Markets in Focus

Timely analysis of market moves and sectors of opportunity

Oct. 31, 2022: A Fed pivot? Tread carefully.

After a terrible September, the price action in October has felt a lot better, but this is not the time to get carried away about the idea of a coming pivot in U.S. Federal Reserve policy, said Matt Orton, CFA, Chief Market Strategist at Raymond James Investment Management.

“It’s encouraging to see that the market can move higher when it’s supposed to,” he said, “but the rally is getting a little long in the tooth and is getting to look like it did over the summer. The key thing to bear in mind is what killed the rally over the summer was the Fed, so what happens on Wednesday is going to be critical in the very short term for driving the direction of the markets.”

Coming into this week, the S&P 500 Index has gained 8.9% in October with breadth and market internals continuing to improve. In fact, the “market of stocks” has done even better than the broad indices, evidenced by the S&P 500® Equal Weight Index jumping 10.3% this month. The relief rally was very well-telegraphed with oversold conditions, washed-out positioning and sentiment as well as favorable seasonals, but Orton said we’ve rapidly approached a key inflection point for the coming weeks. “There are plenty of reasons to expect that Oct. 12 was the low, but the weight of the evidence continues to suggest that we’re not out of the woods just yet,” he said. This week will be very important given a busy economic data calendar — headlined by the Federal Open Market Committee (FOMC) interest rate decision on Wednesday — as well as a continuation of earnings season with about a third of the S&P 500 companies reporting. But the recent price action is certainly encouraging, and Orton said that cannot be ignored.

Global yields have finally moved started to move lower as developed market 10-year yields revert to their means from cycle highs. While the recent moves are but a blip given the magnitude of the recent rise in global yields, Orton said it’s worth noting that a slowing of global yields and the dollar are precursors for a stabilization in risk assets. October is also the most common month to see bear-market bottoms, and if we follow the typical pattern from October lows, Orton said he would expect to see some consolidation over the coming weeks followed a rally into the new year. But he said he still has some concerns about challenges ahead. Rate volatility remains elevated, and we haven’t seen financial conditions roll over in any meaningful way. Since 1987, financial conditions tend to lead the equity market and that hasn’t happened: the S&P 500 is far ahead of the retracement in the Goldman Sachs Financial Conditions Index. Additionally, for the stock market to move higher, mega-cap companies will need to reclaim their respective 50-day daily moving averages to signal that the fundamental backdrop is in fact improving.

Ultimately, however, the Fed controls the path higher or lower for the market, Orton said. Treasuries have staged a decent rally since a report that the Fed might soon slow the pace of tightening. Many investors have been keen to interpret this as the policy “pivot” that markets have been speculating about since early this summer. Orton said slowing the pace of rate hikes doesn’t necessarily translate into a lower terminal fed funds rate. But it does mark a deliberate change in the Fed’s communication strategy. For the last six months, the Fed has relentlessly tried to push interest rate expectations higher and engineer a tightening of financial conditions. And it has worked. Housing and manufacturing have slowed meaningfully, and there is evidence that consumer spending is settling down and that wage growth may start to normalize with demand finally softening. The Fed also may be trying to settle down persistently elevated volatility in the fixed income markets and prevent the rapid tightening of financial conditions from taking on an endogenous dynamic (i.e., that negative feedback loop we’ve discussed where an environment of tighter financial conditions feeds upon itself). Whatever the exact reasons for the change in communications, it’s too early to say that they will lead to the easing of financial conditions that are necessary for a sustainable rally. But we’re getting a preview of quickly markets will react should there be a change to the terminal rate forecasts already implied in the futures curve.

While increased market breadth is encouraging, financial conditions aren’t necessarily telling the same story. The minimum requirement for a trend reversal is a retracement of 38.2% of the bear market decline, Orton said, and in past bear market bottoms we have seen financial conditions reverse trend before or at the same time as the equity market. In this case, equities are much further ahead of financial conditions.

Quote
My biggest concern is that the market, like over the summer, has gotten ahead of itself,” Orton said.


The rally in equities has run ahead of financial conditions

The rally in equities has run ahead of financial conditions

Source: Bloomberg, as of 10/28/22

Why to maintain a core defensive bias

The improved breadth across the market is very encouraging and puts us on much better footing than in June when the last bear market rally took off, Orton said. Earnings season has provided opportunity for increased dispersion, and correlation is declining among index constituents: only 57% of S&P 500 companies are in bear market territory compared to 75% in June. It’s common for stocks to base and turn up ahead of the index, but Orton said escape velocity can only be achieved if other factors also fall into place. Right now that’s a decline in macroeconomic uncertainty, and that can only be achieved with a reliable change in the Fed. We’ll hear from Fed Chairman Jerome Powell on Wednesday, but Orton said he expects Powell to be very conscientious about avoiding a reprise of the market reaction to his initial suggestion of a future downshift at the July FOMC meeting, which he had to correct with his hawkish August Jackson Hole speech. As a result, Orton said he expects Powell to aim to keep December pricing between 50 and 75 basis points — and for the data to determine the outcome.

As a result, Orton said it’s too early to change his playbook. He said he still favors maintaining a core defensive bias, leaning into dividend growth, profitability, and growth at a reasonable price (GARP). The recent rally also has been led by more defensive companies with dividend growth making new highs relative to the S&P 500. He said it’s worth noting that we’re seeing the strongest earnings momentum in energy and defensive sectors like healthcare, and the weakest in materials, information technology, and consumer discretionary. Healthcare and energy remain the market leaders while industrials and smaller-cap regional banks are making fresh new highs. Largecap healthcare remains Orton’s favorite sector as earnings remain quite strong with more reports due this week. He said he also still likes having exposure to small caps as a way to keep exposure to a market rally: owning small caps helped portfolio performance over the past two weeks with the Russell 2000® Index up nearly 10%. Valuations in small caps remain attractive, he said, especially relative to large caps, and flows remain anemic, which can provide tailwinds should that change as investors inevitably chase performance. Flexibility remains the key to success, and Orton said the increased dispersion we’re witnessing is creating an increasing number of opportunities for stock pickers.

What to watch

It’s a busy week for earnings with nearly one third of the S&P 500 reporting, including companies in semiconductors; medical technology; rental cars; pharmaceuticals and biotechnology; car manufacturing; oil and gas; ride hailing; vacation rentals; pharmacies; travel; health insurance; fast-food restaurants; online payments; electric power; foods; and online sports betting.

The main event on the economic calendar will be the FOMC meeting on Wednesday, but three other Group of 10 banks also will make interest rate decisions. And it’s payrolls week, which Orton said will be important for assessing any cooling in the labor market.

This week's data releases

Monday China Purchasing Manager Index; Eurozone inflation and gross domestic product (GDP); Mexico GDP
Tuesday U.S. construction spending, Institute for Supply Management manufacturing Purchasing Managers’ Index, light vehicle sales; U.K. house prices; Australia interest rate decision
Wednesday U.S. Mortgage Bankers Association Weekly Applications, ADP® National Employment Report, FOMC interest rate decision; Germany unemployment; Japan central bank minutes; South Korea Consumer Price Index; Eurozone manufacturing Purchasing Managers’ IndexTM
Thursday U.S. factory orders, durable foods, trade, initial jobless claims, and Services ISM® Report on Business®; U.K. interest rate decision; Caixin China General Services Purchasing Managers Index; Eurozone unemployment
Friday U.S. nonfarm payrolls and unemployment; Canada unemployment; Eurozone Services Purchasing Managers’ Index; Eurozone industrial producer price index; France industrial production; Germany factory orders

 

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.

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.

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

The Goldman Sachs U.S. Financial Conditions Index is designed to track the weighted average of riskless interest rates, the exchange rate, equity valuations, and credit spreads, with weights that correspond to the direct impact of each variable on gross domestic product.

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

The terminal rate is the rate at which the U.S. Federal Reserve stops raising the federal funds rate in an attempt to bring down inflation. The federal funds rate, known as the fed funds rate, is the target interest rate set by the Federal Open Market Committee of the Federal Reserve. The target is the Fed’s suggested rate for commercial banks to borrow and lend their excess reserves to each other overnight.

An endogenous variable, also known as a dependent variable, is a variable in a statistical model that is influenced, changed, or determined by its relationship with other variables within the model. Consequently, it correlates with other variables and its values may be determined by other variables.

