaged in business related to a specific sector. They are subject to fierce competition and their products and services may be subject to rapid obsolescence. There are additional risks associated with investing in an individual sector, including limited diversification.
Investing in small cap stocks generally involves greater risks, and therefore, may not be appropriate for every investor. The prices of small company stocks may be subject to more volatility than those of large company stocks.
International investing presents specific risks, such as currency fluctuations, differences in financial accounting standards, and potential political and economic instability. These risks are further accentuated in emerging market countries where risks can also include possible economic dependency on revenues from particular commodities or on international aid or development assistance, currency transfer restrictions, and liquidity risks related to lower trading volumes.
Definitions
Basis points (bps) are measurements used in discussions of interest rates and other percentages in finance. One basis point is equal to 1/100th of 1%, or 0.01%.
Breadth describes the relationship between the median and the mean of a market index. When a few data outliers result in a mean that is substantially larger (or smaller) than the median of the full data set, then the performance of the entire index is being driven by a “narrow” selection of companies. An index supported by “broad” market movements is one where the median is closer to the mean.
A consensus estimate is a forecast of a public company’s projected earnings, the results of a particular industry, sector, geography, asset class, or other category, or the expected findings of a macroeconomic report based on the combined estimates of analysts and other market observers that track the stock or data in question.
The 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.
Dividend payers are the companies that distribute a portion of their profits to shareholders in the form of a dividend.
The 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.
Earnings per share (EPS) is calculated as a company’s profit divided by the outstanding shares of its common stock. The resulting number serves as an indicator of a company’s profitability.
The federal funds rate, known as the fed funds rate, is the target interest rate set by the Federal Open Market Committee of the U.S. Federal Reserve. The target is the Fed’s suggested rate for commercial banks to borrow and lend their excess reserves to each other overnight.
The Federal Open Market Committee (FOMC) consists of 12 members: the seven members of the Board of Governors of the Federal Reserve System; the president of the Federal Reserve Bank of New York; and four of the remaining 11 Reserve Bank presidents, who serve one-year terms on a rotating basis. The FOMC holds eight regularly scheduled meetings per year at which it reviews economic and financial conditions, determines the appropriate stance of monetary policy, and assesses the risks to its long-run goals of price stability and sustainable economic growth.
Generative artificial intelligence (AI) is a category of AI algorithms that generate new outputs based on the data they have been trained on. It uses a type of deep learning called generative adversarial networks. Generative AI has a wide range of applications, including creating images, text and audio. It can be used to create new content, including audio, code, images, text, simulations, and videos.
The Group of 10, also known as the G10, consists of 11 industrialized nations that meet at least annually to work together on matters of international finance. The member nations are Belgium, Canada, France, Germany, Italy, Japan, the Netherlands, Sweden, Switzerland, the United Kingdom, and the United States, with Switzerland playing a minor role.
Market capitalization, or market cap, refers to the total dollar market value of a company’s outstanding shares of stock.
Mega-cap stocks are the largest publicly traded companies as measured by market capitalization. Generally, this refers to companies with market capitalizations over $200 billion.
The Nvidia GTC 2024 conference is an industry meeting scheduled for March 17-21, 2024 in San Jose, Calif. It brings together developers and executives from a wide range of companies involved in or affected by artificial intelligence to discuss the development and future of AI and its applications.
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.
Positioning refers to assessments of whether professional investors are, on the whole, bullish or bearing on a particular security, industry, sector, market capitalization or other area of the market, as reflected by the extent to which they are invested in the area of the market in question.
Pricing power, also known as market power, refers to a company’s ability to manipulate the price of a product or service in the marketplace by controlling the level of supply, demand, or both.
Quantitative tightening, also known as quantitative tapering, refers to the attempt by central bankers to reverse the effects of quantitative easing (QE), which is a form of unconventional monetary policy in which a central bank purchases longer-term securities from the open market in order to increase the money supply and encourage lending and investment. In quantitative tightening, reducing those purchases is a policy primarily aimed at interest rates and at influencing investor perceptions of the future direction of interest rates.
Secular stocks are characterized by having consistent earnings over the long term constant regardless of other trends in the market. Secular companies often have a primary business related to consumer staples most households consistently use whether the larger economy is good or bad.
