“
”Markets in Focus
Timely analysis of market moves and sectors of opportunity
It seems like U.S. Federal Reserve (Fed) Chair Jerome Powell’s consistent message for the past 18 months – that rates will remain higher for longer – might finally be sinking in.
“While ‘transitory’ was a big miss for the Fed, I’ve been surprised by the degree of skepticism and animosity that many market participants have had toward the Fed over the past year,” said Matt Orton, CFA, Chief Market Strategist at Raymond James Investment Management. “It has contributed to interest rate pricing that has consistently needed to adjust to the Fed, and not the other way around.”
The September Federal Open Market Committee meeting didn’t have many surprises for investors, but Orton said the big moves in interest rates and higher-duration equities were a reminder of just how wrong many investors have been this year. Orton explained that the market is undergoing a process of normalization that better reflects the reality of an economy that’s “good enough” for the Fed to keep rates in restrictive territory, fighting some of the persistently sticky components of core inflation.
“While that might lead to some pain in the short term during the weakest seasonal stretch of the year,” he said, “I believe this creates some exciting opportunities from an asset allocation perspective.”
Real 10-year interest rates are above 2%, and Orton said the need to be selective and to lean into quality across the market will be increasingly important. “The continued lack of market breadth coupled with weak price action on Friday point to an increased likelihood of choppiness this week,” he said. He recommended that investors use downward movements opportunistically to capture the potential for long-term growth.
Orton said that the Federal Open Market Committee’s messaging was marginally hawkish while painting an optimistic picture of the Fed’s ability to navigate a soft landing. Powell again underscored that low, stable inflation was the bedrock of a sound economy and that policymakers would do whatever is necessary to achieve 2% inflation – including potentially hiking rates further and cutting more slowly in 2024.
Orton said his base case remains that the Fed already reached its terminal federal fund rate of 5.50% in July. Economic growth is slowing, and in Orton’s view, a continued deceleration in inflationary pressures will give policymakers, who are clearly striving for a soft landing, the incentive to refrain from hiking rates further.
However, Orton also noted that labor and housing are contributing to some stickiness in core inflation. Layoffs are at their lowest level since January, because companies seem reluctant to fire workers in a still-tight labor market. Home prices, as measured by the S&P CoreLogic Case-Shiller Home Price Index Series, were only down slightly year over year, and the July data is due this week. Orton said that although high rates are likely to repress prices, the current levels of housing inventories – around three months’ supply – have historically been associated with double-digit price gains.
Following a massive change in the yield curve, steepening through Thursday’s session with 10-year yields crossing 4.5%, Orton said that he wasn’t surprised to see weakness in equities. Last week saw the first S&P 500 Index pullback of more than 5% since the collapse of Silicon Valley Bank in early March: The index is down -5.9% since its high on July 31, largely due to weakness in mega-cap stocks and semiconductors more broadly.
“The fact that the broader market of stocks hasn’t been able to outperform despite meaningful weakness at the top is concerning,” Orton said. The lack of market breadth is particularly stark given the jump in longer-dated rates – the 10-year Treasury bond yield is up nearly 50 basis points since the market high on July 31 – coupled with the fact that economic data continues to point to a more benign growth backdrop. Orton said that regardless of the short-term price action, the downward movements from this normalization process are presenting opportunities across the market.
Many investors have elevated cash positions, and Orton advocates for being ready to put some capital to work and take “advantage of the first real downside we’ve seen in over six months.”
There's still plenty of room for the market of stocks to catch-up:
S&P 500 Index year-to-date performance by sector
Source: Bloomberg, as of 9/9/22
Orton made it clear that higher yielding, lower risk assets are a viable alternative for investors who have been “hiding out” in money market funds and short-dated Treasuries. However, he said that there are attractive opportunities across many other parts of the market.
“With rates sitting at the highest levels over the past decade and a number of near-term speedbumps for the economy,” Orton said, referencing the United Auto Workers strike, the resumption of student loan repayments, and a potential government shutdown, “I think there are factors that can support a more bullish bias.” He said that he preferred the more “Fed sensitive” parts of the yield curve given greater cyclical sensitivity. The supply of bonds with long maturities also is set to reach all-time highs further out on the curve.
The most hawkish takeaway from last week’s Federal Open Market Committee meeting may have been the shift in real rate projections: Using policymakers’ median forecasts for the Personal Consumption Expenditures (PCE) Price Index and fed funds rate, the real rate would rise from 1.9% at the end of 2023 to 2.5% at the end of next year. “I think this underscores the importance of quality across all investments going forward,” Orton said.
Given the elevated degree of macroeconomic uncertainty, Orton said that it makes sense to be looking for opportunities tied to large secular growth cycles that go beyond the macro noise. These include artificial intelligence, geopolitics, energy/low carbon transition, aging populations, and the changing dynamics in finance. He provided additional details:
Selectivity in Emerging Markets and Japan. Orton emphasized that quality should permeate any allocation changes, and there are plenty of high-quality companies in these sectors. “I have favored energy for the past few months, and I still think the sector looks appealing,” Orton said. He explained that valuations are attractive, the sector is positively correlated to real rates, and earnings could accelerate now that we’re past difficult comparisons to last year and with oil prices resetting higher. He was optimistic about oil prices remaining supported.
Within healthcare, Orton said that there are underappreciated earnings in areas like providers and services while equipment makers are likely to keep marching higher. “Long term, the impact of an aging population and the need for increased efficiency supports many companies in the healthcare technology space, as well as select biopharmaceuticals,” he said.
Although industrials have underperformed lately, Orton sees plenty of high-quality companies with a premium return on equity and attractive valuations that stand to benefit from a structural pickup in capital expenditures. He said he favors rotation out of the major U.S. air carriers and into areas that are leveraged to infrastructure spending.
Selectivity in Emerging Markets and Japan. Orton said, “I have long favored India, and it’s worth noting that India is trading at all-time highs while China is close to its October lows.” He said that he would continue leaning into India and away from China. “Asia ex-China could also post decent economic growth, given its relatively benign inflation outlook, helping to create a less restrictive policy backdrop,” Orton said. In addition, he noted that Latin America could benefit from a continued loosening cycle.
“Within developed markets, Japan can continue to build on its breakout,” Orton said. Japan lifted all pandemic restrictions only early this year, and in Orton’s opinion, Japan’s modestly paced economic recovery looks set to continue. “The main drivers of pent-up demand and inbound tourism could be helped by terms of trade and still-accommodative fiscal policy,” he said. Orton also pointed out that the rally in Japan is being driven by value, which stands in sharp contrast to the United States, where the rally has been all about growth.
Beware the value rally. Although value has been outperforming in September, Orton said that he wouldn’t read too much into it. “It’s really the result of underperformance in the mega-caps and information technology,” Orton said, “not green shoots in key value sectors like financials.” While there might be some opportunities in select capital markets financials, Orton said that he expects to find better opportunities elsewhere, and value will struggle without financials.
“A correction is healthy,” Orton said. “It’s also incredibly rare for the market to overcorrect after strong performance through July.” He pointed out that the S&P 500 Index has finished the first seven months up 10% or more 33 times since 1928, and in only three of those years were returns negative over the next five months. “Over the same period, the S&P 500 has only finished the year down once after being up 10% or more through July’s end,” he said.
