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Today’s Bond Blunder? Parking Too Much Money Short Term

Weekly Market Guide

  • 09.17.21
  • Markets & Investing
  • Commentary

Review the latest portfolio strategy commentary from Mike Gibbs, managing director of Equity Portfolio & Technical Strategy.

Short-Term Summary:

The S&P 500 is on the lower end of its range, testing the 50-day moving average support level that has held numerous times since last November. This remains the initial key level to monitor (upward-trending at 4434 currently) with short-term internals oversold enough to bounce. Narrow participation remains a technical divergence of the index’s rising trend, as a narrow market can be a market susceptible to pullbacks. We have not been overly concerned by the weakening breadth due to the market’s proclivity for rotation in the current environment, along with still solid intermediate-term technical trends. Additionally, if confidence shifts back to a belief that the macro will re-accelerate, we expect investors to rotate down to some of the lagging sectors and stocks. We favor selectively accumulating some of these areas (i.e. small caps, energy, industrials, financials, select consumer areas) with more aggressive positions when momentum returns (stocks often lead the actual news).

Investors will be paying close attention to the Fed at next Wednesday’s FOMC meeting for clues on the eventual timeline and composition of tapering the current $120B in monthly asset purchases. We do not view tapering as tightening, and expect the Fed to remain accommodative. Raising rates remains a long way off and, even so, will come when the economy is able to handle it. But in looking at previous ends to quantitative easing programs since the financial crisis, forward market returns are likely to moderate/normalize (within a positive overall trend) as Fed policy does. Moreover, factors to build a “wall of worry” are present (i.e. China, supply chain issues, Fed policy, debt ceiling debate, infrastructure/tax bill), though markets are not too disturbed for now. Normal pullbacks and volatility are to be expected in equity markets, but we would use these periods as opportunities.

The fundamental backdrop remains strong for equities, as robust economic growth is correlating to strong sales growth. Though supply chain issues and rising input costs are a headwind, strong demand continues to offset these as S&P 500 margin estimates remain elevated at record highs. We also view the Delta variant’s impact on economic activity as transitory. This, in turn, is resulting in very strong earnings growth well above trend out of last year’s shutdown. Additionally, the demand/supply imbalance economically supports continued fundamental strength (and upside to estimates), as inventories get replenished from very low levels over time. Earnings are the driver of equities over the long term, so this strong fundamental trend (in conjunction with stubbornly low interest rates) bodes well for intermediate term performance trends.

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Index Definitions

The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market.

The Dow Jones Industrial Average (DJIA) is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange (NYSE) and the NASDAQ.

The NASDAQ Composite is a stock market index of the common stocks and similar securities listed on the NASDAQ stock market.

The MSCI World All Cap Index captures large, mid, small and micro-cap representation across 23 Developed Markets (DM) countries. With 11,732 constituents, the index is comprehensive, covering approximately 99% of the free float-adjusted market capitalization in each country.

MSCI EAFE (Europe, Australasia, and Far East) is a free float-adjusted market capitalization index that is designed to measure developed market equity performance, excluding the United States & Canada. The EAFE consists of the country indices of 21 developed nations.

MSCI Emerging Markets Index is designed to measure equity market performance in 23 emerging market countries. The index's three largest industries are materials, energy, and banks.

Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor's results will vary. Past performance does not guarantee future results. Future investment performance cannot be guaranteed, investment yields will fluctuate with market conditions.

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