Technicals refers to technical indicators of historic market data, including price and volume statistics, to which analysts apply a wide variety of mathematical formulas in their study of larger market patterns.
A yield curve is a line that plots yields (interest rates) of bonds having equal credit quality but differing maturity dates. The slope of the yield curve gives an idea of future interest rate changes and economic activity. Investors and market analysts watch certain yield curves for signs of inversion, when yields for longer-term debt instruments fall below yields on short-term debt with the same credit quality. Inversions are watched as potential signs of a weakening economy and in certain cases, a harbinger of recessions.
Index
The S&P 500 Index measures change in stock market conditions based on the average performance of 500 widely held common stocks. It is a market-weighted index calculated on a total return basis with dividend reinvested. The S&P 500 represents approximately 80% of the investable U.S. equity market.
The Russell 2000® Index measures the performance of the 2,000 smallest companies in the Russell 3000® Index, which represents approximately 7% of the total market capitalization of the Russell 3000® Index.
London Stock Exchange Group plc and its group undertakings (collectively, the “LSE Group”). ©LSE Group 2024. FTSE Russell is a trading name of certain of the LSE Group companies. Russell® is a trademark of the relevant LSE Group companies and is used by any other LSE Group company under license. All rights in the FTSE Russell indexes or data vest in the relevant LSE Group company which owns the index or the data. Neither LSE Group nor its licensors accept any liability for any errors or omissions in the indexes or data and no party may rely on any indexes or data contained in this communication. No further distribution of data from the LSE Group is permitted without the relevant LSE Group company’s express written consent. The LSE Group does not promote, sponsor, or endorse the content of this communication.
M-515437 Exp. 7/18/2024
The S&P 500 failed to extend its winning streak into another week, and some of the past few months’ biggest winners have seen recent price action that typically indicates profit taking.
Market breadth keeps improving: The S&P 500® Equal Weight Index hit a new all-time high while sectors like materials, energy, financials, industrials, and healthcare all outperformed the broader index last week.
Waiting might be the best option in the very short term, but investors should consider using downside opportunistically and continuing to lean into the broadening that has been taking place across the market.
Sometimes the best course of action is to wait and see. Matt Orton, CFA, Chief Market Strategist at Raymond James Investment Management, remains optimistic about the bull market and broadening of the rally, but he expects that macro data will regain prominence and likely inject some volatility into short-term price action now that earnings season is largely complete.
“I think the risks are somewhat asymmetric,” Orton said. “Cooler than expected inflationary data is likely to be met with a continued grind upwards, but hotter than expected data could see yields jump higher and pressure investors to question their positioning in the biggest winners of the past few months.”
Orton said that investors have already seen intraday reversals across a diverse set of winners this year. Although weakness by itself is perfectly normal, he believes that such reversals are more indicative of profit taking or rotation into other investments. “Given the positive internals on Friday, I suspect we’re continuing to see rotation,” Orton said.
Overall, Orton would rather wait to put more capital to work until he has seen that the market reacts positively to good news and that it can hold together in the face of bad news.
“The S&P 500 Index remains stretched from a technical perspective, making potential profit taking even less surprising,” he said. “Although waiting might be the best option in the very short term, I would be ready to use downside opportunistically and continue to lean into the broadening that has been taking place across the market.”
The S&P 500 failed to extend its winning streak, but Orton said it’s worth noting that market breadth continued to increase. Sectors like materials, energy, financials, industrials, and healthcare all outperformed the broader index last week, which extended their strong performance over the past month. “Weakness at the top of the market is allowing this broadening to finally manifest itself at the index level, where the S&P 500® Equal Weight Index not only hit a new all-time high, it also bounced off its relative lows versus the capitalization-weighted index,” Orton said. “Rotation is critical to sustaining any bull market, and I urge anyone that has been calling this market a bubble to actually look at the changes occurring.”
Orton said that rotation has been taking place for the past month, and the latest changes are being driven by strong underlying fundamentals – earnings across many of these sectors came in better than expected, which has forced some pessimistic analysts to revise their forecasts higher.