Source: Bloomberg, as of 7/31/2023
With a government shutdown looming on Oct. 1, this week could potentially be the last one for a little while with a full set of scheduled government data releases. Remarks from the Fed and inflation trends will be front and center this week. The U.S. PCE Price Index and Eurostat’s flash estimate inflation for the euro area are due to be released. Other economic reports include durable goods, consumer confidence, new home sales, and the advanced goods trade balance. Fed Chair Jerome Powell will host a town hall with educators, and Federal Reserve Bank of New York President John Williams will speak on Friday. Regional Fed presidents Neel Kashkari (Minneapolis), Austan Goolsbee (Chicago), and Thomas Barkin (Richmond) also will speak during the week. Last week’s Fed speakers’ remarks were consistent with the latest Federal Open Market Committee meeting communication, which had a hawkish tilt on Thursday.
Risk Information:
Investing involves risk, including risk of loss.
Diversification does not ensure a profit or guarantee against loss.
Disclosures:
Index or benchmark performance presented in this document does not reflect the deduction of advisory fees, transaction charges, or other expenses, which would reduce performance. Indexes are unmanaged. It is not possible to invest directly in an index. Any investor who attempts to mimic the performance of an index would incur fees and expenses that would reduce return.
This document is a general communication being provided for informational purposes only. It is educational in nature and not designed to be taken as advice or a recommendation for any specific investment product, strategy, plan feature, or other purpose in any jurisdiction, nor is it a commitment from Carillon Tower Advisers or any of its affiliates to participate in any of the transactions mentioned herein. Any examples used are generic, hypothetical, and for illustration purposes only. This material does not contain sufficient information to support an investment decision, and you should not rely on it in evaluating the merits of investing in any securities or products. In addition, users should make an independent assessment of the legal, regulatory, tax, credit, and accounting implications and make their own determinations together with their own professionals in those fields. Any forecasts, figures, opinions, or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions, and are subject to change without prior notice. All information presented herein is considered to be accurate at the time of production, but no warranty of accuracy is given and no liability in respect of any error or omission is accepted. It should be noted that investment involves risks, the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements, and investors may not get back the full amount invested. Both past performance and yields are not reliable indicators of current and future results.
The views and opinions expressed are not necessarily those of the broker/dealer; or any affiliates. Nothing discussed or suggested should be construed as permission to supersede or circumvent any broker/dealer policies, procedures, rules, and guidelines.
Definitions:
Basis points (bps) are measurements used in discussions of interest rates and other percentages in finance. One basis point is equal to 1/100th of 1%, or 0.01%.
Breadth describes the relationship between the median and the mean of a market index. When a few data outliers result in a mean that is substantially larger (or smaller) than the median of the full data set, then the performance of the entire index is being driven by a “narrow” selection of companies. An index supported by “broad” market movements is one where the median is closer to the mean.
Capital expenditures, or capex, are monies used by a company to buy, improve, or maintain physical assets such as real estate, facilities, technology, or equipment, and may include
new projects or investments.
Comps, short for comparables, carries different meanings depending on the industry and context, but generally entails a comparison of financial metrics — often for two separate time periods — or other factors to quantify performance or determine valuation.
A market correction is considered to be a decline of 10% or more from previously observed highs.
Correlation is a statistic that measures the degree to which two securities move in relation to each other.
Cyclical stocks have prices influenced by macroeconomic changes in the economy and are known for following the economy as it cycles through expansion, peak, recession, and recovery.
The federal funds rate, known as the fed funds rate, is the target interest rate set by the Federal Open Market Committee of the U.S. Federal Reserve. The target is the Fed’s suggested rate for commercial banks to borrow and lend their excess reserves to each other overnight.
The Federal Open Market Committee (FOMC) consists of 12 members: the seven members of the Board of Governors of the Federal Reserve System; the president of the Federal Reserve Bank of New York; and four of the remaining 11 Reserve Bank presidents, who serve one-year terms on a rotating basis. The FOMC holds eight regularly scheduled meetings per year at which it reviews economic and financial conditions, determines the appropriate stance of monetary policy, and assesses the risks to its long-run goals of price stability and sustainable economic growth. The FOMC observes a blackout period, which begins at midnight of the second Saturday before each meeting. During the blackout periods, committee members do not make public comments about macroeconomic developments or monetary policy issues.
Flash estimate inflation for the euro area, issued at the end of each reference month, measures the change of the price level of consumer goods and services between the current month and the same month of the previous year. It is calculated by Eurostat, the statistical office of the European Union. The euro area consists of Belgium, Germany, Estonia, Ireland, Greece, Spain, France, Croatia, Italy, Cyprus, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Austria, Portugal, Slovenia, Slovakia and Finland.
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.
“Green shoots” is a term used to describe positive data or signs of economic growth.
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.
Market of stocks is a term market participants use when referring to the diversity of technical or other characteristics that may exist at any given time within the overall stock market. For example, the stock market as a whole may rise or fall on the fortunes of a small number of very large and thus very influential stocks. But within the broader market of stocks, there can be many companies with performance, risk, or opportunities that vary significantly from what market participants may find at the index level.
Mega-cap stocks are the largest publicly traded companies as measured by market capitalization. Generally, this refers to companies with market capitalizations over $200 billion.
The Personal Consumption Expenditures (PCE) Price Index, excluding food and energy, known as the core PCE index, is a measure of the prices that people living in the United States, or those buying on their behalf, pay for goods and services. The PCE price index, released monthly by the U.S. Department of Commerce Bureau of Economic Analysis, is known for capturing inflation or deflation across a wide range of consumer expenses and reflecting changes in consumer behavior.
Real rates, or real rates of return, are the annual percentages of profits earned on investments, adjusted for taxes and inflation. Real returns are lower than nominal returns, which do not subtract taxes and inflation.
Return on equity (ROE) is a measure of financial performance calculated by dividing net income by shareholders’ equity.
The S&P CoreLogic Case-Shiller Home Price Index Series seeks to measure changes in the total value of all existing single-family housing stock.
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.
Secular trends are characterized by consistent gains over the long term, regardless of other market trends.
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.
A yield curve is a line that plots yields (interest rates) of bonds having equal credit quality but differing maturity dates. The slope of the yield curve gives an idea of future interest rate changes and economic activity.
Indices:
The S&P 500 Index measures change in stock market conditions based on the average performance of 500 widely held common stocks. It is a market-weighted index calculated on a total return basis with dividend reinvested. The S&P 500 represents approximately 80% of the investable U.S. equity market.
The S&P 500® Equal Weight Index is the equal-weight version of the S&P 500. It includes the same constituents as the capitalization-weighted S&P 500, but each company in the S&P 500 Equal Weight Index is allocated a fixed weight, or 0.2% of the index total at each quarterly rebalance.
The Nasdaq Composite Index is the market capitalization-weighted index of over 2,500 common equities listed on the Nasdaq stock exchange.
The Russell 2000® Index measures the performance of the 2,000 smallest companies in the Russell 3000® Index, which represents approximately 7% of the total market capitalization of the Russell 3000® Index.
London Stock Exchange Group plc and its group undertakings (collectively, the “LSE Group”). © LSE Group 2023. FTSE Russell is a trading name of certain of the LSE Group companies. Russell® is a trade mark of the relevant LSE Group companies and is used by any other LSE Group company under license. All rights in the FTSE Russell indexes or data vest in the relevant LSE Group company which owns the index or the data. Neither LSE Group nor its licensors accept any liability for any errors or omissions in the indexes or data and no party may rely on any indexes or data contained in this communication. No further distribution of data from the LSE Group is permitted without the relevant LSE Group company’s express written consent. The LSE Group does not promote, sponsor, or endorse the content of this communication.
M-429955 Exp. 1/25/2024
The sideways price action so far in September has frustrated both bulls and bears, with no discernable price trends emerging in either direction.
