Asset Management
03/18/2024 Market Strategy
March 18, 2024
Turn, Turn, Turn
With markets anticipating a Fed pivot stocks and bonds remain in transitional mode
Key Takeaways
- With 499 or all but one of the firms in the S&P 500 index having reported, results have been stronger than expected. Earnings were up 7.9% from a year earlier on 3.8% revenue growth. Prior to the season’s start, a bottom-up analysis put expected growth at 1.3% YoY.
- We look at recent data on nonfarm productivity, which show growth in output per labor hour rising in recent quarters. This recalls the 1990s period, when rising productivity accompanied a strong bull market in stocks.
- Last week’s data on consumer and producer prices both surprised to the upside in February, as was the case in January. This suggests to us that it would be premature for the Fed to pivot to lowering rates. We expect the central bank to remain sensitive to signs of strength and weakness in the economy while maintaining vigilance against inflation.
- We discuss an alpha-beta approach to portfolio positioning at this time.
The week ahead promises to generate near singular focus by market participants on the Fed’s FOMC meeting this week on Tuesday and Wednesday. Our view is that the Fed is not likely to make any changes to its benchmark rate but rather reiterate a pause for a sixth time (the fifth time in a row) along with its commitment to its policy targeting inflation at 2%.
With just one company in the S&P 500 (belonging to the consumer discretionary sector) left to report Q4 earnings results this week, the Fed’s interest rate decision announcement along with Fed Chair Powell’s comments and Q&A afterwards will be the topic of the day and the likely market mover for the week barring any unexpected catalysts in events and news items day to day.
With 499 of the S&P 500’s companies having already reported earnings, results for Q4 earnings have surprised to the upside with earnings up 7.9% on back of 3.8% revenue growth—considerably better than the 1.3% earnings growth expected by consensus at the start of the season.
Recent near-term profit-taking particularly in growth segments of the market that have had exceptional run-ups since last year into this year continue to appear to us quite normal.
Eight of the 11 sectors have reported positive earnings growth for Q4 with four of those sectors reporting double-digit earnings growth (communications services +48.7%, utilities 42.9%, consumer discretionary 28.9%, and information technology 23.3%). Three sectors reported negative earnings growth in the period (energy -25.2%, materials -20.6% and health care - 16.2%). See our Earnings Scorecard on page 7 of this report for details.
Last week provided a sense of déjà vu as hotter than expected inflation (per prior economist surveys by Bloomberg) caused stocks and bonds to get jostled as Fed futures expectations came into question for another time this year necessitating some investors to tweak positions that had persisted in projections of Fed rate cuts sooner and more frequently than the Fed has intimated since the end of last year.
Alpha/beta is not just for kids
It’s our view that the art and science of positioning equity exposure in portfolios via individual security selection and passive indices—sector specific, style (growth vs. value) and market capitalizations—can provide a useful approach to diversification in a transitional market that’s prone to rotation and rebalancing week to week and even day to day.
It’s worth noting that in recent weeks when inflation has surprised to the upside the stock market has not moved to a hard “risk-off” positioning (i.e. to cash or short term securities) but rather has been prone to move to defensive and even broadly cyclical value oriented sectors.
We’ve noticed that in some cases the market has merely taken some profits in stocks among recent growth outperformers and rotated into other growth issues and/or “growthier” value issues that have been mostly ignored in the power rally that catapulted stocks from late October last year into this year.
ETF passive sector indices in combination with individual stock selection in our experience can help capture upside near term as rallies broaden as well as provide a reference dashboard and sector place-holder providing an investor broader exposure while buying time to make stock specific selections.
We remain positive on equities and continue to see fixed income securities as complimentary to stocks in providing portfolio diversification.
Recent near term profit-taking particularly in growth segments of the market that have had exceptional runups since last year into this year continue to appear to us quite normal. Such activity combined with a process of rebalancing and rotation into other segments of the stock market in our view can be healthy and contribute to a broadening of the markets’ progress from last year through this year.
Near term volatility could in our view present opportunity for investors to “catch babies that get thrown out with the bath water” in periods of market downdrafts as the market digests levels of uncertainty that are not uncommon to times of transition like these.
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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