Friday’s payrolls report continues to support soft landing
U.S. nonfarm payrolls, in thousands
Source: Bloomberg, as of 3/8/24
Orton said that the Employment Situation Summary released Friday by the U.S. Bureau of Labor Statistics showed headline strength that masked some weaker details:
The unemployment rate unexpectedly jumped due to a drop in household employment.
Wage growth rose 0.1%, the smallest increase in two years.
January saw the biggest downward revision to monthly job growth since April 2022.
“None of the revisions or underlying weaknesses point to impending issues with respect to the broader economy,” Orton said. “If anything, the data takes a bit of the edge off of January’s numbers, which showed an unexpected surge in inflation data.” In Orton’s opinion, it reaffirms what investors have heard from the U.S. Federal Reserve (Fed) and decreases the probability of a surprise at its March meeting.
Avoid waiting until it’s too late for small cap companies. Orton said that the Russell 2000® Index has been stealthily improving and witnessing some positive rotation under the surface. He believes that there could be increasing momentum from money finally moving into smaller market capitalizations if small-cap companies continue their breakout above December highs.
“We’re seeing healthcare, technology, industrials, and materials perform better in small-cap stocks, which also corroborates the idea of increasing market breadth,” Orton said. Small-caps are now outperforming large-caps since the start of this rally, and this outperformance could continue if the “soft landing” narrative stays on track.
Energy could complement positioning in technology and semiconductor stocks. “Energy has been participating in the broadening of the market and outperforming the S&P 500 over the past month,” Orton said. “Underperformance over the past year leaves valuations very attractive while company fundamentals remain quite strong. Dividend yields should further enhance the appeal once short-term rates move lower.”
Orton said that he doesn’t advocate for building an overweight energy position in portfolios, but he favors adding exposure to complement technology allocations because of the relative decorrelation between the sectors; the secular growth story of generative artificial intelligence; and strong capital returns in the energy sector.
Opportunities abroad, notably Japan. Orton said that Japan has faced some selling pressure after Friday’s tech selloff and from overbought markets more generally: “I would use downside opportunistically in Japan, because the positive narrative — improving corporate governance, the potential for continued earnings per share growth, and increasing pricing power for companies &mdash' remains firmly in place.” He added that selectivity is critical when looking overseas, since things can be cheap for a reason, but the global economy has been surprisingly resilient. “There some very interesting areas of strength than can help to diversify investor portfolios right now,” he said.
Fed messaging has been consistent heading into the communications blackout period ahead of the Federal Open Market Committee meeting on Mar. 19–20. Once the blackout period begins, markets will focus on the upcoming release of U.S. Consumer Price Index data for a read on how price pressures are faring.
U.S. retail sales data for February will be released this week, likely showing a rebound from January’s negative weather effects.
University of Michigan Consumer Sentiment Survey data will be released on Friday, and it will be important to follow inflation expectations.
Risk Information:
Investing involves risk, including risk of loss.
Diversification does not ensure a profit or guarantee against loss.
Disclosures:
Index or benchmark performance presented in this document does not reflect the deduction of advisory fees, transaction charges, or other expenses, which would reduce performance. Indexes are unmanaged. It is not possible to invest directly in an index. Any investor who attempts to mimic the performance of an index would incur fees and expenses that would reduce return.
This document is a general communication being provided for informational purposes only. It is educational in nature and not designed to be taken as advice or a recommendation for any specific investment product, strategy, plan feature, or other purpose in any jurisdiction, nor is it a commitment from Raymond James Investment Management or any of its affiliates to participate in any of the transactions mentioned herein. Any examples used are generic, hypothetical, and for illustration purposes only. This material does not contain sufficient information to support an investment decision, and you should not rely on it in evaluating the merits of investing in any securities or products. In addition, users should make an independent assessment of the legal, regulatory, tax, credit, and accounting implications and make their own determinations together with their own professionals in those fields. Any forecasts, figures, opinions, or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions, and are subject to change without prior notice. All information presented herein is considered to be accurate at the time of production, but no warranty of accuracy is given and no liability in respect of any error or omission is accepted. It should be noted that investment involves risks, the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements, and investors may not get back the full amount invested. Both past performance and yields are not reliable indicators of current and future results.