A futures contract is a legal agreement to buy or sell an asset at a predetermined price at a specified time in the future, which is known as the expiration date. Futures contracts are financial derivatives that allow investors to speculate on the direction of a particular asset and are often used to hedge the price movement of the underlying asset to help prevent losses from undesired price changes.

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.

Correlation is a statistic that measures the degree to which two securities move in relation to each other.

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.

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%.

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

Growth at a reasonable price (GARP) is a stock investment strategy that seeks to combine tenets of both growth and value investing in the evaluation and selection of individual stocks. GARP investors look for companies with consistent earnings growth above broad market levels but try to avoid companies with very high valuations. By trying to avoid the extremes of either growth or value investing, GARP investors often end up focusing on growth-oriented stocks with relatively low price-to-earnings multiples in normal market conditions.

The Group of 10 consists of 11 industrialized nations that meet regarding international financial matters. The member countries are Belgium, Canada, France, Germany, Italy, Japan, the Netherlands, Sweden, Switzerland, the United Kingdom, and the United States, with Switzerland playing a minor role.

The China Purchasing Manager Index, compiled by the National Bureau of Statistics of China, is based on a monthly survey of purchasing managers in 31 divisions of manufacturing enterprise and 43 divisions of non-manufacturing enterprise.

The Purchasing Managers’ Index (PMI) measures the prevailing direction of economic trends in the U.S. manufacturing sector. It is created by the Institute for Supply Management (ISM), and consists of an index summarizing whether market conditions as reported in a monthly survey of supply chain managers are expanding, staying the same, or contracting.

The Mortgage Bankers Association 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 ADP® National Employment Report is published monthly by the ADP Research Institute® in close collaboration with Moody’s Analytics. The ADP® National Employment Report provides a monthly snapshot of U.S. nonfarm private sector Employment based on actual transactional payroll data.

The South Korea Consumer Price Index, compiled monthly by Statistics Korea, measures the average change in prices for a fixed-market basket of goods and services of constant quantity and quality purchased by consumers. Purchasing Managers’ Index™ data are compiled by IHS Markit for more than 40 economies worldwide. The monthly data are derived from surveys of senior executives at private sector companies. PMI data features a headline number, which indicates the overall health of an economy, and sub-indices, which provide insights into other key economic drivers such as gross domestic product, inflation, exports, capacity utilization, employment, and inventories.

The Caixin China General Services PMI, compiled by IHS Markit, tracks sales, employment, inventories, and prices in China’s services industry. It is based on data compiled from monthly replies to questionnaires sent to purchasing executives in more than 400 companies. Survey responses reflect the change, if any, in the current month compared to the previous month based on data collected mid-month. A reading above 50 indicates expansion, while anything below that points to contraction. The Eurozone Services PMI (Purchasing Managers’ Index) is produced by IHS Markit and is based on original survey data collected from a representative panel of around 2,000 private sector service firms. National data are included for Germany, France, Italy, Spain, and the Republic of Ireland. These countries together account for an estimated 78% of Eurozone private sector services output.

The Eurozone industrial producer price index (PPI) tracks transaction prices for the monthly industrial output of various economic activities in the European Union. The index measures price changes from the seller’s perspective and serves as an early indicator of inflationary pressures in the economy and records the evolution of prices over longer periods of time.

The S&P 500 Index measures change in stock market conditions based on the average performance of 500 widely held common stocks. It is a market-weighted index calculated on a total return basis with dividend reinvested. The S&P 500 represents approximately 75% of the investable U.S. equity market.

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.

Frank Russell Company (“Russell”) is the source and owner of the trademarks, service marks and copyrights related to the Russell Indexes. Russell® is a trademark of Frank Russell Company. Neither Russell nor its licensors accept any liability for any errors or omissions in the Russell Indexes and / or Russell ratings or underlying data, and no party may rely on any Russell Indexes and / or Russell ratings and / or underlying data contained in this communication. No further distribution of Russell Data is permitted without Russell’s express written consent. Russell does not promote, sponsor, or endorse the content of this communication.

 

RJIM22-0086 Exp. 2/31/2023


Oct. 24, 2022: Inflation is still in the driver’s seat

October has been a wild ride, and it’s unlikely to get any calmer this week, said Matt Orton, CFA, Chief Market Strategist at Raymond James Investment Management. Despite a surge in realized volatility, the S&P 500 Index is up nearly 5% with improving internals and market breadth. But traditional volatility measures mask the true extent of the recent market swings. In fact, only one day in October so far has had an intraday move of less than 1% (Oct. 12 had a 0.96% intraday swing), with a median intraday move of 2.04%.

“Last week’s volatility highlights the environment that we’re in,” he said, but it’s important to note that “earnings, corporate margins, and guidance have been better than what a lot of people feared. Blended corporate profit margins for the S&P 500 still sit at 12%, which is lower than the last couple of quarters, but put that in perspective: We have the worst inflationary environment in four decades, coupled with out-of-control wages and a constant barrage of uncertainty with respect to hiring and supply chain dislocations. Yet profit margins have held up at very high levels. In fact, prior to the current post-COVID streak, the net profit margin only hit 12% once in the previous 10 years. The question is how long this continues.”

This week, earnings results will pour in with heavyweights from every sector reporting. Perhaps, Orton said, earnings can help guide this market if results from mega-cap companies continue to give investors a break from the unrelenting news about inflation and interest rates. The U.S. Federal Reserve (Fed) has also entered a blackout ahead of the Federal Open Market Committee (FOMC) meeting on Nov. 2, which will further focus attention on earnings this week. Still, Orton said, no matter how good (or bad) earnings results are this quarter, the pervasive macroeconomic volatility is going to remain firmly in control. Just look at the massive intraday surge on Friday after Federal Reserve Bank of San Francisco President May Daly said that that future interest rate increases could come in smaller increments to achieve the Fed’s target neutral rate.

Unfortunately, Orton said, bonds remain skeptical of any change in the current Fed course and touched some key milestones last week: The yield on the U.S. 10-year Treasury note rose above 4.25% for the first time since the Global Financial Crisis; 10-year German bunds traded at 2.5%; and 10-year U.K. gilts moved back above 4%. Market U.S.-dollar overnight index swaps moved in excess of 5% before the Daly news but still priced a peak fed funds upper bound at 5.06%. The upward trend in rates comes in stark contrast to growing recession risks with manufacturing sentiment and housing showing further downward momentum this week while the Conference Board Leading Economic Index® printed at levels that usually only precede recessions. This divergence highlights the challenge facing fixed income investors looking to harvest increasingly attractive yields. Principally, while the drivers of inflation are well known, inflation, and especially core inflation, continues to surprise in magnitude and persistence against a backdrop of a still tight labor market. As such, Orton said the status quo, where little confidence can be taken in the full extent of central bank tightening, persists.

All of this highlights why macroeconomic uncertainty is so high and why it’s going to be the Fed that ultimately determines the direction of the market, he said. Correlations between the U.S. dollar, bonds, stocks, and commodities are incredibly high right now.

“It’s a one-variable market,” Orton said. “It’s all about how any single data point, including earnings, impacts the outlook for the Fed.” So far, he said, the Fed has been steadfast in playing the expectations game, broadcasting a hard stance in the face of deteriorating forward-looking data. Recent inflation and labor market data have been worse than expected from an inflation standpoint, further fueling the current trajectory of the Fed. Until this changes, Orton said we shouldn’t expect to see the U.S. dollar roll over or 10-year real yields peak. Thus, while the equity market has a laundry list of reasons to stage a rally — it’s at long-term support, with bearish sentiment, favorable seasonals, and massive underweight positioning – Orton said it will be prone to failure until we have some macroeconomic resolution. Maybe that comes from Fed Chairman Jerome Powell’s commentary on Nov. 2. Fed rhetoric, and certainly Fed pricing, has continued to push the envelope of what seems possible during this cycle, but Orton said we certainly can’t count on that. And that’s why he said it is difficult to fight the prevailing trends too aggressively right now.

