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Weekly Market Guide

  • 11.08.19
  • Markets & Investing
  • Commentary

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

Short-Term Summary

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.

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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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