Markets in Focus

Timely analysis of market moves and sectors of opportunity

Sept. 26, 2022: No light at the end of the Fed’s tunnel

Last week was not just more of the same: negative surprises and further market weakness. To the contrary, said Matt Orton, CFA, Chief Market Strategist at Carillon Tower Advisers, a lot changed, and not for the better.

“The markets are incredibly oversold, and a bear-market rally could certainly play out, but I’m much less apt to trust any rally until there’s some sort of change in tone from the Fed,” Orton said. “I believe what Fed officials said at Jackson Hole was absolutely necessary to get the market to recognize that they were not dovish at their July meeting but were committed to depending on the data and looking at things as they came in. But right now I don’t see how they are being data-dependent in any way, shape, or form.”

With this change of tone, the S&P 500 Index crossed the critical 3850 level and quickly took the elevator to the June lows, setting up a challenging technical picture. Real yields continue to increase, presenting a challenge for equities to move higher, and two-year yields have been up for 12 straight sessions, the longest streak on record going back to June 1976. The U.S. Federal Reserve (Fed) also somehow managed to out-hawk the hawks and, in Orton’s view, showed that the notion of basing policy on data is gone. None of the recent data argues for an interest rate increase of 75 basis points (bps) in November, plus 50 bps more in December, plus another 25 in January. The data between the July and September meetings was:

  • One bad Consumer Price Index number;
  • One good one;
  • One good Personal Consumption Expenditures (PCE) deflator number;
  • Labor market data that indicated that supplies are coming back and wages are starting to flatten; and
  • Inflation expectations that have come down, not up.

“Fed Chairman Jerome Powell is moving too fast, and the likelihood of something breaking increased meaningfully last week,” Orton said.

If there’s a silver lining, Orton said it’s that there’s not much evidence that the U.S. economy is cracking outside of housing. Real-time consumer spending data remains encouraging as well as commentary from bank CEOs on the health of the individual and business clients. Third-quarter S&P 500 earnings estimates have also come down by 6.3%, the largest decline in the quarterly earnings-per-share (EPS) estimates since the second quarter of 2020 (and larger than the five-year average of -2.3%). This could set up an environment where companies beat estimates that have become too pessimistic.

“However,” Orton said, “I worry that guidance will problematic – not because business is actually slowing but because a negative feedback loop could be setting in given abysmal market conditions and a Fed that’s determined to break something.”

Given this backdrop, Orton said it’s incredibly difficult to say that now is the time to deploy cash in the market. To be sure, he said, markets are oversold in the short term and a relief rally wouldn’t be surprising. But high macroeconomic uncertainty will continue to weigh on risk sentiment. U.S. 10-year yields took out resistance at the 2018 highs while 2-year yields are aiming for 4.5% or higher on the recent breakout. The dollar has gone parabolic, particularly versus emerging market currencies. And financial conditions continue to reach new levels of tightness. Until these trends start to reverse, Orton said there’s no choice but to remain very cautious.

“But that doesn’t mean to throw in the towel,” he said. “It might not be time to hit the buy button, but it’s also not the time to hit sell. There are parts of the market that are working better on a relative basis and that’s why tactical shifts are so important as the market narrative continues to evolve.”

As a result, Orton said he continues to favor maintaining a core defensive bias by leaning into quality: dividend growth, profitability, growth at a reasonable price, and healthcare. Dividend growth posted another week of good outperformance last week. Small- and mid-caps were trashed last week, but Orton said he would hold off on doing anything right now. Negative flows as well as compelling valuation, a shift to services and better U.S. capital expenditures and reshoring should all provide tailwinds when the market finally bottoms, he said. Earnings season will be the next opportunity for the market to stage a sustainable rally if companies can beat increasingly negative expectations.