Despite the encouraging equity price action in the face of rising yields and maybe some optimism around the trajectory of the Fed, macroeconomic uncertainty is too pervasive. The big intraday moves this month are a reminder of just how quickly the market can change. Consequently, Orton said he continues to favor maintaining a core defensive bias. That means leaning into dividend growth, profitability, and growth at a reasonable price (GARP). Healthcare remains Orton’s preferred sector and, he said earnings results last week further reinforced his conviction right now. He said he expects energy strength to continue as companies are focused on maintaining strong free cash flow generation and returning cash to shareholders. This is not the time to throw in towel and this remains a very attractive environment for long-term investors, he said. Flexibility is key, he said, and there are an increasing number of opportunities for stock pickers. Floors are starting to form within “the market of stocks,” but they’re unlikely to have enough demand to achieve escape velocity until credit conditions peak. As a result, ranges will form and investors will have the chance to pick their levels, so don’t chase the market higher, Orton said. Additionally, the price action in small caps remains constructive and he said he likes the asset class to position for any sort of market bounce. Negative investor flows as well as compelling valuations, a shift to services, and better U.S. capital expenditures and reshoring should all provide tailwinds, he said.

The dollar has been a wrecking ball for risk assets, and the sharp rise in real yields also is problematic, particularly for longer-duration assets, Orton said. It looked like the upward momentum of real yields might have paused, but no such luck. While equities have taken the persistent rise in yields in stride over the past week, he said it’s hard to see how that is sustainable should the trend continue.

The strong dollar is punishing equities (with rising yields waiting in the wings)

The strong dollar is punishing equities (with rising yields waiting in the wings)

Source: Bloomberg, as of 10/21/22

The U.S. Dollar Index versus S&P 500 chart, the Dollar Index line is inverted to reflect the negative correlation between the two indices – that is, higher values for the Dollar Index are correlated with a weaker equities market. The values for the inverted Dollar Index are computed by dividing 1 by the value of the index.

What consumers say vs. what they do

We still get some important economic data this week that will provide updates on wage inflation and the state of the consumer, Orton said. The Employment Cost Index (ECI) is the Fed’s preferred wage measure and hopefully starts to show a small deceleration. An upside surprise would prevent the Fed from downshifting the pace of policy tightening at the coming meetings. Recall: It was the re-acceleration of the wages and salaries component in the second-quarter ECI that played a key role in Powell taking a hawkish turn at the Fed’s meeting at Jackson Hole and the resulting September FOMC upward dot-plot revisions.

What to watch

While earnings will be the focus, some important economic data will help illuminate two key trends: wage inflation persistence and consumer resilience.

Fifty percent of the S&P 500 by market capitalization reporting earnings this week. Orton said energy was on a tear last week, and 57% of the sector within the S&P 500 are scheduled to report. Other reorts are coming from companies in auto manufacturing; package delivery; soft drinks; online advertising; information technology, telecommunications; restaurants; aircraft manufacturing; aerospace and defense; foods; railroads; hotels; online retail; consumer electronics and software; semiconductors; heavy equipment manufacturing; brewing; pharmaceuticals and biopharmaceuticals; airlines; and tobacco.

This week's data releases

Monday Flash Purchasing Managers Indexes for the U.K. and Eurozone; Mexico Consumer Price Index (CPI)
Tuesday U.S. Conference Board Consumer Confidence Index; ifo Institute Business Climate Index for Germany
Wednesday Brazil interest rate decision; Australia CPI
Thursday U.S. third-quarter gross domestic product; European Central Bank interest rate decision; China industrial profits
Friday U.S. third-quarter Employment Cost Index, plus personal income and spending; Japan unemployment, interest rate decision, and Tokyo CPI; Gross domestic product and inflation from France, Spain, and Germany; Italy inflation

 

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.

Realized volatility, also known as historical volatility, measures levels of volatility that took place in the past. Realized volatility is thus different from implied volatility, which describes the market’s assessment of future volatility.

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.

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

Bunds are bonds issued by Germany’s federal government. They are generally viewed as the German equivalent of U.S. Treasury securities.

Gilts are bonds issued by the U.K. government. They are generally viewed as the British equivalent of U.S. Treasury securities.

An overnight index swap applies an overnight rate index such as the U.S. dollar, federal funds or London Interbank Offered Rate (LIBOR) rates. Indexed swaps are hedging contracts in which one party exchanges a predetermined cash flow with a counter-party on a specified date. A debt, equity, or other price index is used as the agreed exchange for one side of this swap.

The federal funds rate, known as the fed funds rate, is the target interest rate set by the Federal Open Market Committee of the 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 Conference Board Leading Economic Index® for the United States is designed to signal peaks and troughs in the business cycle, to be highly correlated with real (adjusted for inflation) GDP, and to be a predictive variable that anticipates (or “leads”) turning points in the business cycle by around seven months. It is comprised from 10 components: Average weekly hours in manufacturing; Average weekly initial claims for unemployment insurance; Manufacturers’ new orders for consumer goods and materials; Institute for Supply Management® Index of New Orders; Manufacturers’ new orders for nondefense capital goods excluding aircraft orders; Building permits for new private housing units; S&P 500 Index; Leading Credit Index™; Interest rate spread (10-year Treasury bonds less federal funds rate); Average consumer expectations for business conditions.

Core inflation, as measured by the “Consumer Price Index for All Urban Consumers: All Items Less Food & Energy” is an aggregate of prices paid by urban consumers for a typical basket of goods, that does not include food and energy. Core CPI is widely used by economists because food and energy typically have very volatile prices.

The neutral rate is the theoretical federal funds rate at which the stance of U.S. Federal Reserve monetary policy is neither accommodative nor restrictive. It is the short-term real interest rate consistent with the economy maintaining full employment with associated price stability.

The U.S. Dollar Index is a measure of the value of the U.S. dollar relative to the value of a basket of currencies from most of the U.S.’s most significant trading partners.

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

Growth at a reasonable price (GARP) is a stock investment strategy that seeks to combine tenets of both growth and value investing in the evaluation and selection of individual stocks. GARP investors look for companies with consistent earnings growth above broad market levels but try to avoid companies with very high valuations. By trying to avoid the extremes of either growth or value investing, GARP investors often end up focusing on growth-oriented stocks with relatively low price-to-earnings multiples in normal market conditions.

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

Duration incorporates a bond’s yield, coupon, final maturity and call features into one number, expressed in years, that indicates how price-sensitive a bond or portfolio is to changes in interest rates. Bonds with higher durations carry more risk and have higher price volatility than bonds with lower durations.

Equity duration is the cash-flow weighted average time at which investors can expect to receive the cash flows from their investment in a company’s stock. Long-duration stocks include fast-growing technology companies, including those that may not pay any dividends in their early years, while short-duration stocks tend to be more mature companies with higher ratios to dividend to price.

Real yields refer to the returns that fixed income investors earn from interest payments after adjustments for the effects of inflation. Nominal yields refer to the coupon rate on bonds and represent the rate that the bond issues promises to pay to bond purchasers. It is fixed and applies to the life of the bond.

Basis points (bps) are measurements used in discussions of interest rates and other percentages in finance. One basis point is equal to 1/100th of 1%, or 0.01%.

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

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.

Real purchasing power is the value of a currency, after it is adjusted for inflation, in terms of the number goods or services that one unit of the currency can buy.

The University of Michigan Index of Consumer Sentiment is based on monthly telephone surveys in which at least 500 consumers in the continental United States are asked 50 questions about what they think now and what their expectations are for their personal finances, business conditions, and buying conditions. Their responses are used to calculate monthly measures of consumer sentiment that can be compared to a base value of 100 set in 1966.

The Consumer Confidence Index (CCI) is a survey, administered by The Conference Board, that measures how optimistic or pessimistic consumers are regarding their expected financial situations.

IHS Markit Flash Composite PMIs (Purchasing Managers’ Index) are based on about 85% of the final number of replies received each month from a survey of a representative panel of private sector firms in select countries across the European Union.

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

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

The Tokyo Consumer Price Index, excluding fresh food, is released by the Statistics Bureau of Japan and tracks a range of consumer prices in the Tokyo metropolis.

The S&P 500 Index measures change in stock market conditions based on the average performance of 500 widely held common stocks. It is a market-weighted index calculated on a total return basis with dividend reinvested. The S&P 500 represents approximately 75% of the investable U.S. equity market.

