Our perspectives

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

Weekly market guide

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

Short-Term Summary:

Market uncertainty remains elevated, and reflected in daily price action. After the best daily S&P 500 price change (2.99%) in almost two years yesterday, today’s -3.6% decline was one of the worst.

The S&P 500 surged yesterday following the May FOMC announcement that contained an underlying more careful tone from Fed Chair Powell. Comments such as 75bp rate hikes are “not something the FOMC is actively considering” o9ered a mild shi- from the increasingly hawkish verbiage exhibited since the year began. The 2-year Treasury yield and market-implied Fed funds rate by year-end both pulled back on the meeting, and 96% of S&P 500 stocks finished higher on the day. This came in part due to oversold conditions leading into the report. But despite the market surge, internals were not as impressive. The advancing vs. declining ratio hit a supportive 4.4:1 but is still below the ~7% “thrust” seen near V-bottoms historically.

So while yesterday’s move was positive, it is far from an “all-clear” event, as reflected by today’s lack of follow-through and heavy selling pressure. Today’s response indicates further challenges technically, and a new low will raise the odds of a S&P 500 downtrend (as opposed to sideways trend). On the flip side, an ability to hold the lows and rally that takes out some resistance levels (even if it fails at ~4600 horizontal resistance) will favor the sideways grind continuing. Technical resistance resides at ~4310 (where S&P 500 finished yesterday), followed by 4373 (50 DMA) and 4490 (200 DMA); while technical support should be monitored at 4061 and 3980. With this in mind, we believe investors should focus on high quality names and be selective with purchases using the draw-downs as opportunity to accumulate with a long-term perspective.

Inflation and interest rates remain highly influential to the market at their current levels. Additionally, the Russia/Ukraine war and China’s zero-tolerance Covid policy remain big unknowns- both acting as net negatives to global growth and net increases to inflation, in turn further complicating the Fed’s situation. We believe that inflation can move in the right direction over the course of the year and bond yields stall their sharp ascent higher; but uncertainty is elevated and the path of improvement is unlikely to be linear. Moreover, inflationary pressures are hitting S&P earnings in aggregate, making the inflationary trend ahead all-the-more paramount for equities. Sales growth (and demand) remains strong, but higher costs are taking a toll on margins- resulting in a recent downtick in S&P 500 earnings estimates. A moderation in inflation would not only be supportive of fundamentals, but also valuation in our view. And there are plenty of inflationary data points over the coming weeks that will remain influential to equity market trends in the short-term- i.e. April jobs report tomorrow, NFIB Small Business survey next Tuesday, April CPI Wednesday, and April PPI Thursday.

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