Percentage of declining stocks in S&P 500

Percentage of declining stocks in S&P 500

Source: Bloomberg, as of 9/23/22

Fading inflation fears signal the Fed is going too far

Even as economic growth slows from the rapid post-recession clip, the Orton said it’s worth noting that the Fed already has done a lot of work in taming inflation fears. U.S. inflation breakeven inflation rates, a measure of expected inflation in the future, have been coming down since March: the 10-year breakeven rate is down 0.5% and the three-year is down almost 1.5%. All the breakevens are converging around 2.5% and the 0.5% spread (from 2.1% to 2.6%) also is back to the kind of spread seen before the pandemic. This fall in breakevens came after the March Fed minutes showed the Federal Reserve Board favoring larger and faster rate rises, and committed to quantitative tapering. As a result, the rise in U.S. Treasuries across the curve this year has come in real yields, not breakevens, reflecting tighter liquidity conditions. All of this is another reason for the Fed to follow the data, Orton said, not to commit to taming inflation to levels that aren’t achievable in the near term without causing a much deeper correction than is necessary.

Quote Image
Fed Chairman Jerome Powell is moving too fast, and the likelihood of something breaking increased meaningfully last week.

“The big problem for the economy now is even though there are no signs of cracking now, there’s a risk of the Fed possibly breaking things by pushing rates too high,” he said. “A cratering market risks cracking business confidence along with the market, and that’s where you start to get into a negative feedback loop where good businesses are concerned about the economic outlook going forward and don’t know what the Fed’s going to do, so they stop investing and stop trying to make improvements on the supply side that would help bring down inflation in the long term. That’s where you could get that negative spiral driving ourselves into a recession that could have been avoided. That is the really big risk for the market right now.”

What to watch

Fedspeak and consumer data will dominate the docket this week. We’ll get important economic data releases including updates on durable goods orders, consumer confidence, new home sales, gross domestic product (GDP) and PCE prices. Overall, Orton said he expects Fedspeak to underscore Powell’s message that the Fed is laser-focused on bringing inflation to target and, increasingly, looking to see some pain in the labor market in order to get there. He said he also expects the data to show weakening growth via subdued real consumer spending, as well as further evidence of inflation expectations holding in check, if not coming down.

This week's data releases

Monday ifo Institute Business Climate Index for Germany; Japan Purchasing Managers’ Index (PMI)
Tuesday U.S. Consumer Confidence Survey®, plus data on durable goods, home prices, and new home sales; China industrial profits; Japan Services Producer Price Index; Brazil central bank minutes and Extended National Consumer Price Index
Wednesday U.S. pending home sales
Thusday U.S. GDP and initial jobless claims; Germany and Spain inflation
Friday U.S. PCE Index, personal income, and University of Michigan Index of Consumer Sentiment; Eurozone, France, and Italy inflation; Japan Consumer Confidence Survey, industrial output, retail sales, and housing starts; China PMI

 

Risk Information:
Investing involves risk, including risk of loss.

Diversification does not ensure a profit or guarantee against loss.

Disclosures:
Index or benchmark performance presented in this document does not reflect the deduction of advisory fees, transaction charges, or other expenses, which would reduce performance. Indexes are unmanaged. It is not possible to invest directly in an index. Any investor who attempts to mimic the performance of an index would incur fees and expenses that would reduce return.

This document is a general communication being provided for informational purposes only. It is educational in nature and not designed to be taken as advice or a recommendation for any specific investment product, strategy, plan feature, or other purpose in any jurisdiction, nor is it a commitment from Carillon Tower Advisers or any of its affiliates to participate in any of the transactions mentioned herein. Any examples used are generic, hypothetical, and for illustration purposes only. This material does not contain sufficient information to support an investment decision, and you should not rely on it in evaluating the merits of investing in any securities or products. In addition, users should make an independent assessment of the legal, regulatory, tax, credit, and accounting implications and make their own determinations together with their own professionals in those fields. Any forecasts, figures, opinions, or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions, and are subject to change without prior notice. All information presented herein is considered to be accurate at the time of production, but no warranty of accuracy is given and no liability in respect of any error or omission is accepted. It should be noted that investment involves risks, the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements, and investors may not get back the full amount invested. Both past performance and yields are not reliable indicators of current and future results.

The views and opinions expressed are not necessarily those of the broker/dealer; or any affiliates. Nothing discussed or suggested should be construed as permission to supersede or circumvent any broker/dealer policies, procedures, rules, and guidelines.