 

RJIM22-0072 Exp. 2/24/2023


Oct. 17, 2022: Below the despair: Growing dispersion

We already saw through the jobs report earlier this month that good news is bad news with respect to this market, but last week was a reminder that bad news is also just bad news, said Matt Orton, CFA, Chief Market Strategist at Raymond James Investment Management. Still, he said, amid the discouraging news on inflation and broad downward moves at the index level, specific sectors and factors continue to offer reasons to remain tactical.

“It’s all about leaning into what’s working until the market establishes a bottom,” he said. “There are still some silver linings and things to do to be set up well for both the near term chop and for when the market turns.”

Last week’s red-hot U.S. September Consumer Price Index (CPI) release, plus a slew of other signals that inflation pressures are not abating as quickly as many forecasters assumed, will continue to pressure the U.S. Federal Reserve (Fed) to remain aggressive in its response. In particular, inflation expectations data rose in the University of Michigan Index of Consumer Sentiment, highlighting that the Fed cannot take for granted that inflation expectations will remain anchored. An unusually wide range of expected outcomes of longer-run inflation expectations in the University of Michigan survey provides an illustration of this point. The distribution of responses has remained uncomfortably wide over the last two years, with a quarter of respondents expecting inflation around 5%. Orton also pointed out that gas prices have a high level of influence on consumer inflation views, and with daily national average gas prices rising more than 6% from their September lows, it was no surprise to see consumers react immediately. Regardless, he said, it’s unlikely that gas prices are going down in the near future so we won’t get any relief on this front in helping to manage expectations.

Amid the flurry of macroeconomic data, it was easy to forget that earnings season also kicked off in earnest last week. And while the start of third-quarter earnings season has been weaker than normal from a headline perspective, there are still some positives that Orton said should not be overlooked. Only 7% of companies in the S&P 500 Index have reported earnings, and the blended earnings growth rate stands at 1.6% versus the 2.8% that had been expected as of Sept. 30. Downward revisions to earnings estimates and negative earnings surprises have largely been focused on companies in the financials sector, though Orton noted that Jamie Dimon reiterated comments around the strength of the consumer which were corroborated by other large money center bank earnings results. On the other hand, results have been strong in healthcare and consumer staples. Moreover, in the handful of consumer-exposed companies that reported last week, results that missed estimates but where guidance was very strong were rewarded for the optimism.

“While it’s hard to be too inspired by the results thus far, it’s clear that a lot of negativity is priced into the market at current levels,” Orton said. “And the reasons for earnings misses haven’t been the result of pernicious or systematic issues. Rather, they’ve been idiosyncratic in nature and largely the result of increased loan losses against difficult 2021 comparables.”

Unfortunately, he said, there just doesn’t seem to be any winning in the market these days. Bonds and stocks continue to move lower and any signs of a reversal in the downward trend never seem to take hold. While it’s easy to despair when looking at the broad indices, he said it’s worth pointing out increased dispersion at the sector and industry level as well as some emerging trends that he said he finds quite encouraging. Energy and healthcare continue to be leaders, but industrials are really making a showing as well as financials. Utilities and real estate, both bond proxies, continue to be losers, as well as information technology, with semiconductors in a death spiral. The strength in financials — banks in particular — is encouraging given some earnings misses and the sector’s sensitivity to declining economic projections, Orton said. Financials were beaten up badly heading into the fall, and perhaps this is evidence that there is a point where investors are willing to step in when the price becomes too detached from reality. He said he hopes this takes hold across the market as a whole in the coming weeks and months.

With macroeconomic uncertainty remaining high and financial conditions still tightening, Orton said he continues to favor maintaining a core defensive bias. That means leaning into dividend growth, profitability, and growth at a reasonable price (GARP).

“This is not the time to throw in towel,” he said, “and each day we move lower, the better the risk-reward becomes for long-term investors.”

The market is getting closer to pricing in a terminal fed funds rate of 5%; and the S&P 500 is trading at a forward price to earnings (P/E) ratio of 16.0x, while the S&P 500® Equal Weight Index is trading at 14.4x, well below its median of 16.5x over the past 30 years. The key this year has been and will continue to be flexibility, Orton said. Once credit conditions peak, he said, it could finally be time to start opportunistically wading into the market. Last week certainly was a reminder that we’re not there yet, he said. Large-cap healthcare remains Orton’s preferred sector, and it continues to push to new relative highs versus the S&P 500 after some good earnings results and guidance last week. Orton said he also has conviction in small caps for when the market does turn, and it’s worth noting that the Russell 2000® Index continues to tread water relative to the broader market and has held its June lows.

“Small caps are one area where I wouldn’t caution against being early if investors want to add a bit of risk back into their portfolios,” he said.

Inflation indicators: Ugly and uglier

The Fed may be looking for economic data to warrant a downshift in the pace of rate hikes and an eventual pause to the tightening cycle, but Orton said the latest data — including the September jobs report and especially the latest CPI results — do not appear to justify a lighter touch on policy levers just yet. Not only is the Consumer Price Index on a hot streak, but Orton said a confluence of inflationary developments — including concerns among Fed officials over wage-price feedback loops, renewed supply chain disruptions and production cuts by the Organization of the Petroleum Exporting Countries plus several non-member oil exporters — appear poised to encourage hawkish sentiment on the Federal Open Market Committee. In the CPI report, both the headline and core rates exceeded consensus estimates and the underlying composition was even more troubling. Core services was particularly hot, notching the fastest one-month gain since August 1990. This occurred as CPI rent pressures continued to intensify and overshadowed some supply-chain healing that is occurring much later than Orton said he would have thought. A strengthening trade-weighted dollar, elevated inventory-sales ratios, and easing transportation bottlenecks should point to further significant declines in import prices and, in turn, core CPI goods, he said. But he noted that core goods account for only 21% of total CPI compared to 57% for core services, so even moderate upside surprises in the latter stand to wash out the gains to be had from supply-chain improvement — and this indeed appeared to be the case in the August and September data.

Even worse, Orton said, while the University of Michigan consumer sentiment indicator improved and beat expectations, the sting in the tail was a rise in the median five- to 10-year inflation expectation to 2.9%, higher than the forecast 2.8%. Yet the mean five- to 10-year inflation expectation dropped to 3.3%, its lowest since last April, suggesting that there is a cohort of the public that expects a quite low outcome. But Orton said there is an unusually wide range of expected outcomes for longer-run inflation expectations, highlighting the high level of uncertainty in the current environment. The one-year expectation surged to 5.1%, half a percent higher than forecast, adding to already bad news on the inflation front. As Federal Reserve Bank of Cleveland President Loretta Mester stated publicly in response to some dovish commentary from her peers: “Being cautious does not mean doing less. Instead it means not allowing wishful thinking to substitute for compelling evidence, leading one to prematurely declare victory over inflation.” All of this leads Orton to believe that this whipsaw-prone environment will endure for a while longer. Macroeconomic developments will continue to be in the driver’s seat, but he said that is yet another reason for investors to be tactical.

“There are always factors that are working,” he said. “It’s also a reason why long-term investors should be scouring the environment for value being created on what I believe is nearly a daily basis.”

Services inflation surges: Breakdown of CPI inputs

Services inflation surges: Breakdown of CPI inputs

Sources: U.S. Consumer Price Index, Bloomberg, as of 9/30/22

What to watch

This week’s earnings calendar will provide fresh evidences on just how pervasive (or not) the demand slowdown has been and its implication on corporate margins, Orton said. Along with macroeconomic updates on industrial production and the closely watched Empire State Manufacturing Survey, the week will bring earnings reports from companies in banking and financial services; consumer goods; aerospace and defense; airlines; online streaming; electric vehicle manufacturing; medical devices; insurance; casinos and resorts; technology; tobacco; telecommunications; railroads; package delivery; and retail sales.

This week's data releases

Monday U.S. Empire State Manufacturing Survey; U.K. house prices
Tuesday U.S. industrial production and National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index; China retail sales, industrial output, GDP, and surveyed jobless; Germany ZEW Financial Market Survey; Canada housing starts
Wednesday U.S. Federal Reserve beige book, plus reports on housing starts, building permits, and mortgage applications; U.K. Consumer Prices Index and Producer Price Index; Eurozone Harmonised Index of Consumer Prices; Canada Consumer Price Index
Thursday U.S. initial jobless claims, home sales, and Conference Board Leading Economic Index®; U.K. consumer confidence
Friday Retail sales from Canada and U.K.; Eurozone Consumer Confidence Indicator; South Korea Producer Price Index; Japan, Hong Kong 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.