“The positive is that as the market churns, there are a lot of opportunities,” said Matt Orton, CFA, Chief Market Strategist at Raymond James Investment Management. “I believe it’s also marginally encouraging that we haven’t seen more consolidation across equities, particularly in the higher-duration parts of the market, given that longer-dated interest rates have continued to push higher.”
Meanwhile, investors have increasingly started to accept that rates will remain higher for longer, with a 57% probability of a lower Fed target rate by June 2024, down from 81% one month ago. There’s still room to go given the stickiness of inflation and the resiliency seen in recent economic data, which Orton said could add marginal pressure to sectors that have been more challenged lately like information technology. The market will watch a series of planned central bank meetings, and while the Federal Open Market Committee meeting could provide a potential catalyst in either direction, Orton said he doesn’t expect there to be too many implications.
“A pause is essentially a done deal and the resilient tone of recent activity data will likely keep open speculation about another move in November,” he said. Further, last week’s Consumer Price Index data doesn’t do anything to change what we already have heard from a wave of U.S. Federal Reserve (Fed) speakers before the blackout period. “While the market may remain stuck in the mud for a little while longer,” he said, “this sideways movement provides a healthy reset of sentiment and momentum upon which it can move higher should we start to get some relief on interest rates.”
Also nearing is the third-quarter earnings season, with analyst expectations returning to positive growth. For now, investors should consider being tactical and leveraging downside opportunistically, Orton said. Fortunately (or unfortunately), we haven’t had much downside to work with — the S&P 500 Index is down only 3% from its peak on July 31 — but specific parts of the market like small caps have been hit harder. Those who used strong gains over the summer to take profits on their big winners have been rewarded. Orton said he continues to advocate doing this selectively and leaning into quality and growth at a reasonable price (GARP).
“With Fed Chair Jerome Powell likely to emphasize that rates will remain at restrictive levels for longer, this could be a key to success,” he said.
Seasonals aside, part of the reason equities remain stuck comes down to a number of conflicting factors that investors are contending with now. The double-edged sword of stronger economic data and a tighter labor market keeps alive the potential for a soft landing and an earnings recovery, but it also contributes to the stickiness of inflation and keeps the Fed biased to leave rates higher for longer. The impending resumption of student loan repayments adds to a potentially softening consumer outlook, and it’s also hard to ignore the negative impulse of higher bond yields and the slowdown in Europe and China. Perhaps these conflicts are contributing to the lack of breadth across the market. Orton noted that not much has worked this month except energy and utilities, the latter jumping for technical reasons after retesting its October lows. The broader market of stocks just can’t seem to break out from the capweighted stock market despite the underperformance of tech, offering another reason why there’s no need to chase the market higher. He also highlighted that high-yield credit spreads remain very close to 16-month lows while 10-year real yields are still sitting at 2%, only marginally below the 14-year high reached last month. This increases the importance of selectivity and leaning into quality, Orton said.
From an asset allocation perspective, Orton continues to recommend remaining overweight to equities.
Inflation continues to move lower, but sticky components remain
Consumer Price Index (CPI) as of 8/31/23
Source: Bloomberg, as of 9/15/2023
“Just because the overall market doesn’t look terribly interesting right now doesn’t mean there aren’t some very interesting opportunities,” he said. With student loan repayments resuming and the consumer already showing some signs of exhaustion, he said it could make sense to take profits on winners this year like airlines, hotels, restaurants and leisure, and homebuilders, while rotating into energy, select parts of healthcare, and some capital markets companies within financials. Overseas, he said India remains highly attractive and Japan is bullish and building on a breakout. Interestingly, he said, the rally in Japan is being driven by value, which stands in sharp contrast to the United States, where the rally has been all about growth. More particularly, Orton suggests thinking about:
Rotation opportunities in energy, industrials, and healthcare. Quality should permeate any allocation changes that are made, he said, and there are plenty of high-quality companies in these sectors. Orton has favored energy for the past few months and he said he still finds the sector appealing. Valuations are attractive, earnings should accelerate now that we’re past difficult comparisons to a year ago, and with oil prices resetting higher, the sector is positively correlated to real rates. Within healthcare, he said there are underappreciated earnings in areas like providers and services while equipment makers are likely to keep marching higher. Industrials have underperformed lately, and Orton said he favors rotating out of the major U.S. air carriers and into areas that are leveraged to infrastructure spending.
Being selective in emerging markets and Japan. Orton has long favored India and he noted that India is trading at all-time highs while China is close to its October lows. He said he expects this dispersion to remain in place and thus would continue leaning into India and away from China. He said Asia ex-China also should be able to post decent economic growth given its relatively benign inflation outlook, helping to create a less restrictive policy backdrop. Similarly, he said Latin America should benefit from a continued loosening cycle. Within developed markets, Japan can continue to build on its breakout. Having lifted all pandemic restrictions only early this year, Japan’s modestly paced economic recovery looks set to continue, Orton said. The main drivers of pent-up demand and inbound tourism should be helped by terms of trade and still-accommodative fiscal policy.
Leveraging recent downside in small caps. Small caps just can’t catch a break and last week was another rough one, though the Russell 2000® Index managed to outperform the Nasdaq Composite Index. Valuations relative to large caps are back to the lowest levels since early 2002. The march higher in rates hasn’t helped, but Orton said any clarity around the economic outlook and the ending of the rate hike cycle could be a catalyst to see money flow to the space. Earnings season also provides a long-awaited opportunity for small caps to post earnings per share growth that bests large. “Tread carefully right now since the charts are ugly,” he said, “but I do believe investors willing to step in could be rewarded long-term.”
Energy has been about the only thing working:
S&P 500 performance by sector since July 31
Source: Bloomberg, as of 9/8/2023
Retail sales were stronger than expected in data released Thursday, with headline sales rising 0.6% month over month (m/m) after a 0.5% increase in July, while the control group ticked up 0.1% m/m after a 0.7% gain the prior month. The data still points to strong consumer spending in the current quarter: Retail sales are tracking 4.4% quarter over quarter on a seasonally adjusted annual rate, up from 0.4% in the second quarter, and control group sales rose from 2.4% in the second quarter to 4.8% (all in nominal terms). However, downward revisions to June and July were enough to take some steam out of the Federal Reserve Bank of Atlanta’s estimate for third-quarter gross domestic product, which is now a seasonally adjusted annual rate of 4.9%, down from 5.5% prior. Still, Orton said he views this estimate as “way too high.”
He said it’s encouraging to note that real-time credit card data continues to point to strong spending with average credit card utilization rates still 2% to 3% below prepandemic levels. Student loan repayments pose a risk, and he said we’ll need to pay close attention to spending data in October, particularly for lower-income Americans who, up until now, have had the willingness and capacity to keep spending levels elevated.
Central banks will be in focus with the U.S. Federal Reserve, Bank of England, and Bank of Japan all providing updates. Rate decisions are also due from the central banks of Norway, Sweden, and Switzerland. Drama also could rise on the political front with the approach of a potential government shutdown on Oct. 1. Investors will also have to contemplate the impact of the United Auto Workers strike and the ramifications across more than a dozen stocks.
Risk Information:
Investing involves risk, including risk of loss.
Diversification does not ensure a profit or guarantee against loss.
Disclosures:
Index or benchmark performance presented in this document does not reflect the deduction of advisory fees, transaction charges, or other expenses, which would reduce performance. Indexes are unmanaged. It is not possible to invest directly in an index. Any investor who attempts to mimic the performance of an index would incur fees and expenses that would reduce return.