Technicals refers to technical indicators of historic market data, including price and volume statistics, to which analysts apply a wide variety of mathematical formulas in their study of larger market patterns.

Hawkish, dovish, and centrist are terms used to describe the monetary policy preferences of central bankers and others. Hawks prioritize controlling inflation and may favor raising interest rates to reduce it or keep it in check. Doves tend to support maintaining lower interest rates, often in support of stimulating job growth and the economy more generally. Centrists tend to occupy the middle of the continuum between tight (hawkish) and loose (dovish) monetary policy.

Real yield curve rates, commonly referred to as “Real Constant Maturity Treasury” rates, on Treasury Inflation-Protected Securities (TIPS) at “constant maturity” are estimated by the U.S. Treasury from the Treasury’s daily par real yield curve. These par real yields are calculated from indicative secondary market quotations obtained by the Federal Reserve Bank of New York. The par real yield values are read from the par real yield curve at fixed maturities, currently 5, 7, 10, 20, and 30 years. This method provides a par real yield for a 10-year maturity, for example, even if no outstanding security has exactly 10 years remaining to maturity.

Basis points (bps) are measurements used in discussions of interest rates and other percentages in finance. One basis point is equal to 1/100th of 1%, or 0.01%.

The U.S. Consumer Price Index (CPI) measures the change in prices paid by consumers for goods and services. The U.S. Bureau of Labor Statistics bases the index on prices of food, clothing, shelter, fuels, transportation, doctors’ and dentists’ services, drugs, and other goods and services that people buy for day-to-day living. Prices are collected each month in 75 urban areas across the country from about 6,000 households and 22,000 retailers.

The Personal Consumption Expenditures (PCE) Price Index is a measure of the prices that people living in the United States, or those buying on their behalf, pay for goods and services. The PCE price index, released monthly by the U.S. Department of Commerce’s Bureau of Economic Analysis, is known for capturing inflation or deflation across a wide range of consumer expenses and reflecting changes in consumer behavior.

An implicit price deflator (the PCE deflator) is a price measure reflecting aggregate consumption inflation. Deflators are calculated by dividing the current-dollar value of an aggregate or component of a selected price index by its corresponding chained-dollar value, and then multiplying by 100. For all periods, the values of the deflator are very close to the values of the corresponding chain-type price index.

Oversold is a term used to describe a security believed to be trading at a level below its intrinsic or fair value.

Defensive stocks provide consistent dividends and stable earnings regardless whether the overall stock market is rising or falling. Companies with shares considered to be defensive tend to have a constant demand for their products or services and thus their operations are more stable during different phases of the business cycle.

Growth at a reasonable price (GARP) is a stock investment strategy that seeks to combine tenets of both growth and value investing in the evaluation and selection of individual stocks. GARP investors look for companies with consistent earnings growth above broad market levels but try to avoid companies with very high valuations. By trying to avoid the extremes of either growth or value investing, GARP investors often end up focusing on growth-oriented stocks with relatively low price-to-earnings multiples in normal market conditions.

Quantitative tapering refers to the attempt by central bankers to reverse the effects of quantitative easing (QE), which is a form of unconventional monetary policy in which a central bank purchases longer-term securities from the open market in order to increase the money supply and encourage lending and investment. In quantitative easing, buying securities adds new money to the economy, and also serves to lower interest rates by bidding up fixed-income securities. It also expands the central bank’s balance sheet. In quantitative tapering, reducing those purchases is a policy primarily aimed at interest rates and at influencing investor perceptions of the future direction of interest rates.

Earnings per share (EPS) is calculated as a company’s profit divided by the outstanding shares of its common stock. The resulting number serves as an indicator of a company’s profitability.

Breakeven inflation rates reflect what market participants expect inflation to be over a specified period of time, on average. For example, the 10-year breakeven inflation rate reflects what market participants expect inflation to be in the next 10 years, on average. It is calculated using 10-Year U.S. Treasury Constant Maturity Securities and 10-Year Treasury Inflation-Indexed Constant Maturity Securities. The five-year breakeven inflation rate is derived from 5-Year Treasury Constant Maturity Securities and 5-Year Treasury Inflation-Indexed Constant Maturity Securities.