The views and opinions expressed are not necessarily those of the broker/dealer or any affiliates. Nothing discussed or suggested should be construed as permission to supersede or circumvent any broker/dealer policies, procedures, rules, and guidelines.
Sector investments are companies engaged in business related to a specific sector. They are subject to fierce competition and their products and services may be subject to rapid obsolescence. There are additional risks associated with investing in an individual sector, including limited diversification.
Investing in small cap stocks generally involves greater risks, and therefore, may not be appropriate for every investor. The prices of small company stocks may be subject to more volatility than those of large company stocks.
International investing presents specific risks, such as currency fluctuations, differences in financial accounting standards, and potential political and economic instability. These risks are further accentuated in emerging market countries where risks can also include possible economic dependency on revenues from particular commodities or on international aid or development assistance, currency transfer restrictions, and liquidity risks related to lower trading volumes.
Definitions
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.
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.
Correlation is a statistic that measures the degree to which two securities move in relation to each other. Decorrelation reflects conditions in which securities or sectors do not move in relation to each other.
Dividend yield, which is expressed as a percentage, is a ratio of the current rate of dividend payout divided by the current stock price.
The payroll report, officially known as the Employment Situation Summary, is a monthly U.S. Bureau of Labor Statistics (BLS) report tracking nonfarm payroll employment and the national unemployment rate, with data on changes in average hourly earnings, and job trends in public and private sectors of employment. The report is based on surveys of households and employers.
The Federal Open Market Committee (FOMC) consists of 12 members: the seven members of the Board of Governors of the Federal Reserve System; the president of the Federal Reserve Bank of New York; and four of the remaining 11 Reserve Bank presidents, who serve one-year terms on a rotating basis. The FOMC holds eight regularly scheduled meetings per year at which it reviews economic and financial conditions, determines the appropriate stance of monetary policy, and assesses the risks to its long-run goals of price stability and sustainable economic growth.
Generative artificial intelligence (AI) is a form of artificial intelligence that can create new content that includes text, audio, code, video, and images.
Internals refer to quantitative market indicators that investment professionals monitor to spot trends and forecast movements within securities markets. A subset of technical indicators, internals include a number of formulas and ratios, such as the number of stocks moving in the same direction as a larger trend, the ratio of securities with rising and falling prices, the ratio of new highs to new lows, and price and volume indicators that are seen as indicators of overall market sentiment.
Market capitalization, or market cap, refers to the total dollar market value of a company’s outstanding shares of stock.
Overbought is a term used to describe a security or group of securities believed to be trading at a level above its or their intrinsic or fair value.
Overweight describes a portfolio position in an industry sector or some other category that is greater than the corresponding weight level in a benchmark portfolio.
Positioning refers to assessments of whether professional investors are, on the whole, bullish or bearing on a particular security, industry, sector, market capitalization or other area of the market, as reflected by the extent to which they are invested in the area of the market in question.
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.
Index
The Russell 2000® Index measures the performance of the 2,000 smallest companies in the Russell 3000® Index, which represents approximately 7% of the total market capitalization of the Russell 3000® Index.
The Russell 3000® Index measures the performance of the 3,000 largest U.S.-traded stocks, which represent about 96% of the total market capitalization of all U.S. incorporated equity securities.
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.
London Stock Exchange Group plc and its group undertakings (collectively, the “LSE Group”). ©LSE Group 2024. FTSE Russell is a trading name of certain of the LSE Group companies. Russell® is a trademark of the relevant LSE Group companies and is used by any other LSE Group company under license. All rights in the FTSE Russell indexes or data vest in the relevant LSE Group company which owns the index or the data. Neither LSE Group nor its licensors accept any liability for any errors or omissions in the indexes or data and no party may rely on any indexes or data contained in this communication. No further distribution of data from the LSE Group is permitted without the relevant LSE Group company’s express written consent. The LSE Group does not promote, sponsor, or endorse the content of this communication.
M-512199 Exp. 7/11/2024
The S&P 500 Index is up 16 out of the last 18 weeks. That’s a streak that hasn’t been seen since 1971.