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.

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.

Core inflation, as measured by the “Consumer Price Index for All Urban Consumers: All Items Less Food & Energy” is an aggregate of prices paid by urban consumers for a typical basket of goods, that does not include food and energy. Core CPI is widely used by economists because food and energy typically have very volatile prices.

A consensus estimate is a forecast of a public company’s projected earnings 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 trade-weighted dollar is an index created by the U.S. Federal Reserve to measure the value of the U.S. dollar based on its competitiveness versus trading partners. Rather than compare the dollar to all foreign currencies, the index emphasizes currencies most widely used in international trade. It aims to gauge the dollar’s purchasing value to capture the effects of dollar appreciation or depreciation against foreign currencies.

The Empire State Manufacturing Survey is a monthly survey of manufacturers in New York State conducted by the Federal Reserve Bank of New York.

The National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI) is based on a monthly survey of NAHB members designed to take the pulse of the single-family housing market. The survey asks respondents to rate market conditions for the sale of new homes at the present time and in the next six months as well as the traffic of prospective buyers of new homes.

The ZEW Financial Market Survey is produced monthly by the Zentrum für Europäische Wirtschaftsforschung (the Center for European Economic Research) and is based on a survey of about 350 economists and analysts on the economic future of Germany in the medium term.

The U.K. Consumer Prices Index is a measure of consumer price inflation in the United Kingdom based a wide range of household spending, including on food, alcoholic beverages and tobacco, clothing and shoes, housing and utilities, health, transportation, communication, recreation, education, restaurants and hotels, and miscellaneous goods and services.

The U.K. Producer Price Index measures the changes in the prices of goods bought and sold by U.K. manufacturers, including prices of materials and fuels purchased (input prices) and factory gate prices (output prices).

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 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 South Korea Producer Price Index, released monthly by the Bank of Korea, measures changes in the price of goods and services produced and transacted in the domestic market. The index is used to measure business trend indicators, deflators, and other economic developments.

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

The Hong Kong Consumer Price Index, released by the Census and Statistics Department of the government of the Hong Kong Special Administrative Region, measures the changes over time in the price level of consumer goods and services generally purchased by households. The year-on-year rate of change in the CPI is widely used as an indicator of the inflation affecting consumers.

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

The Conference Board Leading Economic Index® for the United States is designed to signal peaks and troughs in the business cycle, to be highly correlated with real (adjusted for inflation) GDP, and to be a predictive variable that anticipates (or “leads”) turning points in the business cycle by around seven months. It is comprised from 10 components: Average weekly hours in manufacturing; Average weekly initial claims for unemployment insurance; Manufacturers’ new orders for consumer goods and materials; Institute for Supply Management® Index of New Orders; Manufacturers’ new orders for nondefense capital goods excluding aircraft orders; Building permits for new private housing units; S&P 500 Index; Leading Credit Index™; Interest rate spread (10-year Treasury bonds less federal funds rate); Average consumer expectations for business conditions.

The S&P 500 Index measures change in stock market conditions based on the average performance of 500 widely held common stocks. It is a market-weighted index calculated on a total return basis with dividend reinvested. The S&P 500 represents approximately 75% of the investable U.S. equity market.

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.

Frank Russell Company (“Russell”) is the source and owner of the trademarks, service marks and copyrights related to the Russell Indexes. Russell® is a trademark of Frank Russell Company. Neither Russell nor its licensors accept any liability for any errors or omissions in the Russell Indexes and / or Russell ratings or underlying data, and no party may rely on any Russell Indexes and / or Russell ratings and / or underlying data contained in this communication. No further distribution of Russell Data is permitted without Russell’s express written consent. Russell does not promote, sponsor, or endorse the content of this communication.

 

RJIM22-0063 Exp. 2/17/2023


Oct. 10, 2022: Earnings? Important. Guidance? Critical.

Good news about the resiliency of the labor market was decidedly bad news for the equities market last week, said Matt Orton, CFA, Chief Market Strategist at Raymond James Investment Management.

“There’s still a lot riding on every single macroeconomic data print that’s to come, and this week there’s a number of data prints that can significantly move the market up or down,” he said.

The U.S. Federal Reserve (Fed) policy pivot narrative failed the payrolls test on Friday with the latest data showing a strong U.S. labor market, he said. While payrolls rose at the slowest pace since April 2021, the unemployment rate came down to 3.5%, hourly earnings didn’t decelerate, and labor force participation was marginally weaker. Usually, steady job gains — particularly in the sectors with the greatest demand like leisure & hospitality and healthcare — would be welcome news for investors amid fears of a recession, he said.

“But in our bizarre reality right now this gives the Fed more reason to keep its foot on the brake, and there was nothing in the jobs data to signal the Fed will change course, a headwind for the market,” Orton said. “If there is a silver lining, it’s that we may be getting closer to a peak in yields at which point we can finally start the bottoming process and build a base for equities to start a sustainable recovery. We’re just not there yet.”

Quote
There are so many uncertainties going forward, and it will be critical to see how margins are expected to evolve into the end of the year and into 2023.

Orton also said he expects the persistent tightness in the labor market to feed through to earnings season, which kicks off in earnest late this week. Companies in recent weeks have been highlighting labor challenges, both with respect to getting enough employees and the consistent upward pressure on wages to retain talent. Orton said he is concerned about the decrease in labor force participation, so it will be important to pay especially close attention to how companies forecast labor market dislocations to impact future margins. Margin estimates for the third quarter are still expected to remain strong at 12.2% (above the five-year average of 11.3%), but continued upward pressure on wages and an easing of inflation that could erode companies’ ability to pass along price increases could be problematic. We’ve heard this narrative for the past few quarters and companies have consistently surprised to the upside, but he said it’s nonetheless very important to follow closely. Unfortunately, the shortage of workers following the pandemic lockdowns highlights what Orton said he believes to be a supply issue that is totally out of control of the Fed, even if a worse than expected recession occurs. The greatest shortage of workers isn’t in white collar jobs, it’s for skilled tradesmen, hourly workers, and in healthcare where there is huge lack of properly trained workers.

While earnings will finally provide a much needed catalyst for markets outside of the Fed, Orton said key data with respect to inflation will still dominate the narrative. This week the Consumer Price Index (CPI) report will take center stage. He said he expects that we’ll see core inflation edge down from August’s scorching 0.6% month-over-month pace but remain uncomfortably high. Another month of declining gasoline prices, albeit to a lesser degree than in the month prior, should partially offset hot food inflation.

“Risks to the market are still skewed higher,” Orton said. “We’re oversold and better than expected CPI data could result in another relief rally, but I just don’t believe it will be durable.” Given officials’ current guidance — they want to see “convincing evidence” of inflation moving down — he said a downside surprise is unlikely to knock the Fed off course for 75 basis points (bps) in November. However, it could spark the downshift discussion looking ahead to December. It could also reinforce lower terminal fed funds pricing by giving ammunition to dovish-leaning Fed officials who have offered the possibility of a pause and assessment of the data after the Fed reaches a fed funds rate in the neighborhood of 4.5% by the end of this year. On the other hand, Orton said an upside surprise could give the six hawks on the September Federal Open Market Committee ammunition to push terminal pricing toward 5%.

Looking forward, Orton said he continues to favor maintaining a core defensive bias. That means leaning into dividend growth, profitability and growth at a reasonable price (GARP). Large-cap healthcare has been Orton’s favored sector for months and is close to making new relative highs versus the S&P 500 Index, he said. For global portfolios, Orton has been outspoken to avoid Europe and instead lean into Latin America and India to pick up selective emerging market exposure. India is making new highs relative to the broader emerging markets complex, and Latin America also continues to meaningfully outperform. Selectivity is critical since financial conditions remain near levels of recent historical tightness and the dollar bounced off critical support levels and remains in an uptrend.

