Review the latest portfolio strategy commentary from Mike Gibbs, managing director of Equity Portfolio & Technical Strategy.
Anxiety surrounding the debt ceiling has contributed to recent market weakness in our view, though also accompanied by supply chain issues, inflation concerns, and details on the coming infrastructure/tax bill. While all of these variables can impact volatility and act as headwinds in the short term, they do not alter our positive view on the intermediate term outlook. Equities are rallying today on reports that Congress has come to agreement on a short-term extension to the debt ceiling (suggesting the amount can carry borrowing capacity into December). Details are not yet finalized; and though we view debt ceiling brinkmanship as largely “noise,” the agreement would remove some near-term uncertainty impacting market volatility (delaying debt ceiling resolution to December like government funding).
Technically, the S&P 500 has put in a string of lower highs and lower lows over the past month. Today’s bounce has the index approaching resistance at its 50-day moving average (4438) which is in line with the most recent lower high. We will be monitoring price action around this level. On the downside, we would like to see the trend of lower lows come to an end- and would thus like to see the recent low of 4278 hold if the S&P 500 pulls back in (and as the overall market pattern gets rebuilt). Below this, we see technical support at 4233 (65-day low) and 4165 (in line with 200-day moving average). We view the current pullback as normal and unlikely to move significantly below these support levels (unless the narrative materially changes). We are also encouraged by the pro-cyclical nature of sector and stock performance beneath the surface through the current bout of volatility (along with very narrow credit spreads), and believe the improved relative strength trends of these more economically-sensitive areas can continue.
Q3 earnings season begins next week, and we expect the predominant theme to surround companies’ ability to weather the ongoing supply chain inefficiencies and bottlenecks. Investors will be listening closely to cost inflation, pricing power, and the margin outlook for companies. Despite these headwinds, demand remains strong in our view- supporting our positive outlook on the economic and fundamental recovery. We see the positives of a healthy consumer, monetary and fiscal stimulus, above trend economic growth, and strong earnings growth outweighing the potential impacts of higher inflation, taxes, and interest rates. We also believe valuations will normalize further but can remain above average in the low interest rate environment. This results in our updated base case S&P 500 price objectives of 4613 for 2021 and 4950 for 2022 (includes 25% corporate tax). For details on our updated S&P 500 targets, please see our recently-published Q3 Equity Market Update (linked here).
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