Given this historic run, it wouldn’t be surprising to see a pullback. The index hasn’t pulled back by 5% since October (while the average is three per year). Meanwhile, the backdrop remains positive.
A broadening market could offer further opportunities in small caps, industrials, healthcare, and dividend growth, plus stocks in Japan and Europe.
The S&P 500 Index is on quite a winning streak — rising 16 of the past 18 weeks — and according to Bloomberg another week in the green would be the first time we’ve seen such consistent gains since the 1960s.
“Could the market take a breather?” said Matt Orton, CFA, Chief Market Strategist at Raymond James Investment Management. “Certainly, but I would be ready to use downside opportunistically.”
Since World War II, drawdowns of more than 10% followed by new all-time highs tend to lead to further gains, with strong average forward 3-month, 6-month, 1-year, and 3-year gains and high hit rates. It took the S&P 500 745 days to hit an all-time high earlier this year, and now we have a decent economic backdrop and fourth-quarter earnings that have surprised meaningfully to the upside for the 97% of S&P 500 companies that have reported results. Given these improvements and inflections in earnings, Orton said there are plenty of opportunities to lean into a broadening market, perhaps by shifting some overweight positioning in the mega-caps or cash to other areas of the market like small caps, industrials, healthcare, or dividend growth.
Many of the bears have started to increase their earnings targets for 2024 over the past few weeks, but Orton said there are still plenty of haters out there. While positioning might be rising across retail investors, pension fund allocations to public equity, which are reported on at least a quarterly basis, are still at multi-decade lows, and positioning in themes like high-beta stocks and cyclical sectors remains quite bearish.
“All of this goes to say that we’re still pretty far away from euphoric conditions, even if enthusiasm around the bull market continues to build,” he said. “Given the historic run the market is on, I wouldn’t be surprised to see some sort of consolidation in the near term, but the overall backdrop remains positive.”
On average, the S&P 500 tends to experience three pullbacks of more than 5% each year, and we haven’t had such a move since October. This doesn’t mean the market must pull back, he said, but it certainly wouldn’t be surprising and would be an opportunity for investors to put surplus cash to more productive uses.
Don’t fear an all-time high. Embrace it.
S&P 500 returns following an all-time high
that comes after a 10% drawdown, since 1950
Source: Bloomberg, as of 3/1/24
The theme of growing market breadth is worth highlighting since we continue to see more companies working beneath the surface and companies reporting good outlooks being rewarded. With increased dispersion at the top, the Magnificent Seven are only contributing 42% of the S&P 500’s returns year to date while the top five stocks are down to contributing 58% of year to date gains as of March 1, according to Bloomberg. More than 60% of index constituents are positive while 35% are outperforming the S&P 500. Small caps even managed to outperform in February and are building some positive technical momentum. These developments speak to a nice broadening of the market, and Orton said he would expect this to continue going forward. Thus, he continues to highlight the many attractive opportunities to lean into a broadening market. Remember, he said, earnings first inflected higher for information technology and communication services, and since then a much wider range of sectors has seen a bottoming and/or improvement in earnings over the past few quarters. Fourth-quarter results have generally been strong and Orton expects earnings per share (EPS) growth of 15% in 2024, which is more optimistic than consensus targets. But he believes this will be driven by sectors like healthcare and industrials surprising to the upside and better growth in the most cyclical parts of the economy, which is possible given the resiliency of the global economy.
As the broadening of the market becomes more apparent, Orton said we’re likely to see even stronger gains in more cyclical areas as more investors start to reallocate capital.
“A pullback could provide a favorable entry point, so have your shopping lists ready,” he said. In this environment, Orton likes:
Considering energy as a complement to technology and semiconductor companies. Energy has been a tough place to be for the past year, but we’re starting to see gains expand outside of a handful of refiners, he said. From an asset allocation standpoint, he certainly doesn’t advocate for building an overweight position in energy, but does favor adding some exposure to complement technology allocations for multiple reasons, including the relative decorrelation between the sectors; the secular growth story of generative artificial intelligence; and the strong capital returns of the energy sector.