Tight financial conditions thwart equity rallies

Tight financial conditions thwart equity rallies

Source: Bloomberg, as of 10/7/22

So for now, Orton said, stick with what has been working. Once central bankers move past peak hawkishness, then it should be a matter of time until credit conditions improve. As credit conditions peak, he said he expects the momentum factor to reverse, making it finally the time to start opportunistically wading into the market. And when the market does show signs of bottoming, Orton said small caps are at the top of his list. Negative investor flows as well as compelling valuations, a shift to services, and better U.S. capital expenditures and reshoring could all provide tailwinds, he said. Additionally, it’s worth noting that the Russell 2000® Index held the June lows despite all the doom and gloom, setting up for a doublebottom formation.

Closer look at earnings season

For the third quarter, the estimated earnings growth rate for the S&P 500 is 2.4% (down from 2.8% expected on Sept. 30), which would be the lowest earnings growth reported by the index since the third quarter of 2020. Four of 11 sectors are expected to report year-over-year earnings growth, led by energy and industrials. On the other hand, seven sectors are expected to report a year-over-year decline in earnings, led by the communication services and financials sectors. Orton said it’s worth noting that expectations have come down meaningfully throughout the quarter, moving from 9.9% expected year-over-year growth to 2.4% currently. This represents a 6.8% decline in estimates (from $59.44 to $55.51). This is the largest decrease in expectations since the second quarter of 2020 (-37.0%) and is meaningfully above the five-, 10- and 20-year average declines (-2.3%, -3.3%, and -3.8% respectively).

“If we take all of the analyst estimates for the next 12 months, the bottom-up target price for the S&P 500 is 4696.78, which is 29.0% above Friday’s closing price of 3639.66 and still too high in my opinion,” Orton said. However, he said this doesn’t mean the entire market is overvalued. To the contrary, he said he believes the earnings correction will play out on a more idiosyncratic level. At the sector level, the communication services (+38.1%) and real estate (+37.7%) sectors are expected to see the largest price increases which to Orton seem ripe for correction given economic headwinds. Real estate is also more of a bond proxy and has been breaking down recently with rates continuing to march higher. On the other hand, the energy (+12.9%) sector is expected to see the smallest price increase, as this sector has the smallest upside difference between the bottom-up target price and the closing price.

“Even more important than the earnings results will be guidance from management teams,” Orton said. “There are so many uncertainties going forward, and it will be critical to see how margins are expected to evolve into the end of the year and into 2023.”

Going back to the challenges in the jobs market, Orton noted that labor costs have been cited by the highest number of companies in the S&P 500 over the past few weeks as a factor that either had a negative impact on earnings, revenues, or profit margins in third quarter, or is expected to have a negative impact on earnings, revenues, or profit margins in a future quarter. The estimated net profit margin for the S&P 500 for the third quarter 2022 is 12.2%, which is above the five-year average of 11.3% and equal to the net profit margin of 12.2% in the second quarter. Financials, information technology, and communication services are all expected to report a decline in margins, and it will be especially important to pay attention to how this materializes and whether more pressure is to be expected. But there will be winners and losers, and Orton said this should continue to be a good environment for stock picking to outperform.

What to watch

Third-quarter earnings season comes charging in with some key financials reporting as well as companies in air travel, pizza delivery; soft drink bottling; industrial supplies; semiconductors; pharmacies; and managed healthcare to provide a sense of how the consumer is holding up. The economic calendar is also busy, overshadowed by the U.S. CPI and Producer Price Index (PPI) reports.

This week's data releases

Monday U.S. bond market holiday
Tuesday U.K. unemployment; Japan Balance of Payments Current Account; Australia consumer confidence, business conditions, and household spending; Brazil inflation
Wednesday U.S. Producer Price Index, mortgage applications, Federal Open Market Committee minutes; U.K. gross domestic product; Eurozone and U.K. industrial output
Thursday U.S. initial jobless claims and CPI; Germany and Sweden inflation data; Japan PPI
Friday U.S. retail sales, inventories, and University of Michigan Index of Consumer Sentiment; China Industrial Sector Producer Price Index and trade; Inflation data from China, France, Spain, Poland, and Israel

 

Risk Information:
Investing involves risk, including risk of loss.

Diversification does not ensure a profit or guarantee against loss.

Disclosures:
Index or benchmark performance presented in this document does not reflect the deduction of advisory fees, transaction charges, or other expenses, which would reduce performance. Indexes are unmanaged. It is not possible to invest directly in an index. Any investor who attempts to mimic the performance of an index would incur fees and expenses that would reduce return.

This document is a general communication being provided for informational purposes only. It is educational in nature and not designed to be taken as advice or a recommendation for any specific investment product, strategy, plan feature, or other purpose in any jurisdiction, nor is it a commitment from Carillon Tower Advisers or any of its affiliates to participate in any of the transactions mentioned herein. Any examples used are generic, hypothetical, and for illustration purposes only. This material does not contain sufficient information to support an investment decision, and you should not rely on it in evaluating the merits of investing in any securities or products. In addition, users should make an independent assessment of the legal, regulatory, tax, credit, and accounting implications and make their own determinations together with their own professionals in those fields. Any forecasts, figures, opinions, or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions, and are subject to change without prior notice. All information presented herein is considered to be accurate at the time of production, but no warranty of accuracy is given and no liability in respect of any error or omission is accepted. It should be noted that investment involves risks, the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements, and investors may not get back the full amount invested. Both past performance and yields are not reliable indicators of current and future results.

The views and opinions expressed are not necessarily those of the broker/dealer; or any affiliates. Nothing discussed or suggested should be construed as permission to supersede or circumvent any broker/dealer policies, procedures, rules, and guidelines.

The 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.

Core inflation, as measured by the “Consumer Price Index for All Urban Consumers: All Items Less Food & Energy” is an aggregate of prices paid by urban consumers for a typical basket of goods, that does not include food and energy. Core CPI is widely used by economists because food and energy typically have very volatile prices.

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

Basis points (bps) are measurements used in discussions of interest rates and other percentages in finance. One basis point is equal to 1/100th of 1%, or 0.01%.

The terminal rate is the rate at which the U.S. Federal Reserve stops raising the federal funds rate in an attempt to bring down inflation. The federal funds rate, known as the fed funds rate, is the target interest rate set by the Federal Open Market Committee of the Federal Reserve. The target is the Fed’s suggested rate for commercial banks to borrow and lend their excess reserves to each other overnight.

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.

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

Growth at a reasonable price (GARP) is a stock investment strategy that seeks to combine tenets of both growth and value investing in the evaluation and selection of individual stocks. GARP investors look for companies with consistent earnings growth above broad market levels but try to avoid companies with very high valuations. By trying to avoid the extremes of either growth or value investing, GARP investors often end up focusing on growth-oriented stocks with relatively low price-to-earnings multiples in normal market conditions.

A double bottom pattern is a technical analysis charting pattern that shows a change in trend and a momentum reversal from a prior leading price action. On a chart, it takes the shape of the letter “W,” showing the drop of a stock or index, then a rebound, then another drop to the same or a similar level as the original drop, and finally another rebound.

The Goldman Sachs U.S. Financial Conditions Index is designed to track the weighted average of riskless interest rates, the exchange rate, equity valuations, and credit spreads, with weights that correspond to the direct impact of each variable on gross domestic product. Bond-proxy stocks are stocks that offer relatively more reliable and predictable income that is similar to that offered by bonds.

The U.S. Producer Price Index (PPI), published monthly by the U.S. Bureau of Labor Statistics, measures the average change over time in the selling prices received by domestic producers for their output.

The Japan Balance of Payments Current Account, issued by the Bank of Japan, measures the size of the trade surplus or deficit in goods and services between Japan and the rest of the world and summarizes factors accounting for changes in the balance.

The University of Michigan Index of Consumer Sentiment is based on monthly telephone surveys in which at least 500 consumers in the continental United States are asked 50 questions about what they think now and what their expectations are for their personal finances, business conditions, and buying conditions. Their responses are used to calculate monthly measures of consumer sentiment that can be compared to a base value of 100 set in 1966.

The China Industrial Sector Producer Price Index (PPI) is released monthly by the National Bureau of Statistics of China and reflects the trend and level of prices change when the products are sold for the first time. The survey of industrial producers covers the prices of industrial products in 40 major industrial categories and more than 1,300 basic categories.

The S&P 500 Index measures change in stock market conditions based on the average performance of 500 widely held common stocks. It is a market-weighted index calculated on a total return basis with dividend reinvested. The S&P 500 represents approximately 75% of the investable U.S. equity market.