The ifo Institute Business Climate Index for Germany is based on a monthly survey of about 9,000 firms in manufacturing, the services sector, and construction, plus wholesale and retail sales about their characterization of their current business and their expectations for the next six months. It is published by the ifo Institute for Economic Research, based in Munich.

Purchasing Managers’ Index data are compiled by IHS Markit for more than 40 economies worldwide. The monthly data are derived from surveys of senior executives at private sector companies. PMI data features a headline number, which indicates the overall health of an economy, and sub-indices, which provide insights into other key economic drivers such as gross domestic product, inflation, exports, capacity utilization, employment, and inventories.

The U.S. Consumer Confidence Survey®, published monthly by The Conference Board, reflects prevailing business conditions and likely developments for coming months based on consumer attitudes, buying intentions, vacation plans, and expectations for inflation, stock prices, and interest rates.

The Japan Services Producer Price Index, released monthly by the Bank of Japan, tracks changes in prices paid for services that include advertising; leases and rentals; real estate services; transportation and postal activities; information and communications; finance and insurance; sewage and waste disposal; motor vehicle and machinery repair; health and hygiene; call centers, hotels, and architectural, civil engineering, legal, accounting and other professional services.

Brazil’s Extended National Consumer Price Index (IPCA), calculated by the Brazilian Institute of Geography and Statistics, measures the inflation rate for selected retail products and services, including food and beverages; housing; household articles; wearing apparel; transportation; health and personal care; personal expenses; education; and communication. The index is constructed to cover 90% families living in 13 geographic zones: the metropolitan areas of Belém, Fortaleza, Recife, Salvador, Belo Horizonte, Vitória, Rio de Janeiro, São Paulo, Curitiba, Porto Alegre, as well as the Federal District and the cities of Goiânia and Campo Grande.

The University of Michigan Index of Consumer Sentiment is based on monthly telephone surveys in which at least 500 consumers in the continental United States are asked 50 questions about what they think now and what their expectations are for their personal finances, business conditions, and buying conditions. Their responses are used to calculate monthly measures of consumer sentiment that can be compared to a base value of 100 set in 1966.

The Japan Consumer Confidence Survey, released monthly by the Economic and Social Research Institute and the Cabinet Office of the Government of Japan, is carried out to provide a quick understanding of shifts in consumer perception as a tool in evaluating economic trends.

The S&P 500 Index measures change in stock market conditions based on the average performance of 500 widely held common stocks. It is a market-weighted index calculated on a total return basis with dividend reinvested. The S&P 500 represents approximately 75% of the investable U.S. equity market.

 

CTA22-0568 Exp. 1/26/2023


Sept. 19, 2022: Weathering the storm

Last week was rough, not just the negative price action but also because of the implications from a much worse than expected Consumer Price Index (CPI) report and a dismal earnings forecast from a global package delivery company. Negative sentiment abounds, but how bad will it get?

“I just don’t think we know, and, if anything, the CPI report highlights that,” said Matt Orton, CFA, Chief Market Strategist at Carillon Tower Advisers. “We don’t know what the path of data will be. It’s going to be volatile, and markets don’t like uncertainty, so risks are elevated right now. But, at the same time, it’s worth being conscious of just how much negativity is reflected in the market already. Some of the worstcase scenarios that we can see are priced or are being priced into the market. It’s hard, without a substantial earnings deterioration, to see how the market can substantially stay below where it was in June.”

There was nowhere to hide in the August CPI report where core CPI rose from 0.3% in July to 0.6% month over month, with core services remaining hot and owners’ equivalent of rent (OER) — a key indicator of inflation in housing — hitting a new cycle high. The ugly data raised the prospect for a 100-basis point (bp) hike at this week’s Federal Open Market Committee (FOMC) meeting this week and sent equity markets sharply lower as financial conditions sharply tightened. The only good news last week was that the University of Michigan Index of Consumer Sentiment five- to 10-year inflation expectations moved lower, hitting the lowest level in more than a year, signaling that longterm expectations remain anchored. While Orton acknowledged the risk for a 100-bp move, he said he continues to believe that the U.S. Federal Reserve (Fed) will deliver its third straight 75-bp hike.