This document is a general communication being provided for informational purposes only. It is educational in nature and not designed to be taken as advice or a recommendation for any specific investment product, strategy, plan feature, or other purpose in any jurisdiction, nor is it a commitment from Carillon Tower Advisers or any of its affiliates to participate in any of the transactions mentioned herein. Any examples used are generic, hypothetical, and for illustration purposes only. This material does not contain sufficient information to support an investment decision, and you should not rely on it in evaluating the merits of investing in any securities or products. In addition, users should make an independent assessment of the legal, regulatory, tax, credit, and accounting implications and make their own determinations together with their own professionals in those fields. Any forecasts, figures, opinions, or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions, and are subject to change without prior notice. All information presented herein is considered to be accurate at the time of production, but no warranty of accuracy is given and no liability in respect of any error or omission is accepted. It should be noted that investment involves risks, the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements, and investors may not get back the full amount invested. Both past performance and yields are not reliable indicators of current and future results.
The views and opinions expressed are not necessarily those of the broker/dealer; or any affiliates. Nothing discussed or suggested should be construed as permission to supersede or circumvent any broker/dealer policies, procedures, rules, and guidelines.
Definitions:
The Federal Open Market Committee (FOMC) blackout begins at midnight of the second Saturday before each FOMC meeting to review economic and financial conditions, determine the appropriate stance of monetary policy, and assess the risks to its long-run goals of price stability and sustainable economic growth. During the blackout periods, committee members do not make public comments about macroeconomic developments or monetary policy issues.
Breadth describes the relationship between the median and the mean of a market index. When a few data outliers result in a mean that is substantially larger (or smaller) than the median of the full data set, then the performance of the entire index is being driven by a “narrow” selection of companies. An index supported by “broad” market movements is one where the median is closer to the mean.
Comps, short for comparables, carries different meanings depending on the industry and context, but generally entails a comparison of financial metrics — often for two separate time periods — or other factors to quantify performance or determine valuation.
Consolidation is a term used in technical analysis to describe when stocks reverse previous gains (or losses) to stay within well-defined trading levels.
The U.S. Consumer Price Index (CPI) measures the change in prices paid by consumers for goods and services. The U.S. Bureau of Labor Statistics bases the index on prices of food, clothing, shelter, fuels, transportation, doctors’ and dentists’ services, drugs, and other goods and services that people buy for day-to-day living. Prices are collected each month in 75 urban areas across the country from about 6,000 households and 22,000 retailers.
The retail control group represents the total industry sales that the U.S. Bureau of Labor Statistics uses to prepare the estimates of the Personal Consumption Expenditures Price Index for most goods. Those sales include total retail trade, less automobile dealers, building material and garden equipment and supplies dealers, gasoline stations, office supply and stationery stores, mobile home dealers, tobacco stores, and gasoline sales at warehouse clubs, supercenters, and grocery stores, except for convenience stores.
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. Headline CPI inflation includes food and energy prices.
Correlation is a statistic that measures the degree to which two securities move in relation to each other.
A credit spread is the difference in yield between a U.S. Treasury bond and another debt security with the same maturity but different credit quality. Also referred to as “bond spreads” or “default spreads,” credit spreads are measured in basis points, with a 1% difference in yield equaling a spread of 100 basis points. Credit spreads reflect the risk of the debt security being compared with the Treasury bond, which is considered to be risk-free. Higher quality securities have a lower chance of the issuer defaulting. Lower quality securities have a higher chance of the issuer defaulting.
Dispersion refers to the range of outcomes in different areas of a financial market or to the potential outcomes of investments based on historical volatility or returns.
Equity duration is the cash-flow weighted average time at which investors can expect to receive the cash flows from their investment in a company’s stock. Long-duration stocks include fast-growing technology companies, including those that may not pay any dividends in their early years, while short-duration stocks tend to be more mature companies with higher ratios to dividend to price.
The federal funds rate, known as the fed funds rate, is the target interest rate set by the Federal Open Market Committee of the U.S. Federal Reserve. The target is the Fed’s suggested rate for commercial banks to borrow and lend their excess reserves to each other overnight.
Fund flow is the net of all cash inflows and outflows into and out of a particular financial asset, sector, or index. It typically is measured on a quarterly or monthly basis. Investors and others look at the direction of fund flows for indications about the health of specific securities and sectors or the overall market.
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.
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.
High-yield bonds pay higher interest rates because they have lower credit ratings than investment-grade bonds. High-yield bonds have credit ratings below BBB- from Standard & Poor’s or below Baa3 from Moody’s.
Market capitalization, or market cap, refers to the total dollar market value of a company’s outstanding shares of stock.
Market of stocks refers to the diversity of technical or other characteristics that may exist at any given time within the overall stock market. For example, the stock market as a whole may rise or fall on the fortunes of a small number of very large and thus very influential stocks. But within the broader market of stocks, there can be many companies with performance, risk, or opportunities that vary significantly from what market participants may find at the index level.
Overweight describes a portfolio position in an industry sector or some other category that is greater than the corresponding weight level in a benchmark portfolio.
Nominal measures of economic activity such as price trends or gross domestic product include all economic activity and are often referred to as headline measures. Real measures of economic activity are adjusted for inflation, in some cases by excluding more volatile prices for things like food and fuel.
A real interest rate, also known as a real yield, is an interest rate that has been adjusted to remove the effects of inflation. Once adjusted, it reflects the real cost of funds to a borrower and the real yield to a lender or to an investor. A real interest rate reflects the rate of time preference for current goods over future goods. For an investment, a real interest rate is calculated as the difference between the nominal interest rate, which is not adjusted for inflation, and the inflation rate.
Rotation describes the movement of investments in securities from one industry, sector, factor, or asset class to another as market participants react to or try to anticipate the next stage of the economic cycle.
Seasonal effects refer to predictable changes that occur over a one-year period in a business, market, market sector, or economy based on the season, including calendar or commercial seasons.
A seasonally adjusted annual rate is a rate adjusted to remove seasonal variations in economic or business data such as prices, sales, or employment figures.
Technicals refers to technical indicators of historic market data, including price and volume statistics, to which analysts apply a wide variety of mathematical formulas in their study of larger market patterns.
Value investing is an investment strategy that involves picking stocks that appear to be trading for less than their intrinsic or book value.
Indices:
The S&P 500 Index measures change in stock market conditions based on the average performance of 500 widely held common stocks. It is a market-weighted index calculated on a total return basis with dividend reinvested. The S&P 500 represents approximately 80% of the investable U.S. equity market.
The S&P 500® Equal Weight Index is the equal-weight version of the S&P 500. It includes the same constituents as the capitalization-weighted S&P 500, but each company in the S&P 500 Equal Weight Index is allocated a fixed weight, or 0.2% of the index total at each quarterly rebalance.
The Nasdaq Composite Index is the market capitalization-weighted index of over 2,500 common equities listed on the Nasdaq stock exchange.
The Russell 2000® Index measures the performance of the 2,000 smallest companies in the Russell 3000® Index, which represents approximately 7% of the total market capitalization of the Russell 3000® Index.
London Stock Exchange Group plc and its group undertakings (collectively, the “LSE Group”). © LSE Group 2023. FTSE Russell is a trading name of certain of the LSE Group companies. Russell® is a trade mark of the relevant LSE Group companies and is used by any other LSE Group company under license. All rights in the FTSE Russell indexes or data vest in the relevant LSE Group company which owns the index or the data. Neither LSE Group nor its licensors accept any liability for any errors or omissions in the indexes or data and no party may rely on any indexes or data contained in this communication. No further distribution of data from the LSE Group is permitted without the relevant LSE Group company’s express written consent. The LSE Group does not promote, sponsor, or endorse the content of this communication.