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.

Frank Russell Company (“Russell”) is the source and owner of the trademarks, service marks and copyrights related to the Russell Indexes. Russell® is a trademark of Frank Russell Company. Neither Russell nor its licensors accept any liability for any errors or omissions in the Russell Indexes and / or Russell ratings or underlying data, and no party may rely on any Russell Indexes and / or Russell ratings and / or underlying data contained in this communication. No further distribution of Russell Data is permitted without Russell’s express written consent. Russell does not promote, sponsor, or endorse the content of this communication.

 

RJIM22-0039 Exp. 2/10/2023


Oct. 3, 2022: Why now is no time to fold

After an ugly week, ugly month, and ugly quarter, some investors are asking whether it even makes sense to remain invested in U.S. equities.

“It certainly does,” said Matt Orton, CFA, Chief Market Strategist at Raymond James Investment Management. “If you’re still invested in the market at this point, why on earth are you going to hit the ‘sell’ button now? You already rode it down 25%. You’re going to get out to save yourself maybe 3 or 4% and risk missing out when the market bounces? All bear markets, all recessions, always come to an end. In every single recession since World War II, except for one, markets were up meaningfully a year after the recession, and many times markets were up during the recession. It’s all about tactically allocating assets to minimize the pain in the meantime.”

Quote
If you’re still invested in the market at this point, why on earth are you going to hit the ‘sell’ button now?

As expected, the S&P 500 Index posted its worst monthly performance this year (-9.34%) during September. In fact, September was the worst month since March 2020 and the terrible price action over the past few weeks has left markets incredibly oversold. Orton noted that just 3% of companies in the S&P 500 are trading above their 50-day daily moving average (DMA), with about the same percentage trading above their 10-day DMA, and about 11% trading above their 200-day DMA. Passive investors are hurting and 60/40 asset allocations experienced one of their steepest historical drawdowns. Seasonality, sentiment, and momentum all point to an approaching inflection point, Orton said, but unfortunately equity markets do not operate in a vacuum. Foreign exchange instability is elevated as interest rates continue to march higher, bond market liquidity is poor, and cross-asset volatility is high: all headwinds for risk assets. A wide variety of U.S. Federal Reserve (Fed) speakers doubled down on recent hawkish commentary, increasing the risks that we’re getting closer to the point where the wheels start coming off the system. We also have nearly two weeks before earnings season kicks off in earnest, providing an echo chamber for the bears until we can really get a clear picture of whether expectations remain too high. Orton said he still believes we need to proceed with extreme caution and any rally off these oversold conditions should be treated skeptically.

Percentage of S&P 500 above or below the 200-day
daily moving average (DMA)

Percentage of S&P 500 above or below the 200-day daily moving average (DMA)

Source: Bloomberg, as of 9/30/22

While Orton is not constructive on the market in the short term, he said he continues to believe that we’re closer to end of the downside than the beginning. The S&P 500 is down more than 25% since its peak on Jan. 3. There are many out there saying this correction isn’t enough — that we need to have a 35% to 50% correction before we’re done — but he said he believes that minimizes the damage that’s already done and assumes we have a deep earnings recession. We’re anchored to the most recent bear markets where COVID shut down the entire economy or the Global Financial Crisis where the entire global financial system cratered. But he said those are not the norm with respect to bear markets or recessions. A 25% drawdown is a BIG deal, he said. More than $10 trillion of wealth has been wiped out so far this year as investors react to a slowing economy and rapidly tightening monetary policy. Orton also noted that the median recession decline for the S&P 500 is 24%, and we’re there. Unfortunately, he said, the Fed has stopped depending on the data to guide its policy and is driving the economy into recession, but Orton said he believes it will be a real, not a nominal recession — meaning that nominal growth will keep expanding (and a deep drop in earnings is less likely). Once the Fed blinks, we’ll finally be able to come out of the storm, he said.

Daily swings have picked up significantly this year, heightening investor awareness to volatility. We’ve had 48 days since the start of 2020 where the S&P 500 has declined more than 2%, and 18 of those days have been in 2022. So nearly 40% of these large moves have occurred this year. Orton said it’s no surprise that investor sentiment is so poor right now. For two weeks in a row, the American Association of Individual Investors Sentiment Survey’s index of bearish sentiment registered a reading of 60%. This is the first time in the index’s history (since 1987) that we’ve had two consecutive weeks of 60% bears. It’s also one of the highest bearish readings on record, higher than during the COVID market crash. This is not a reason in and of itself for the market to reverse, Orton said, but it speaks to the extreme oversold condition and the fact that we’re probably closer to seeing a light at the end of the tunnel.

% of bears in the American Association of
Individual Investors Sentiment Survey

% of bears in the American Association of Individual Investors Sentiment Survey

Source: Bloomberg, American Association of Individual Investors, as of 9/30/22

Where to go in the current market

Orton said he was asked an interesting and important question a few weeks ago that he believes will sound very familiar to most investors: With all the talk about a looming recession, rate hikes, impending job cuts, and more, why put money to work in this environment? Why not throw in the towel and sit on the sidelines to avoid further losses? Unfortunately, he said he believes many investors have thrown in the towel already. But there is no worse time to hit the “sell” button than right now. Market timing is impossible, he said, and missing the inflection points meaningfully erodes long-term performance. The stock market is also forward-looking and rarely, if ever, aligns with the actual bottom in economic growth. Long-term investors historically have been rewarded for staying the course.

There are also places to hide in the current market. Valuations, dividends, and profitability all have worked quite well this year, and leaning into these factors within a portfolio can help drive meaningful outperformance, he said. You can see in the chart below the difference between factor performance. There has also been massive sector dispersion year to date, with a 70.14-percentage point difference between the best- and worst-performing sectors (energy +30.71% versus communication services -39.43%). More defensive sectors like consumer staples and healthcare have outperformed the S&P 500 by more than 10% year to date. What’s critical, Orton said, is being tactical within your portfolios.

Orton said he can certainly appreciate that the ride lower is very uncomfortable, particularly following more than a decade of meaningful gains to the equity market. In fact, the worst year for the S&P 500 since the Global Financial Crisis was in 2018 after the market melted down on hawkish Fed rhetoric (sounds familiar), and the S&P 500 was only down -6.24% on the year. We’ve had 10 years of double digit positive returns since 2008, four of which were over 20%. So the discomfort we’re feeling this year is made even more painful given this backdrop. But Orton said Warren Buffet is right in saying that investors make their money in bear markets. There’s still some weakness ahead, but it’s time to start thinking about leaning into the weakness. Orton said he hasn’t put any of his own money in recently, but he is very close. Valuations are much more attractive, with the S&P 500 forward price-to-earnings ratio at 16x and the equal-weighted S&P 500 at 14x.

“Anyone who is saying that stocks are still way too expensive, I don’t agree,” Orton said. “There’s still some expensive stocks in the market where you need to have valuation de-ratings, but overall the market looks a lot more attractive today than it did even three months ago, especially six or eight months ago. We are seeing really good long-term opportunities.

“It’s a great time to be active and to start looking for opportunities over the longer term,” he said, “because as soon as there’s a whiff of the Fed loosening up or any sort of pivot, I believe the market is going to move higher, and it’s better not to be caught out of the market because of wanting to save 2 or 3% on the downside.”