“Clearly, the FOMC meeting will be the key driver of markets this week and it will likely set the stage for price action for the next few weeks until we start to hear earnings results and guidance from management teams in October,” he said.

Bearishness has become incredibly pervasive and positioning continues to wash out. Institutional cash positioning is at the highest level since 2001 — higher even than during the depths of the Global Financial Crisis in 2008-09. Equity underweight positioning is at the highest level on record while nearly a record share of investors expect a weaker economy in 12 months. There are clearly very tangible risks in the near term and such extreme pessimism is simply a reflection of this. Yet Orton said he can’t help but believe that there is significant myopia among investors who fail to consider any situation where we see an inflection in the bad news. The labor market is still strong and the consumer remains pretty resilient, so we’re not facing dire economic challenges right now, he said. Yes, there is definitely a slowdown showing up. Risks to earnings are increasing, though Orton said he still believes some of these risks are overstated. The technical setup also is quite challenged now with the S&P 500 Index starting the week hovering around the critical 3850 level and most global indices below their 50- day daily moving averages. We need to respect the recent price action and the current environment necessitates extreme caution, but Orton said he’s not ready to throw in the towel yet. Given this incredibly negative backdrop, we may very well re-test the June lows or even break lower, but he said he just doesn’t see how that price action is sustainable without multiple parts of the economy falling apart at the same time.

“I continue to believe that the current level of bearishness is extreme and that there is still scope for normalization,” he said. “My playbook remains unchanged — remaining defensive and leaning into quality, specifically dividend growth, growth at a reasonable price (GARP), and healthcare — as I would expect recent outperformance in those areas to continue amid heightened volatility.”

Tightening financial conditions
likely to continue weighing on equities

Tightening financial conditions likely to continue weighing on equities

Source: Bloomberg, as of 9/16/22

A closer look at recent economic data

The most pivotal data last week was the hotter-than-expected CPI report, which came in far higher than consensus expectations with core inflation rising 0.6% month over month (compared to 0.3% expectations and the month prior). The print delivered on core services remaining hot, with OER hitting a new cycle high and rent just a few hundredths from matching its own previous high. Core service inflation excluding shelter and health insurance also accelerated from 0.2% in July to 0.5% month over month, highlighting what looks likely to be sticky price pressures on the service inflation front. This strength will take time to dissipate, even as some recent moderation of wage growth points to nascent signs of progress. The acceleration in core goods prices also was surprising, but Orton said he continues to believe that coming inventory liquidations and realized dollar strength will moderate core goods inflation.

The University of Michigan survey’s inflation was a positive data point, where inflation expectations continued to show movement in the right direction. The final August print showed one-year expectations declining for the second consecutive month and five- to 10-year expectations holding steady at 2.9% (from a peak of 3.1% in June). The preliminary read on Friday showed further declines, which makes sense since expectations coincide with gasoline prices, which have continued to drop in the first half of September. This is another encouraging data point to which the Fed will play close attention.

Lower gas prices have led to lower inflation

Lower gas prices have led to lower inflation

Source: Bloomberg, as of 9/19/22

Retail sales also printed a downward surprise, further adding to the likelihood for a 75-bp hike. Orton said a weak print shouldn’t have been unexpected as consumers accelerate the switch in spending from goods to services. “Given this expected transition, an upside surprise would have reflected excess demand and would have been particularly worrying to me,” Orton said. “Fed officials said they would be sensitive to the retail sales report. In July, the lack of a hot retail sales report obviated the need to go to 100 basis points, and the Fed delivered a 75-basis point increase. I believe similar logic applies here.”

Orton said it’s also worth noting that a 75-bp move would take the fed fund rate 75 bps above long-run neutral and more or less right in line with estimates of short-term neutral. This is important, he said, because Fed officials have communicated that, once in restrictive territory, they prefer to take a more “assess-as-you-go” approach to further tightening. Indeed, this was Federal Reserve Bank of St Louis President James Bullard’s response as to the 75- versus 100-bp question in July. Now it is even more applicable with rates set to breach long-run neutral regardless of whether the increase is 75 or 100 bps. Also, a 75-bp hike plus maximum caps for quantitative tapering is actually an acceleration in the pace of tightening.