M-427181 Exp. 1/18/2024
Last week was another reminder of the impact that the currently heightened macroeconomic uncertainty can have across asset classes, according to Matt Orton, CFA, Chief Market Strategist for Raymond James Investment Management. The enthusiasm that came in the aftermath of the U.S. Federal Reserve’s (Fed’s) Jackson Hole Economic Symposium collided with the reality that the economic backdrop remains “good enough” and is unlikely to lead to any imminent rate cuts, he said.
“Longer-dated rates jumped higher, and that highlighted that there’s a limit to how much yields can fall in this environment,” he said. “Economic data simply doesn’t justify moving forward or increasing rate-cut pricing at this point.”
As evidence that rates are unlikely to come down anytime soon, Orton pointed to last week’s labor market data. Initial jobless claims fell to their lowest level since February, and the July Job Openings and Labor Turnover Survey (JOLTS) report showed that much of the cooling in the labor market has come from reduced hiring intensity rather than layoffs.
Still, Orton emphasized, “the upside on rates might be capped by continued expectations that the rate-hiking cycle is nearing its end or has ended.” That was the inference he believes can be drawn from comments made by members of the Federal Reserve before they entered the blackout period, when they make no public comments in advance of an upcoming meeting of the Federal Open Market Committee (FOMC).
“It was clear that officials seem content to move carefully,” Orton said. He also noted that the historically seasonal patterns of the stock market are unfavorable, and that could further cloud the near-term outlook. “We’re likely to see more sideways movement in the market as we head into the September FOMC meeting,” he said. He believes that investors may be able to find select opportunities to take advantage of short-term market dips or stocks that seem undervalued, but he cautions investors to avoid the temptation to chase the market higher given the current risks. He also recommends focusing on high-quality stocks and growth stocks in the GARP style (growth at a reasonable price) of investing. As he noted, these stocks have made a comeback over the past few weeks. “If rates remain at more restrictive levels, as I expect, focusing on quality and GARP could be the key to success,” he said.
While economic data in the United States remains fairly resilient, even after the most rapid-rate hiking cycle of the past 40 years, there have been cracks appearing in the economic outlook for the United States, other developed markets, and emerging market economies. While Orton acknowledges the Atlanta Fed GDPNow™, which is an estimate of U.S. gross domestic product (GDP) growth by the Federal Reserve Bank of Atlanta, might say differently, he believes the global economy will have to catch its breath over the next few quarters, and he points to disappointing data already seen in Europe and China as evidence of this.
The impact of monetary tightening is increasingly weighing on demand, in Orton’s view. Further, some of the buffers that have supported economic activity, such as the excess savings households accumulated during the pandemic and fiscal stimulus, are starting to fade. However, these developments don’t necessarily point to recession either, according to Orton. Labor markets are likely to remain resilient, in his view. There has also been evidence of labor hoarding, as companies whose business activity is slowing avoid laying off workers and look to cut costs in other ways. Orton notes that corporate balance sheets also remain robust. That has helped, and could continue to help, prevent a meaningful correction in business activity.
“We also can’t forget about the incredibly elevated level of fiscal spending in the U.S. where much of the allocated money through the IRA [Inflation Reduction Act] and CHIPS [Creating Helpful Incentives to Produce Semiconductors and Science Act] has yet to be deployed,” he said.
Orton believes that many of the Federal Reserve Board members are keenly aware of the opportunity they have to land this economic plane. Federal Reserve Bank of New York President John Williams echoed Fed Governor Christopher Waller’s comments from earlier last week, as both showed little urgency for a rate hike in September. Williams said “policy is in the right place” and that inflation is far too high but running in the right direction. Williams did stress that the Fed’s future decision-making will depend on that data, adding that it is “an open question” as to whether rates are sufficiently restrictive. In the absence of a very negative inflationary surprises this week, Orton believes the Fed could be done with its rate-hiking cycle.
Rates are still high and will likely remain higher for longer
Source: Bloomberg, as of 9/8/2023
The question for investors is where do we go from here. Orton acknowledged that market breadth remains a challenge, and it will be critical for the broader market of stocks to build sustainable upward momentum. More than 20% of the companies in the Russell 3000 Index are trading at a one-month low while the index itself, given that it is market-capitalization weighted, is closer to its one-month high. As further evidence of the recent narrowness of the market, the S&P 500 Equal Weight Index underperformed the traditional, market-cap-weighted S&P 500 Index as well as the Nasdaq Composite Index last week, and the equal weight index is down nearly 200 basis points relative to both over the past month. This occurred over a period when rates jumped higher. Small caps have fared even worse, despite relatively good economic data. However, the trend of higher highs and higher lows for both large and small caps remains in place. The U.S. dollar rally is also quite extended, but if the weakness in the dollar seen last Friday continues, that could provide a ballast for the equity market.
“These conflicting signals are a reminder of why there’s no reason to chase the market higher and why selectivity is so important,” Orton said. He suggested investors may want to take some profits in their biggest winners and lighten up on their lower-quality positions in risk assets. Doing so would provide some capacity for investors to redeploy capital opportunistically in higher-quality pockets of the market. Orton believes there are few key themes for investors to consider in the weeks and months ahead:
Lean into GARP. Quality has continued to perform well and GARP stocks (the growth equities that are priced reasonably) have outperformed the broader market for the past few months. “As we face a very mixed macroeconomic picture, and more investors will be likely to chase performance heading into year-end, I think we can see these recent tailwinds continue,” said Orton. Focusing on energy has been a good tactical call, as it was once again the only sector that worked last week. “I continue to like the sector given that its current earnings are favorably comparable to past earnings, many energy companies have strong balance sheets, their stocks have attractive valuations, and there is a positive correlation between energy companies’ earnings and real [after inflation] interest rates,” he said.
Leverage recent downside in small caps. Orton noted it has been a bumpy ride for small caps over the past month, but key support levels have held up and active managers have outperformed on the downside. In his view, that proves selectivity matters. He doesn’t believe it is time to commit strongly to long positioning, but he noted the recent downturn can be used opportunistically, especially if a reversal of the small caps continues this week. Valuations remain attractive, in Orton’s view, and he believes earnings are bottoming and poised to reaccelerate into fiscal year 2024. The trends of reshoring production capabilities and vendor relationships and the continued increases in capital expenditures by firms could provide tailwinds for small caps.
Selectivity in emerging markets (EM). The performance of the EM complex has been erratic and somewhat difficult to interpret over the past few weeks. Still, the dispersion of returns among different markets has been quite high with some clear winners and losers. Asia EM has seen strong fund inflows recently, and that continued last week. China has been the weakest link, and Orton still suggests that investors should consider avoiding the region. India has held up well on a relative basis, and it remains Orton’s most-favored region. Asia ex-China also has had challenges, given weakness in semiconductors, but there have been encouraging signs for investors as certain sectors and industries in South Korea and Taiwan have held up. From a sector perspective, EM information technology, consumer discretionary, and energy have strong tailwinds that look set to continue.
What is wrong with the markets of stocks since the stock market’s July 31 peak?
Source: Bloomberg, as of 9/8/2023
Inflation data will be in focus with the August Consumer Price Index (CPI) report released on Wednesday. Given that inflation started to moderate in August of last year, the favorable base effects of comparing the latest monthly inflation numbers to their previous year’s levels may begin to reverse. And given that trend and energy price increases, headline inflation, which includes commodities like food and energy, is expected to accelerate while core inflation, which excludes food and fuel, is expected to keep moderating. With the data dependency of the Fed, a higher than expected report on core inflation could change the more cautious tone many Fed representatives expressed last week.
