Review the latest portfolio strategy commentary from Mike Gibbs, managing director of Equity Portfolio & Technical Strategy.
Equity market strength has continued since the S&P 500 break out to new highs on continued trade progress, a positive reaction to Q3 earnings season, steepening yield curve, and violent rotation into some of the deep cyclical areas. Trade is moving in the right direction, but we maintain our guarded optimism until the phase 1 agreement is signed (due to multiple trade setbacks over the past year). Global equity markets are also showing strength, as developed markets (ex-US) and emerging markets are breaking downtrends and moving higher in unison (a much more supportive global backdrop than late 2018). In the short term, the degree of the S&P 500 advance is approaching levels that have historically coincided with overbought conditions. This does not mean the S&P 500 is due for a big pullback, but it does suggest the market is likely due for a pause or consolidation period where moving averages can "catch up" and the index can digest its recent strength.
The market break out to new highs is positive in terms of momentum. We evaluated all market breakouts going back to 1928 and quantified the forward returns. When the S&P 500 has traded to a new high (after over 3 months of not having a new high-in order to only include the more significant breakouts), forward returns over the next 1 month, 3 months, 6 months, and 12 months have been above average historically. Additionally, seasonality now becomes a tailwind as the November-April timeframe is historically the strongest period of the year for equity returns. When the S&P 500 has been up over 20% year-to-date through October (as it was this year), November, the rest of the year (Nov. & Dec.), and next 6 month returns have been above historical averages. We see this as "strength begets strength." Breakouts to new highs and strength through October are both suggestive of above-average forward returns on average. This supports our positive bias to equities.
The wave of rotation into Value (from Growth) continues. A significant catalyst for Value's upside momentum is the rise in interest rates that has taken place over the past month. When the US 10 year yield was able to make a higher low in early October, the banks (largest weighting within Value) were able to break above their relative strength downtrend. Contributing to this was also a steepening in the yield curve which has eased macro concerns and led to improvement from some of the deep cyclical (Value) areas that had been under pressure for the vast majority of the past couple of years (i.e. banks, industrials, transports, and semiconductors). Accordingly, the more "defensive" interest rate sensitive areas (Utilities, Real Estate, Consumer Staples) have significantly underperformed over the past month. We would not rush into knee-jerk reactions to your portfolio allocations at this point; although the strength of the trend change remains notable and does warrant building Value exposure within portfolios at a measured pace.
IMPORTANT INVESTOR DISCLOSURES
This material is being provided for informational purposes only. Expressions of opinion are provided as of the date above and subject to change. Any information should not be deemed a recommendation to buy, hold or sell any security. Certain information has been obtained from third-party sources we consider reliable, but we do not guarantee that such information is accurate or complete. This report is not a complete description of the securities, markets, or developments referred to in this material and does not include all available data necessary for making an investment decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct.
Links to third-party websites are being provided for informational purposes only. Raymond James is not affiliated with and does not endorse, authorize, or sponsor any of the listed websites or their respective sponsors. Raymond James is not responsible for the content of any third-party website or the collection or use of information regarding any websites users and/or members.
This report is provided to clients of Raymond James only for your personal, noncommercial use. Except as expressly authorized by Raymond James, you may not copy, reproduce, transmit, sell, display, distribute, publish, broadcast, circulate, modify, disseminate, or commercially exploit the information contained in this report, in printed, electronic, or any other form, in any manner, without the prior express written consent of Raymond James. You also agree not to use the information provided in this report for any unlawful purpose. This report and its contents are the property of Raymond James and are protected by applicable copyright, trade secret, or other intellectual property laws (of the United States and other countries). United States law, 17 U.S.C. Sec. 501 et seq, provides for civil and criminal penalties for copyright infringement. No copyright claimed in incorporated U.S. government works.
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.
For clients in the United Kingdom:
For clients of Raymond James Financial International Limited (RJFI): This document and any investment to which this document relates is intended for the sole use of the persons to whom it is addressed, being persons who are Eligible Counterparties or Professional Clients as described in the FCA rules or persons described in Articles 19(5) (Investment professionals) or 49(2) (high net worth companies, unincorporated associations, etc.) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (as amended)or any other person to whom this promotion may lawfully be directed. It is not intended to be distributed or passed on, directly or indirectly, to any other class of persons and may not be relied upon by such persons and is, therefore, not intended for private individuals or those who would be classified as Retail Clients.
For clients of Raymond James Investment Services, Ltd.: This document is for the use of professional investment advisers and managers and is not intended for use by clients.
For clients in France:
This document and any investment to which this document relates is intended for the sole use of the persons to whom it is addressed, being persons who are Eligible Counterparties or Professional Clients as described in "Code Monetaire et Financier" and Reglement General de l'Autorite des marches Financiers. It is not intended to be distributed or passed on, directly or indirectly, to any other class of persons and may not be relied upon by such persons and is, therefore, not intended for private individuals or those who would be classified as Retail Clients.
For clients of Raymond James Euro Equities: Raymond James Euro Equities is authorised and regulated by the Autorite de Controle Prudentiel et de Resolution and the Autorite des Marches Financiers.
For institutional clients in the European Economic rea (EE ) outside of the United Kingdom:
This document (and any attachments or exhibits hereto) is intended only for EEA institutional clients or others to whom it may lawfully be submitted.
For Canadian clients:
This document is not prepared subject to Canadian disclosure requirements, unless a Canadian has contributed to the content of the document. In the case where there is Canadian contribution, the document meets all applicable IIROC disclosure requirements.
Securities are: NOT Deposits • NOT Insured by FDIC or any other government agency • NOT GUARANTEED by the bank • Subject to risk and may lose value
Raymond James & Associates, Inc., member New York Stock Exchange/SIPC. Raymond James Financial Services, Inc., member FINRA/SIPC. Raymond James® is a registered trademark of Raymond James Financial, Inc.