“I just don’t see how there is justification to go any more than 75 basis points,” Orton said. “Doing so would truly risk driving the economy off a cliff.”

Earnings will be key post-FOMC

Once we get past the FOMC meeting this week, earnings will again be in focus. Last week’s big miss from the overnight delivery company raises some very valid concerns around current expectations of corporate profitability, Orton said. Recent recession experiences have led many strategists to believe that S&P 500 earnings are likely to get crushed in response to higher interest rates, but an examination of longer-term history shows earnings declines vary extensively. Without clear economic excesses to be resolved, the consensus for modest earnings-per-share (EPS) growth seems more reasonable to Orton than is commonly believed.

The scars of the Global Financial Crisis linger over many investors, but it’s worth noting that not all recessions are equally troubling for S&P 500 EPS, and recent recessions may offer faulty guidance on what’s to come. According to an interesting Bloomberg study, the average peak-to-trough drawdown in EPS associated with recessions from 1960 to 1981 was around 12.6%, and the lightest was a mere 4.6%. In contrast, the average drop associated with the 1990, 2001 and 2009 recessions was 61%. Unlike the prior three recessions, however, Orton said it is difficult to point to economic excesses likely to have severe earnings consequences. Though financial market bubbles developed with policy intervention, he said limited economic excess may shelter EPS from a severe decline.

Moreover, Orton noted, “the bar is low. If earnings don’t deteriorate materially, companies have the opportunity to beat expectations and potentially be catalysts to help move the markets higher.”

What to watch

It’s all about the FOMC meeting this week, with some noteworthy earnings reports coming from companies in food products; discount retailing; auto parts; package delivery; restaurants; and information technology services and consulting.

This week's data releases

Tuesday U.S. building permits and housing starts; Germany Producer Price Index; Japan CPI
Wednesday U.S. existing home sales and FOMC interest rate decision
Thusday U.S. initial jobless claims; Eurozone Consumer Confidence Indicator
Friday U.S. Federal Reserve Bank of Kansas City Manufacturing Activity

 

Risk Information:
Investing involves risk, including risk of loss.

Diversification does not ensure a profit or guarantee against loss.

Disclosures:
Index or benchmark performance presented in this document does not reflect the deduction of advisory fees, transaction charges, or other expenses, which would reduce performance. Indexes are unmanaged. It is not possible to invest directly in an index. Any investor who attempts to mimic the performance of an index would incur fees and expenses that would reduce return.

This document is a general communication being provided for informational purposes only. It is educational in nature and not designed to be taken as advice or a recommendation for any specific investment product, strategy, plan feature, or other purpose in any jurisdiction, nor is it a commitment from Carillon Tower Advisers or any of its affiliates to participate in any of the transactions mentioned herein. Any examples used are generic, hypothetical, and for illustration purposes only. This material does not contain sufficient information to support an investment decision, and you should not rely on it in evaluating the merits of investing in any securities or products. In addition, users should make an independent assessment of the legal, regulatory, tax, credit, and accounting implications and make their own determinations together with their own professionals in those fields. Any forecasts, figures, opinions, or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions, and are subject to change without prior notice. All information presented herein is considered to be accurate at the time of production, but no warranty of accuracy is given and no liability in respect of any error or omission is accepted. It should be noted that investment involves risks, the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements, and investors may not get back the full amount invested. Both past performance and yields are not reliable indicators of current and future results.

The views and opinions expressed are not necessarily those of the broker/dealer; or any affiliates. Nothing discussed or suggested should be construed as permission to supersede or circumvent any broker/dealer policies, procedures, rules, and guidelines.

The U.S. Consumer Price Index (CPI) measures the change in prices paid by consumers for goods and services. The U.S. Bureau of Labor Statistics bases the index on prices of food, clothing, shelter, fuels, transportation, doctors’ and dentists’ services, drugs, and other goods and services that people buy for day-to-day living. Prices are collected each month in 75 urban areas across the country from about 6,000 households and 22,000 retailers.