The economic calendar will also feature updates on retail sales, producer prices, and jobless claims. We’ve also entered a blackout period ahead of the FOMC meeting scheduled for Sept. 19 to 20, so the lack of color from Fed members could increase the volatility of the market’s responses to these reports.
Risk Information:
Investing involves risk, including risk of loss.
Diversification does not ensure a profit or guarantee against loss.
Disclosures:
Index or benchmark performance presented in this document does not reflect the deduction of advisory fees, transaction charges, or other expenses, which would reduce performance. Indexes are unmanaged. It is not possible to invest directly in an index. Any investor who attempts to mimic the performance of an index would incur fees and expenses that would reduce return.
This document is a general communication being provided for informational purposes only. It is educational in nature and not designed to be taken as advice or a recommendation for any specific investment product, strategy, plan feature, or other purpose in any jurisdiction, nor is it a commitment from Carillon Tower Advisers or any of its affiliates to participate in any of the transactions mentioned herein. Any examples used are generic, hypothetical, and for illustration purposes only. This material does not contain sufficient information to support an investment decision, and you should not rely on it in evaluating the merits of investing in any securities or products. In addition, users should make an independent assessment of the legal, regulatory, tax, credit, and accounting implications and make their own determinations together with their own professionals in those fields. Any forecasts, figures, opinions, or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions, and are subject to change without prior notice. All information presented herein is considered to be accurate at the time of production, but no warranty of accuracy is given and no liability in respect of any error or omission is accepted. It should be noted that investment involves risks, the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements, and investors may not get back the full amount invested. Both past performance and yields are not reliable indicators of current and future results.
The views and opinions expressed are not necessarily those of the broker/dealer; or any affiliates. Nothing discussed or suggested should be construed as permission to supersede or circumvent any broker/dealer policies, procedures, rules, and guidelines.
Definitions:
The base effect relates to inflation in the corresponding period of the previous year. If the inflation rate was too low in the corresponding period of the previous year, even a smaller rise in the Consumer Price Index will arithmetically give a high rate of inflation now. On the other hand, if the price index had risen at a high rate in the corresponding period of the previous year, a similar absolute increase in the price index now will show a lower inflation rate now.
Basis points (bps) are measurements used in discussions of interest rates and other percentages in finance. One basis point is equal to 1/100th of 1%, or 0.01%.
Breadth describes the relationship between the median and the mean of a market index. When a few data outliers result in a mean that is substantially larger (or smaller) than the median of the full data set, then the performance of the entire index is being driven by a “narrow” selection of companies. An index supported by “broad” market movements is one where the median is closer to the mean.
Capital expenditures, or capex, are monies used by a company to buy, improve, or maintain physical assets such as real estate, facilities, technology, or equipment, and may include new projects or investments.
The 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 [CPI] 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.
Correlation is a statistic that measures the degree to two or more financial metrics may move in relation to each other.
The CHIPS (Creating Helpful Incentives to Produce Semiconductors and Science) Act is federal legislation passed in 2022. It aims to increase investments in U.S. semiconductor manufacturing capacity, while also aiming to support the development leading-edge technologies, such as quantum computing, AI, clean energy, and nanotechnology, while also looking to create high-tech hubs that can foster a larger and more inclusive science, technology, engineering, and math (STEM) workforce.
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.
Dispersion refers to the range of outcomes in different areas of a financial market or to the potential outcomes of investments based on historical volatility or returns.
Defensive stocks provide consistent dividends and stable earnings regardless of whether the overall stock market is rising or falling. Companies with shares considered to be defensive tend to have a constant demand for their products or services and thus their operations are more stable during different phases of the business cycle.
The Federal Open Market Committee (FOMC) consists of 12 members: the seven members of the Board of Governors of the Federal Reserve System; the president of the Federal Reserve Bank of New York; and four of the remaining 11 Reserve Bank presidents, who serve one-year terms on a rotating basis. The FOMC holds eight regularly scheduled meetings per year at which it reviews economic and financial conditions, determines the appropriate stance of monetary policy, and assesses the risks to its long-run goals of price stability and sustainable economic growth. The FOMC observes a blackout period, which begins at midnight of the second Saturday before each meeting. During the blackout periods, committee members do not make public comments about macroeconomic developments or monetary policy issues.
Fiscal stimulus is an attempt by a government to stimulate economic activity through measures such as decreasing taxes and increasing government spending.
Fund flow is the net of all cash inflows and outflows into and out of a particular financial asset, sector, or index. It typically is measured on a quarterly or monthly basis.
Federal Reserve GDPNow™ is model estimate for real gross domestic product (GDP) growth (seasonally adjusted annual rate). It is produced by the Federal Reserve Bank of Atlanta, but it is not an official forecast of the Atlanta Fed. Rather, it is best viewed as a running estimate of real GDP growth based on available economic data for the current measured quarter. There are no subjective adjustments made to GDPNow. The estimate is based solely on the mathematical results of the model.
Growth 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.
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.
Headline measures of economic activity such as price trends or gross domestic product include all economic activity and are often referred to as nominal measures. Real measures of economic activity are adjusted for inflation, in some cases by excluding more volatile prices for things like food and fuel.
The Inflation Reduction Act (IRA) is federal legislation passed in August 2022. It aims to help curb inflation by directing spending toward reducing carbon emissions and lowering health care costs, while also aiming to improve taxpayer compliance through increased funding for the Internal Revenue Service.
The Jackson Hole Economic Symposium, hosted annually by the Federal Reserve Bank of Kansas City in Jackson Hole, Wyo., brings together dozens of central bankers, policymakers, scholars, and economists to discuss economic issues, implications and policy options pertaining to a specified topic. The 2023 symposium took place Aug. 24-26 and focused on the topic, “Structural Shifts in the Global Economy.”
The Job Openings and Labor Turnover Survey (JOLTS) includes monthly data on job openings, hires, and separations compiled by the U.S. Bureau of Labor Statistics.
A long position refers to the purchase of a security with the expectation that it will rise in value, reflecting a bullish attitude.
Market capitalization, or market cap, refers to the total dollar market value of a company’s outstanding shares of stock.
Market of stocks refers to the diversity of technical or other characteristics that may exist at any given time within the overall stock market. For example, the stock market as a whole may rise or fall on the fortunes of a small number of very large and thus very influential stocks. But within the broader market of stocks, there can be many companies with performance, risk, or opportunities that vary significantly from what market participants may find at the index level.
The U.S. Bureau of Labor Statistics payroll report, known as the Employment Situation Summary, is a monthly report tracking nonfarm payroll employment and the national unemployment rate, with data on changes in average hourly earnings, and job trends in public and private sectors of employment.
Overweight describes a portfolio position in an industry sector or some other category that is greater than the corresponding weight level in a benchmark portfolio.
A real interest rate is an interest rate that has been adjusted to remove the effects of inflation. Once adjusted, it reflects the real cost of funds to a borrower and the real yield to a lender or to an investor. A real interest rate reflects the rate of time preference for current goods over future goods. For an investment, a real interest rate is calculated as the difference between the nominal interest rate, which is not adjusted for inflation, and the inflation rate.
Reshoring describes the effort to bring manufacturing and other services back to the United States from overseas operations.
Risk asset generally refers to assets that have a significant degree of price volatility, such as equities, commodities, high-yield bonds, real estate, and currencies.
Seasonal effects refer to predictable changes that occur over a one-year period in a business, market, market sector, or economy based on the season, including calendar or commercial seasons.
Valuation ratios, also known as market value ratios, are used to determine the relative value of a security (that is, whether it is cheap or expensive) when compared with a fundamental financial metric such as profits or enterprise value.
