Review the latest portfolio strategy commentary from Mike Gibbs, managing director of Equity Portfolio and Technical Strategy.
As expected, the Federal Reserve (Fed) raised the federal funds rate by 25 bps on February 1, the smallest increase since March 2022 at the beginning of the rate hike cycle. The market interpretation was positive with the S&P 500 rallying despite Fed Chairman Jerome Powell hinting that a couple more rate hikes from here may be necessary, a suggestion that the market seems to be ignoring for now, with market expectations seeming to be more optimistic that the rate hike cycle is coming to an end much sooner than the Fed suggests.
Overall, equity markets continue to show resiliency with the S&P 500 up 7.3% to begin the year. Despite mixed messages, where on one hand the economy appears to be weakening and companies remain cautious, the interpretation by the market has been positive and the technicals seem to be telling a much different story than headlines would suggest as positives continue to mount. The S&P 500 broke above its recent downtrend, and if the old adage “as goes January, so goes the year” holds true, 2023 should be a positive year for the S&P 500. Moreover, the 50-DMA is attempting to break above the 200-DMA while cyclicals are beginning to see relative performance improvement vs. defensive areas.
Overall, the interpretation seems to reflect a goldilocks scenario: 1) inflation, which was the biggest headwind over the last year, seems to be moderating as reflected by the ECI data this week, 2) the job market remains strong (with JOLTS job openings increase to almost 2 jobs per unemployed person), and 3) despite some softening in the macro and risk to further earnings revisions lower, the expectations is that the Fed is nearing the end of the rate hike cycle and a potential slowdown/recession will likely be mild and short-lived. Given that equities are forward looking, it appears the market is discounting the positives for now.
That said, we believe given the quickly shifting economic backdrop and market interpretations of every move by the Fed, we would favor equities to remain in the 3700-4300 range as volatility is likely to persist. Longer-term, we believe that equities present attractive risk/reward for investors and that stocks will be climbing by year-end. But for those investors trying to be timely, we recommend pragmatism and patience. Accumulate favored stocks over time as the trend evolves, refrain from chasing the rally periods, and use the weak periods as opportunity within a long-term perspective.
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The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market.
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