Core inflation, as measured by the “Consumer Price Index for All Urban Consumers: All Items Less Food & Energy,” is an aggregate of prices paid by urban consumers for a typical basket of goods that does not include food and energy. Core CPI is widely used by economists because food and energy typically have very volatile prices.

Owners’ equivalent of rent of primary residences (OER) is a component of the Consumer Price Index that helps measure changes in the cost of shelter in the United States. It is based on the answers from consumers who own their homes to the question: “If someone were to rent your home today, how much do you think it would rent for monthly, unfurnished and without utilities?”

Basis points (bps) are measurements used in discussions of interest rates and other percentages in finance. One basis point is equal to 1/100th of 1%, or 0.01%.

The University of Michigan Index of Consumer Sentiment is based on monthly telephone surveys in which at least 500 consumers in the continental United States are asked 50 questions about what they think now and what their expectations are for their personal finances, business conditions, and buying conditions. Their responses are used to calculate monthly measures of consumer sentiment that can be compared to a base value of 100 set in 1966.

Technicals refers to technical indicators of historic market data, including price and volume statistics, to which analysts apply a wide variety of mathematical formulas in their study of larger market patterns.

The daily moving average (DMA) is a calculation that takes the arithmetic mean of a given set of prices over the specific number of days in the past; for example, over the previous 15, 30, 100, or 200 days.

Defensive stocks provide consistent dividends and stable earnings regardless whether the overall stock market is rising or falling. Companies with shares considered to be defensive tend to have a constant demand for their products or services and thus their operations are more stable during different phases of the business cycle.

Growth at a reasonable price (GARP) is a stock investment strategy that seeks to combine tenets of both growth and value investing in the evaluation and selection of individual stocks. GARP investors look for companies with consistent earnings growth above broad market levels but try to avoid companies with very high valuations. By trying to avoid the extremes of either growth or value investing, GARP investors often end up focusing on growth-oriented stocks with relatively low price-to-earnings multiples in normal market conditions.

The Goldman Sachs U.S. Financial Conditions Index is designed to track the weighted average of riskless interest rates, the exchange rate, equity valuations, and credit spreads, with weights that correspond to the direct impact of each variable on gross domestic product.

The federal funds rate, known as the fed funds rate, is the target interest rate set by the Federal Open Market Committee of the Federal Reserve. The target is the Fed’s suggested rate for commercial banks to borrow and lend their excess reserves to each other overnight.

The neutral rate is the theoretical federal funds rate at which the stance of U.S. Federal Reserve monetary policy is neither accommodative nor restrictive. It is the short-term real interest rate consistent with the economy maintaining full employment with associated price stability

Quantitative tapering refers to the attempt by central bankers to reverse the effects of quantitative easing (QE), which is a form of unconventional monetary policy in which a central bank purchases longer-term securities from the open market in order to increase the money supply and encourage lending and investment. In quantitative easing, buying securities adds new money to the economy, and also serves to lower interest rates by bidding up fixed-income securities. It also expands the central bank’s balance sheet. In quantitative tapering, reducing those purchases is a policy primarily aimed at interest rates and at influencing investor perceptions of the future direction of interest rates.

Earnings per share (EPS) is calculated as a company’s profit divided by the outstanding shares of its common stock. The resulting number serves as an indicator of a company’s profitability.

The German Producer Price Index is compiled by Germany’s Federal Statistical Office on a monthly basis to track the prices of industrial products that include energy, capital goods such as machines and vehicles, intermediate goods such as raw materials, wood, metals, chemicals, and electronic intermediate circuits, and non-durable consumer goods such as butter, sugar, pork, poultry and crude vegetable oils.

The Japan Consumer Price Index, released monthly by the Statistics Bureau of Japan, tracks core inflation by monitoring price changes in a wide variety of goods and services, excluding fresh foods but including energy, purchased by households nationwide.

The Eurozone Consumer Confidence Indictor is conducted by the Directorate General for Economic and Financial Affairs to measure consumer confidence within different sectors of the economies in the European Union and in the applicant countries.