Indices:
The S&P 500 Index measures change in stock market conditions based on the average performance of 500 widely held common stocks. It is a market-weighted index calculated on a total return basis with dividend reinvested. The S&P 500 represents approximately 80% of the investable U.S. equity market.
The S&P 500® Equal Weight Index is the equal-weight version of the S&P 500. It includes the same constituents as the capitalization-weighted S&P 500, but each company in the S&P 500 Equal Weight Index is allocated a fixed weight, or 0.2% of the index total at each quarterly rebalance.
The Nasdaq Composite Index is the market capitalization-weighted index of over 2,500 common equities listed on the Nasdaq stock exchange.
The Russell 2000® Index measures the performance of the 2,000 smallest companies in the Russell 3000® Index, which represents approximately 7% of the total market capitalization of the Russell 3000® Index.
The Russell 3000® Index measures the performance of the 3,000 largest U.S.-traded stocks, which represent about 96% of the total market capitalization of all U.S. incorporated equity securities.
London Stock Exchange Group plc and its group undertakings (collectively, the “LSE Group”). © LSE Group 2023. FTSE Russell is a trading name of certain of the LSE Group companies. Russell® is a trade mark of the relevant LSE Group companies and is used by any other LSE Group company under license. All rights in the FTSE Russell indexes or data vest in the relevant LSE Group company which owns the index or the data. Neither LSE Group nor its licensors accept any liability for any errors or omissions in the indexes or data and no party may rely on any indexes or data contained in this communication. No further distribution of data from the LSE Group is permitted without the relevant LSE Group company’s express written consent. The LSE Group does not promote, sponsor, or endorse the content of this communication.
M-425785 Exp. 1/12/2024
Equities reacted very positively last week following U.S. Federal Reserve Chair Jerome Powell’s speech at the Jackson Hole Economic Symposium, where he avoided surprises and essentially confirmed what we already knew: That the Fed will be datadependent and that interest rates will remain elevated for an extended period.
“The recent strength of the market is both good and a little bit bad,” which underscores the critical importance of being selective going forward, said Matt Orton, CFA, Chief Market Strategist at Raymond James Investment Management. “I believe there’s still a lot of opportunity in this market. It’s just important not to chase it, but to pick your positions wisely.”
The lack of any hawkish surprises coupled with oversold equities and Treasuries allowed the market to bounce nicely. But economic data also has been generally disappointing, and the belief that “bad news is good news” has further fueled upside in equity markets. Central to this view is a belief that weak economic data will lead the Fed to cut rates earlier than expected, as reflected by the market’s pricing of 113 basis points (bps) in federal funds rate cuts by December 2024. Given the consistency in Powell’s “higher for longer” message, Orton said he can’t help but think that markets are still offsides. While some recent economic data releases have disappointed, he said they still highlight a strong backdrop with supportive consumption habits and a labor market that remains tight even as it is finally normalizing.
“I say be careful what you wish for, because if bad news is actually going to get the behavior that the market and investors are betting on from the Fed, you’re going to be staring down the barrel of a really severe recession,” he said. “And at that point, I doubt investors would cheer that as ‘good news’ for equities. As a result, I would remain overweight equities but resist chasing the market and instead being opportunistic with entry points as they’re presented.“
The technical backdrop for equities looks more encouraging after the rally last week but Orton said there remain a few headwinds to be mindful of in the short term. Stocks bottomed when rates peaked on Aug. 22, but he said he wonders whether a reversal in yields is enough. And is the reversal in yields sustainable? We’ll have a slew of Fed officials commenting this week ahead of the Federal Open Market Committee blackout period that will probably keep rates somewhat volatile and rangebound. If this is the case, higher-duration parts of the market likely remain supported, Orton said, but he still believes investors should mind the position sizes of their big winners so far this year and cycle into opportunities down the market-capitalization spectrum or to higher-quality names where he said earnings momentum has been improving and valuations remain attractive. The market of stocks also can’t seem to find its footing, with defensive shares underperforming in August as well as sectors like financials taking a beating over the past two weeks. If we’re to trust that the market can break out from the recent highs at the end of July, Orton said we need to see broader participation. A weaker dollar would also help. Overall, the current set-up is mixed and we can’t rule out further consolidation. But Orton said he remains optimistic and would use additional downside to add to positioning in certain areas of the market.
So what looks attractive right now? Almost all S&P 500 Index sectors fell in August, though strangely, more defensive groups struggled relative to cyclical counterparts. Energy was the only sector in the green, though decliners like communication services, healthcare, consumer discretionary, and information technology outperformed the broad index. Defensive sectors like utilities and consumer staples underperformed as did materials and financials. Orton said he continues to prefer leaning into more cyclical sectors like industrials and energy while avoiding financials for now, even though valuations might look attractive. Here is a summary of his highest-conviction allocation themes:
Defensives didn’t really hold up in August:
S&P 500 performance by sector
Source: Bloomberg, as of 8/31/23
What is wrong with the market of stocks?
Improvement is needed in the ratio of the pricing of the equal-weighted
S&P 500 Index (SPW) to the market-weighted S&P 500 Index (SPX)
Source: Bloomberg, as of 8/25/23
GARP is making a comeback
... and provides defensive characteristics
Source: Bloomberg, as of 9/1/23
The August jobs report was stronger than expected, accompanied by a jump in the unemployment rate that resulted not from labor weakness but rather from a flood of new labor market entrants. Orton said Fed officials should be encouraged by recent evidence that labor conditions are coming into better balance, as reflected by higher unemployment, rising participation, and cooler Job Openings and Labor Turnover Survey (JOLTS) data. However, rebounding aggregate hours and broad-based hiring strength will likely feed into their wariness of reaccelerating metrics of economic activity, which Powell acknowledged in his Jackson Hole speech.
Orton said it’s also worth noting that growth of average hourly earnings (AHE) was the weakest since February 2022, helping to balance the jobs report. The 0.2% rise in AHE comes after a string of four gains averaging 0.4%, adding to the array of indicators showing an ongoing rebalancing of supply and demand in the jobs market. That, in turn, tones down the urgency to dial up policy restriction. The bankruptcy of a large “less than truckload” trucking firm and the Hollywood writers’ strike also impacted the jobs report, likely shaving off 50,000 jobs from growth. It’s hard to tell right now whether the impact from trucking company bankruptcy is temporary or symptomatic of a broader slowing in demand for goods shipping. Orton said the recent drop in the American Trucking Association’s Truck Tonnage Index suggests that the issues might be more broad-based.
This week will be dominated by remarks from eight Federal Reserve policymakers, with four speeches focusing on the economic outlook and policy:
Given Logan’s voting status, Orton said her speech will likely be most relevant. On the economic front, the key events will be releases on factory orders, initial jobless claims, and consumer credit. Volatility remains suppressed with the Chicago Board Options Exchange (CBOE) Volatility Index, or VIX, reaching a new one-month low (13.09), down (-16.58%) for the week after decreasing each day, so Orton said there is potential to see a pickup in market moves around all these events.
Risk Information:
Investing involves risk, including risk of loss.
Diversification does not ensure a profit or guarantee against loss.
Disclosures:
Index or benchmark performance presented in this document does not reflect the deduction of advisory fees, transaction charges, or other expenses, which would reduce performance. Indexes are unmanaged. It is not possible to invest directly in an index. Any investor who attempts to mimic the performance of an index would incur fees and expenses that would reduce return.