Continuing to position for expanding market breadth. Positioning remains concentrated, and Orton said that provides a catalyst for the market to continue to broaden. Be careful around this week’s jobs report given the potential for a binary market reaction, but the fundamentals across many sectors are positive. Healthcare, industrials and small caps all continue to look interesting, he said, and even sectors like consumer staples are improving. Also, don’t forget about opportunities to diversify outside of the United States where markets like Japan and Europe continue to sit at all-time highs while positioning remains light.
U.S. small-cap equities as well as dividend growers. Orton has been optimistic on both following meaningful underperformance in 2023. While the Fed’s exact path and timing are debatable, it’s clear that interest rate cuts are on the horizon. Small caps could benefit from a lower rate environment, and valuations remain at multi-decade lows while earnings are starting to inflect higher. Investor positions in small caps have been light, and even a slight rebalancing from the largest companies or cash could benefit smaller companies. From a technical perspective, he said, small caps look much more encouraging now as well, so some good earnings numbers and a tick up in flows could set the stage for a breakout.
Russell 2000 Index on the verge of breaking out
Russell 2000, since 2019
Source: Bloomberg, as of 3/1/24
This week’s headline event will be the U.S. jobs report on Friday. Economists expect jobs to have risen by 190,000 with wage growth slowing to 0.2% month over month.
Before then, Super Tuesday will dominate headlines in the U.S. Republican primaries, and President Biden gives his State of the Union address on Wednesday. Fed Chair Jerome Powell also will deliver his semiannual congressional testimony. Orton expects Powell to stay on message, with recent strength in the U.S. economy affording the Fed some time before starting to cut interest rates.
While earnings season is coming to a close, this week still includes a few important releases, particularly in the semiconductor and consumer spaces.
Risk Information:
Investing involves risk, including risk of loss.
Diversification does not ensure a profit or guarantee against loss.
Disclosures:
Index or benchmark performance presented in this document does not reflect the deduction of advisory fees, transaction charges, or other expenses, which would reduce performance. Indexes are unmanaged. It is not possible to invest directly in an index. Any investor who attempts to mimic the performance of an index would incur fees and expenses that would reduce return.
This document is a general communication being provided for informational purposes only. It is educational in nature and not designed to be taken as advice or a recommendation for any specific investment product, strategy, plan feature, or other purpose in any jurisdiction, nor is it a commitment from Raymond James Investment Management or any of its affiliates to participate in any of the transactions mentioned herein. Any examples used are generic, hypothetical, and for illustration purposes only. This material does not contain sufficient information to support an investment decision, and you should not rely on it in evaluating the merits of investing in any securities or products. In addition, users should make an independent assessment of the legal, regulatory, tax, credit, and accounting implications and make their own determinations together with their own professionals in those fields. Any forecasts, figures, opinions, or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions, and are subject to change without prior notice. All information presented herein is considered to be accurate at the time of production, but no warranty of accuracy is given and no liability in respect of any error or omission is accepted. It should be noted that investment involves risks, the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements, and investors may not get back the full amount invested. Both past performance and yields are not reliable indicators of current and future results.
The views and opinions expressed are not necessarily those of the broker/dealer or any affiliates. Nothing discussed or suggested should be construed as permission to supersede or circumvent any broker/dealer policies, procedures, rules, and guidelines.
Sector investments are companies engaged in business related to a specific sector. They are subject to fierce competition and their products and services may be subject to rapid obsolescence. There are additional risks associated with investing in an individual sector, including limited diversification.
Investing in small cap stocks generally involves greater risks, and therefore, may not be appropriate for every investor. The prices of small company stocks may be subject to more volatility than those of large company stocks.
International investing presents specific risks, such as currency fluctuations, differences in financial accounting standards, and potential political and economic instability. These risks are further accentuated in emerging market countries where risks can also include possible economic dependency on revenues from particular commodities or on international aid or development assistance, currency transfer restrictions, and liquidity risks related to lower trading volumes.
Definitions
Beta is a measure of the volatility or systemic risk of a security or portfolio compared with the market as a whole.
Breadth describes the relationship between the median and the mean of a market index. When a few data outliers result in a mean that is substantially larger (or smaller) than the median of the full data set, then the performance of the entire index is being driven by a “narrow” selection of companies. An index supported by “broad” market movements is one where the median is closer to the mean.