S&P 500 returns before, during, and after recessions

Recession 6-months prior During Recession One Year After Three Years After Five Years After 10 Years After
Nov 1948 - Oct 1949 9.83% 4.12% 31.48% 87.98% 171.33% 497.04%
July 1953 - May 1957 -6.46% 27.57% 35.92% 83.74% 144.81% 294.38%
Aug 1957 - April 1958 9.28% -6.51% 37.31% 66.35% 89.72% 211.33%
April 1960 - Feb 1961 -1.04% 18.40% 13.61% 35.06% 68.41% 111.33%
Dec 1969 - Nov 1970 -7.78% -3.45% 11.24% 20.63% 25.16% 145.87%
Nov 1973 - Mar 1975 2.86% -17.90% 28.32% 21.99% 55.33% 252.40%
Jan 1980 - July 1980 7.67% 16.14% 12.92% 55.89% 100.89% 345.64%
July 1981 - Nov 1982 -1.02% 14.66% 25.40% 67.24% 103.23% 350.51%
July 1990 - Mar 1991 3.09% 7.64% 11.04% 29.84% 98.21% 284.66%
Mar 2001 - Nov 2001 -17.84% -7.18% -16.51% 8.44% 34.33% 33.16%
Dec 2007 - June 2009 -2.33% -35.46% 14.43% 57.70% 136.98% 294.17%
Mar 2020 - Apr 2020 1.92% -1.12% 45.98% ? ? ?
Source: Bloomberg, as of 9/30/22

 

Third-quarter review

The surge in Treasury yields weighed heavily on sentiment overall, with September the third time this year that the S&P 500 fell by 7% or more. Longer-dated yields increased meaningfully in September, which weighed on bond-proxy stocks like utilities and real estate, both of which underperformed the market in the third quarter. The 10-year yield increased by 88 basis points (bps) during the quarter (that’s a 30.5% increase) to 3.7654% and the 30-year yield increased 54 bps (or 17%) to 3.7220%. As a result of these moves, coupled with a reversal in the sharp underperformance of growth following the June lows, value indices slightly underperformed during the quarter. However, value continues to meaningfully outperform year to date across all market capitalizations.

Small caps also outperformed for the quarter, rallying strongly off the June lows and holding up better than expected on the way back down. While there are risks to small underperforming should the market move lower, Orton said there are a variety of reasons that small caps remain his favored way to position for an ultimate bottoming process. Negative flows as well as compelling valuations, a shift to services and better U.S. capital expenditures and reshoring should all provide tailwinds when the market finally bottoms, he said. It’s still early and for now he said he continues to favor maintaining a core defensive bias by leaning into quality: dividend growth, profitability, growth at a reasonable price (GARP), and healthcare. For global portfolios, Orton said he would avoid Europe and instead lean into Latin America and India to pick up selective emerging markets exposure.

What to watch

There is a full roster of Fed speakers this week, although the expectation is that the central bankers will reiterate the goal not to pull back prematurely on restrictive monetary policy. Orton said Friday’s September jobs report will be very important to setting the tone of the market until earnings kick off at the end of next week.

This week's data releases

Monday U.S. light vehicle sales and Institute for Supply Management manufacturing Purchasing Managers’ Index; Bank of Japan Short-Term Economic Survey of Prices in Japan (Tankan)
Tuesday U.S. factory orders and durable goods; Eurozone industrial producer price index; Australia central bank interest rate decision; Japan Tokyo Consumer Price Index (CPI)
Wednesday Industrial output reports from France and Brazil
Thursday U.S. initial jobless claims; European Central Bank monetary-policy account; Eurozone retail sales; Germany factory orders; Spain industrial output
Friday U.S. unemployment and nonfarm payrolls; Canada unemployment; Germany industrial output; Mexico CPI; Russia CPI; Japan household spending

 

Risk Information:
Investing involves risk, including risk of loss.

Diversification does not ensure a profit or guarantee against loss.

Disclosures:
Index or benchmark performance presented in this document does not reflect the deduction of advisory fees, transaction charges, or other expenses, which would reduce performance. Indexes are unmanaged. It is not possible to invest directly in an index. Any investor who attempts to mimic the performance of an index would incur fees and expenses that would reduce return.

This document is a general communication being provided for informational purposes only. It is educational in nature and not designed to be taken as advice or a recommendation for any specific investment product, strategy, plan feature, or other purpose in any jurisdiction, nor is it a commitment from Carillon Tower Advisers or any of its affiliates to participate in any of the transactions mentioned herein. Any examples used are generic, hypothetical, and for illustration purposes only. This material does not contain sufficient information to support an investment decision, and you should not rely on it in evaluating the merits of investing in any securities or products. In addition, users should make an independent assessment of the legal, regulatory, tax, credit, and accounting implications and make their own determinations together with their own professionals in those fields. Any forecasts, figures, opinions, or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions, and are subject to change without prior notice. All information presented herein is considered to be accurate at the time of production, but no warranty of accuracy is given and no liability in respect of any error or omission is accepted. It should be noted that investment involves risks, the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements, and investors may not get back the full amount invested. Both past performance and yields are not reliable indicators of current and future results.

The views and opinions expressed are not necessarily those of the broker/dealer; or any affiliates. Nothing discussed or suggested should be construed as permission to supersede or circumvent any broker/dealer policies, procedures, rules, and guidelines.

Seasonality refers to predictable changes that occur over a one-year period in a business, market, market sector, or economy based on the season, including calendar or commercial seasons.

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.

Nominal values refer to the current price without taking inflation or other factors into account as opposed to real values, which include adjustments changes in general price levels over time.

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

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

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

Growth investing is a stock-buying strategy that focuses on companies expected to grow at an above-average rate compared to their industry or the market.

Value investing is an investment strategy that involves picking stocks that appear to be trading for less than their intrinsic or book value.

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.

Price-to-earnings (P/E) ratios measure a company’s current share price relative to its earnings per share. The ratio is used to help assess a company’s value and is sometimes referred to as the price multiple or earnings multiple.

Forward price-to-earnings (forward P/E) is a version of the ratio of price to earnings that uses forecast earnings for the P/E calculation. The earnings used in this ratio are an estimate and therefore are not as reliable as current or historical earnings data.

Bond-proxy stocks are stocks that offer relatively more reliable and predictable income that is similar to that offered by bonds.

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%.

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

Growth at a reasonable price (GARP) is a stock investment strategy that seeks to combine tenets of both growth and value investing in the evaluation and selection of individualstocks. GARP investors look for companies with consistent earnings growth above broad market levels but try to avoid companies with very high valuations. By trying to avoid the extremes of either growth or value investing, GARP investors often end up focusing on growth-oriented stocks with relatively low price-to-earnings multiples in normal market conditions.

De-rating is a term used to describe what happens as investors become less willing to pay for a company’s shares of stock and its future earnings, often because a metric such as the price-to-earnings ratio (P/E) has gone down or contracted, suggesting that the company faces the prospect of lower earnings in the future.

The Purchasing Managers’ Index (PMI) measures the prevailing direction of economic trends in the manufacturing sector. It is created by the Institute for Supply Management (ISM), and consists of an index summarizing whether market conditions as reported in a monthly survey of supply chain managers are expanding, staying the same, or contracting.

The Short-Term Economic Survey of Enterprises in Japan, also known as the Tankan, is released quarterly by the Bank of Japan and reflects changes in business conditions; supply and demand conditions, inventories, and prices; sales and current profits; fixed investment; employment; corporate finance; inflation outlooks; and overseas business activities as reported by small, medium and large businesses.

The Eurozone industrial producer price index (PPI) tracks transaction prices for the monthly industrial output of various economic activities in the European Union. The index measures price changes from the seller’s perspective and serves as an early indicator of inflationary pressures in the economy and records the evolution of prices over longer periods of time.

The Tokyo Consumer Price Index, excluding fresh food, is released by the Statistics Bureau of Japan and tracks a range of consumer prices in the Tokyo metropolis.

European Central Bank monetary policy accounts cover the monetary policy meetings of the bank’s Governing Council, which are normally held every six weeks. The accounts include a review of financial, economic, and monetary developments and policy options as well as a summary of the discussions and decisions. The accounts typically are published four weeks after the meetings.

The Mexico Consumer Price Index, released monthly by the Instituto Nacional de Estadística Geografia e Informática (INEGI), tracks prices paid by consumers for a range of goods and includes core and non-core components. Non-core components are subject to higher price variability as in some cases they can be influenced by factors such as international references for certain livestock products, government administrative decisions on vehicles, property, or gasoline, and weather conditions affecting agriculture.

The Russian Consumer Price Index, according to the Organization for Economic Co-operation and Development, measures inflation as defined by the change in the prices of a basket of goods and services that are typically purchased by specific groups of households. Inflation is measured in terms of the annual growth rate and in index, 2015 base year with a breakdown for food, energy and total excluding food and energy.

The S&P 500 Index measures change in stock market conditions based on the average performance of 500 widely held common stocks. It is a market-weighted index calculated on a total return basis with dividend reinvested. The S&P 500 represents approximately 75% of the investable U.S. equity market.

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.

 

RJIM22-0034 Exp. 2/3/2023