This document is a general communication being provided for informational purposes only. It is educational in nature and not designed to be taken as advice or a recommendation for any specific investment product, strategy, plan feature, or other purpose in any jurisdiction, nor is it a commitment from Carillon Tower Advisers or any of its affiliates to participate in any of the transactions mentioned herein. Any examples used are generic, hypothetical, and for illustration purposes only. This material does not contain sufficient information to support an investment decision, and you should not rely on it in evaluating the merits of investing in any securities or products. In addition, users should make an independent assessment of the legal, regulatory, tax, credit, and accounting implications and make their own determinations together with their own professionals in those fields. Any forecasts, figures, opinions, or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions, and are subject to change without prior notice. All information presented herein is considered to be accurate at the time of production, but no warranty of accuracy is given and no liability in respect of any error or omission is accepted. It should be noted that investment involves risks, the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements, and investors may not get back the full amount invested. Both past performance and yields are not reliable indicators of current and future results.
The views and opinions expressed are not necessarily those of the broker/dealer; or any affiliates. Nothing discussed or suggested should be construed as permission to supersede or circumvent any broker/dealer policies, procedures, rules, and guidelines.
Definitions:
The American Trucking Association Truck Tonnage Index reflects the month-to-month and year-over-year changes in tonnage hauled by truck fleets that are members of the association, as well as relevant economic comparisons and key financial indicators, based on a survey of association members.
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 Chicago Board Options Exchange (CBOE) Volatility Index, or VIX, is a real-time market index that represents the market’s expectation of 30-day forward-looking volatility. Derived from the price inputs of the S&P 500 index options, it provides a measure of market risk and investors’ sentiments.
Comps, short for comparables, carries different meanings depending on the industry and context, but generally entails a comparison of financial metrics — often for two separate time periods — or other factors to quantify performance or determine valuation.
Consolidation is a term used in technical analysis to describe when stocks reverse previous gains (or losses) to stay within well-defined trading levels.
Conviction represents a market participant’s confidence in particular investments or the likelihood that particular outcomes will take place. High-conviction investments represent what participants consider to be their best bets for performance for a given outlook or period.
Correlation is a statistic that measures the degree to which two securities move in relation to each other.
Cyclical stocks have prices influenced by macroeconomic changes in the economy and are known for following the economy as it cycles through expansion, peak, recession, and recovery.
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.
Dispersion refers to the range of outcomes in different areas of a financial market or to the potential outcomes of investments based on historical volatility or returns.
Dovish, hawkish, and centrist are terms used to describe the monetary policy preferences of central bankers and others. Hawks prioritize controlling inflation and may favor raising interest rates to reduce it or keep it in check. Doves tend to support maintaining lower interest rates, often in support of stimulating job growth and the economy more generally. Centrists tend to occupy the middle of the continuum between tight (hawkish) and loose (dovish) monetary policy.
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.
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 federal funds rate, known as the fed funds rate, is the target interest rate set by the Federal Open Market Committee of the U.S. Federal Reserve. The target is the Fed’s suggested rate for commercial banks to borrow and lend their excess reserves to each other overnight.
The Federal Open Market Committee (FOMC) consists of 12 members: the seven members of the Board of Governors of the Federal Reserve System; the president of the
Federal Reserve Bank of New York; and four of the remaining 11 Reserve Bank presidents, who serve one-year terms on a rotating basis. The FOMC holds eight regularly scheduled meetings per year at which it reviews economic and financial conditions, determines the appropriate stance of monetary policy, and assesses the risks to its long-run goals of price stability and sustainable economic growth. The FOMC observes a blackout period, which begins at midnight of the second Saturday before each meeting. During the blackout periods, committee members do not make public comments about macroeconomic developments or monetary policy issues.
Fund flow is the net of all cash inflows and outflows into and out of a particular financial asset, sector, or index. It typically is measured on a quarterly or monthly basis.
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.
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 Jackson Hole Economic Symposium, hosted annually by the Federal Reserve Bank of Kansas City in Jackson Hole, Wyo., brings together dozens of central bankers, policymakers, scholars, and economists to discuss economic issues, implications and policy options pertaining to a specified topic. The 2023 symposium took place Aug. 24-26 and focused on the topic, “Structural Shifts in the Global Economy.”
The Job Openings and Labor Turnover Survey (JOLTS) includes monthly data on job openings, hires, and separations compiled by the U.S. Bureau of Labor Statistics.
A long position refers to the purchase of a security with the expectation that it will rise in value, reflecting a bullish attitude.
Market capitalization, or market cap, refers to the total dollar market value of a company’s outstanding shares of stock.
Market of stocks refers to the diversity of technical or other characteristics that may exist at any given time within the overall stock market. For example, the stock market as a whole may rise or fall on the fortunes of a small number of very large and thus very influential stocks. But within the broader market of stocks, there can be many companies with performance, risk, or opportunities that vary significantly from what market participants may find at the index level.
The U.S. Bureau of Labor Statistics payroll report, known as the Employment Situation Summary, is a monthly report tracking nonfarm payroll employment and the national unemployment rate, with data on changes in average hourly earnings, and job trends in public and private sectors of employment.
Oversold is a term used to describe a security or group of securities believed to be trading at a level below its or their intrinsic or fair value.
Overweight describes a portfolio position in an industry sector or some other category that is greater than the corresponding weight level in a benchmark portfolio.
Rangebound is a condition where the value of a security keeps vacillating between the low and high ends of a narrow range. For example, if the 10-year Treasury yield repeatedly vacillated between 3.75% and 4.25%, it would be described as “rangebound.”
A real interest rate is an interest rate that has been adjusted to remove the effects of inflation. Once adjusted, it reflects the real cost of funds to a borrower and the real yield to a lender or to an investor. A real interest rate reflects the rate of time preference for current goods over future goods. For an investment, a real interest rate is calculated as the difference between the nominal interest rate, which is not adjusted for inflation, and the inflation rate.
Reshoring describes the effort to bring manufacturing and other services back to the United States from overseas operations.
Seasonal effects refer to predictable changes that occur over a one-year period in a business, market, market sector, or economy based on the season, including calendar or commercial seasons.
Technicals refers to technical indicators of historic market data, including price and volume statistics, to which analysts apply a wide variety of mathematical formulas in their study of larger market patterns.
Value investing is an investment strategy that involves picking stocks that appear to be trading for less than their intrinsic or book value.
Indices:
The S&P 500 Index measures change in stock market conditions based on the average performance of 500 widely held common stocks. It is a market-weighted index calculated on a total return basis with dividend reinvested. The S&P 500 represents approximately 80% of the investable U.S. equity market.
The S&P 500® Equal Weight Index is the equal-weight version of the S&P 500. It includes the same constituents as the capitalization-weighted S&P 500, but each company in the S&P 500 Equal Weight Index is allocated a fixed weight, or 0.2% of the index total at each quarterly rebalance.
The Nasdaq Composite Index is the market capitalization-weighted index of over 2,500 common equities listed on the Nasdaq stock exchange.
The Russell 2000® Index measures the performance of the 2,000 smallest companies in the Russell 3000® Index, which represents approximately 7% of the total market capitalization of the Russell 3000® Index.
London Stock Exchange Group plc and its group undertakings (collectively, the “LSE Group”). © LSE Group 2023. FTSE Russell is a trading name of certain of the LSE Group companies. Russell® is a trade mark of the relevant LSE Group companies and is used by any other LSE Group company under license. All rights in the FTSE Russell indexes or data vest in the relevant LSE Group company which owns the index or the data. Neither LSE Group nor its licensors accept any liability for any errors or omissions in the indexes or data and no party may rely on any indexes or data contained in this communication. No further distribution of data from the LSE Group is permitted without the relevant LSE Group company’s express written consent. The LSE Group does not promote, sponsor, or endorse the content of this communication.
M-422683 Exp. 1/5/2024