A consensus estimate is a forecast of a public company’s projected earnings, the results of a particular industry, sector, geography, asset class, or other category, or the expected findings of a macroeconomic report based on the combined estimates of analysts and other market observers that track the stock or data in question.
Consolidation in the technical analysis of market dynamics refers to an asset trading within a well-defined pattern of trading levels. Consolidation is generally seen as a sign of market indecisiveness, and it ends when the asset’s rise rises or falls outside the range of the trading pattern.
Correlation is a statistic that measures the degree to which two securities move in relation to each other. Decorrelation reflects conditions in which securities or sectors do not move in relation to each other.
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.
Dispersion refers to the range of outcomes in different areas of a financial market or to the potential outcomes of investments based on historical volatility or returns.
Earnings per share (EPS) is calculated as a company’s profit divided by the outstanding shares of its common stock. The resulting number serves as an indicator of a company’s profitability.
Forward returns reflect returns that take place after a specified point in time or event.
Fund flow is the net of all cash inflows and outflows into and out of a particular financial asset, sector, or index. It typically is measured on a quarterly or monthly basis. Investors and others look at the direction of fund flows for indications about the health of specific securities and sectors or the overall market.
Generative artificial intelligence (AI) is a category of AI algorithms that generate new outputs based on the data they have been trained on. It uses a type of deep learning called generative adversarial networks. Generative AI has a wide range of applications, including creating images, text and audio. It can be used to create new content, including audio, code, images, text, simulations, and videos.
A hit rate reflects the percentage of holdings in an investment portfolio that generate positive returns over a specified period of time.
The U.S. Bureau of Labor Statistics (BLS) payroll report, known as the Employment Situation Summary, or, more simply, as the jobs report, is a monthly report tracking nonfarm payroll employment and the national unemployment rate, with data on changes in average hourly earnings, and job trends in public and private sectors of employment. The report is based on surveys of households and employers.
The “Magnificent Seven” refers to the seven largest stocks by market capitalization in the S&P 500 Index, as of Dec. 29, 2023. Collectively they made up more than 25% of the market capitalization of the entire index. They are Alphabet, Amazon.com, Apple, Meta Platforms, Microsoft, NVIDIA and Tesla.
Market capitalization, or market cap, refers to the total dollar market value of a company’s outstanding shares of stock.
Mega-cap stocks are the largest publicly traded companies as measured by market capitalization. Generally, this refers to companies with market capitalizations over $200 billion.
Overweight describes a portfolio position in an industry sector or some other category that is greater than the corresponding weight level in a benchmark portfolio.
Positioning refers to assessments of whether professional investors are, on the whole, bullish or bearing on a particular security, industry, sector, market capitalization or other area of the market, as reflected by the extent to which they are invested in the area of the market in question.
Secular stocks are characterized by having consistent earnings over the long term constant regardless of other trends in the market. Secular companies often have a primary business related to consumer staples most households consistently use whether the larger economy is good or bad.
Technicals refers to technical indicators of historic market data, including price and volume statistics, to which analysts apply a wide variety of mathematical formulas in their study of larger market patterns.
Index
The S&P 500 Index measures change in stock market conditions based on the average performance of 500 widely held common stocks. It is a market-weighted index calculated on a total return basis with dividend reinvested. The S&P 500 represents approximately 80% of the investable U.S. equity market.
The 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 STOXX Europe 600 Index measures the 600 largest European stocks measured by free-float market cap.
London Stock Exchange Group plc and its group undertakings (collectively, the “LSE Group”). ©LSE Group 2024. FTSE Russell is a trading name of certain of the LSE Group companies. Russell® is a trademark of the relevant LSE Group companies and is used by any other LSE Group company under license. All rights in the FTSE Russell indexes or data vest in the relevant LSE Group company which owns the index or the data. Neither LSE Group nor its licensors accept any liability for any errors or omissions in the indexes or data and no party may rely on any indexes or data contained in this communication. No further distribution of data from the LSE Group is permitted without the relevant LSE Group company’s express written consent. The LSE Group does not promote, sponsor, or endorse the content of this communication.
M-508736 Exp. 7/4/2024
