Asset Management
02/13/2023 Market Strategy
February 13, 2023
What’s Going On?
Nothing new when it comes to human behavior as markets navigate a fed funds hike cycle
Key Takeaways
- With 346, or 69%, of the firms in the S&P 500 index having reported, earnings are off 2.7% from a year ago on revenue growth of 5.35%.
- Results have been mixed with five sectors showing double-digit earnings growth from a year earlier and six showing declines. Earnings season continues this week with 60 firms scheduled to report.
- Last week, preliminary data from the University of Michigan’s Consumer Sentiment survey showed an uptick in February’s readings. The survey’s inflation expectations also brought mixed news as the average expectation for the inflation rate one-year ahead rose to 4.2% in Feb. from 3.9% in the prior month.
- The recent pullback in equities could serve as “a pause that refreshes” the market’s recent upward trajectory.
A glance “under the hood” of what’s been going on in the equity and bond markets suggests to us that the 2.1% sell-off in the S&P 500 since Feb. 2 and a drop in bond prices that’s pushed yields higher stateside may be in hindsight a few months (or even a few weeks) from now considered a pause that refreshes a significant upside sequence in market performance that’s reflected in the performance of the S&P 500 from the low on October 12 through the market close last Friday.
Valuations, a mixed Q4 earnings season, economic data and geopolitical risk among other factors in our view have of late configured a cocktail of turbulence for equity markets. This has extended a hangover of bearish sentiment that pushed stocks lower for a second week in a row through last Friday and that has provided bears, skeptics, and nervous market participants with enough catalysts in aggregate with opportunity to growl, fret, and take some profits without FOMO (fear of missing out).
During the last two weeks, an upward revision to the Dec. CPI data; an increase in the price of oil (commensurate with an announcement by Russia that it plans to cut oil production); an increase in consumers’ inflation expectations (even as those expectations remained below levels seen in the first half of last year) along with more than a spate of bearish “Fedspeak” from a number of prominent Federal Reserve officials managed to further curb market sentiment that may have gotten somewhat ahead of itself.
We remain positive on equities and consider the current retracement as an opportunity for investors to seek out “babies that got thrown out with the bathwater.”
For all the resurgence in bearish chatter and downside action during the last two weeks that have taken the major stock averages lower and bond yields higher, the major equity indices ended last week well within “recovery mode” from 2022. The Dow Jones Industrials, the S&P 500, the S&P 400 (mid-caps), the S&P 600 (small caps), the Russell 2000 and the NASDAQ Composite, respectively, are higher from the start of 2023: 2.18%, 6.54%, 8.6%, 9.33%, 8.95% and 11.96%.
Where Does the Market Want to Go from the Low?
A glance at the S&P 500’s performance from the low on October 12 shows four cyclical sectors leading the other 11 with the industrials, financials, information technology and materials sectors (all cyclical sectors) respectively 20.5%, 20.47%, 19.86% and 19.85% higher. All 11 sectors of the S&P 500 are positive in the period.
Bond prices fell as yields rose on economic data released last week that suggested the Federal Reserve might have to raise rates higher and longer than some market participants had expected just a week ago. Indeed, some market-watchers expect that the terminal rate might rise as high as 6% this cycle.
It has been our view for some time now that the Fed is unlikely to pause or pivot its activities to curb inflation in the near term even as it remains highly sensitive to the effects of monetary policy on the economy.
CPI data on Tuesday will likely provide some clarity as to how “sticky” inflation remains and offer opportunity for traders and other investors to ponder the near-term direction of the markets. In our view, the central bank is “on the case” in dealing with inflation and suitably determined to stem untoward levels of inflation.
We remain positive on equities and consider the current retracement as an opportunity for investors to seek out “babies that got thrown out with the bathwater” (good quality stocks that get sold off in market downdrafts).
In our experience of nearly four decades in the markets, fed fund cycles that take time to work out are never easy to experience but can be rewarding for investors who practice diversification and exercise patience. “Know what you own and why you own it relative to your investment goals, objectives and tolerance to risk and right size your expectations” remains one of our favorite investment mantras particularly during “workout” periods as markets navigate an economic landscape transitioning from a period of great crisis and uncertainty to the “next new normal.”
Name:
John Stoltzfus
Title:Chief Investment Strategist, Oppenheimer Asset Management Inc.
John is one of the most popular faces around Oppenheimer: our clients have come to rely on his market recaps for timely analysis and a confident viewpoint on the road forward. He frequently lends his expertise to CNBC, Bloomberg, Fox Business, and other notable networks.
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