The Federal Reserve Bank of Kansas City Manufacturing Survey is a monthly survey that monitors manufacturing plants selected according to geographic distribution, industry mix and size in the Tenth Federal Reserve District, which includes the western third of Missouri; all of Kansas, Colorado, Nebraska, Oklahoma, and Wyoming; and the northern half of New Mexico. Survey results reveal changes in several indicators of manufacturing activity, including production and shipments, and identify changes in prices of raw materials and finished products.

The S&P 500 Index measures change in stock market conditions based on the average performance of 500 widely held common stocks. It is a market-weighted index calculated on a total return basis with dividend reinvested. The S&P 500 represents approximately 75% of the investable U.S. equity market.

 

CTA22-0558 Exp. 1/19/2023


Sept. 12, 2022: This remains a whipsaw-prone environment

The positive price action in U.S. equities last week was important to preserving an upward bias as the market moves through a basing process – especially since monetary policy hawks were hard at work as global central banks continued their tightening campaigns – but there is no guarantee that the ride ahead will be smooth.

“I believe we’re getting further confidence that the June lows will hold, but even though the market bounced nicely, this is a whipsaw-prone environment and the likelihood of seeing 4% or 5% weekly moves is totally on the table going forward,” said Matt Orton, CFA, Chief Market Strategist at Carillon Tower Advisers. “Every move is being fully dictated by the macroeconomic backdrop, and this week there’s a plethora of very important macro data coming out.”

The likelihood of seeing 4% or 5% weekly moves is totally on the table going forward.

Fedspeak last week was consistently hawkish and traders have almost fully priced a 75-basis point (bp) hike at the September Federal Open Market Committee (FOMC) meeting. Notably, U.S. Federal Reserve Chairman Jerome Powell did not push back against a 75-bp hike last Thursday and repeated at a monetary policy conference in Washington D.C. that “we need to act now forthrightly, strongly, as we have been doing, and we need to keep at it until the job is done.” Orton said he believes Powell’s non-pushback essentially solidifies a 75-bp increase unless there is a big downward surprise in the Consumer Price Index (CPI) data on Tuesday.

“We’re also in a blackout period, so we will not hear from Fed members for interpretation prior to the FOMC meeting,” he said. “I still don’t believe the totality of the recent data supports 75 basis points, but the Fed is very focused on inflation expectations and they also have a political problem with credibility, so they want to sound hawkish for that. Remember, the tightening of financial conditions isn’t linear, and you can quickly get to a point where the Fed has tightened too much and created a crisis as a result. This is why I continue to see the ceiling at 3.5% or 3.75% depending on what happens in September.”

On the positive side, Orton said equity markets shouldn’t have a sharp reaction to a 75-bp hike given that it’s essentially fully priced in. Any further evidence of decelerating inflation should also marginally add to risk sentiment as it would put downward pressure on terminal fed funds expectations. We also get University of Michigan Index of Consumer Sentiment data on Friday, which includes the critical results for long-term inflation expectations. Further evidence that five- to 10-year inflation expectations remain anchored would be viewed very positively. We also got some additional positive anecdotal evidence on the inflation front last week when a major grocery chain beat expectations and said that it sees inflation moderating in the second half of the year. Used vehicle prices also fell by a larger than normal 4% in August, which is important given the historic dislocations that need to continue to reverse inflation.

Orton also noted that we’re seeing strong upward moves for companies that beat earnings expectations, particularly for the highest duration companies whose share prices have declined by 50% to 70% year to date. “I have been saying for a while that expectations have come down quite a bit over the past two quarters, and they don’t necessarily need to come down too much more from here,” he said. Third-quarter earnings-per-share (EPS) growth for the S&P 500 Index is now expected to be 3.7% and fourth-quarter EPS growth is expected to be 4.8%, both very reasonable, and that would bring calendar-year earnings growth for 2022 to 7.9%.

“If we keep with the level of surprise that we have had, we could end up with 10% earnings growth this year,” Orton said. “That says to me that we’ve set the bar low enough that positive earnings surprises should be enough to move stocks higher, not lower. We’re also still waiting on the recession shoe to drop, and there’s no evidence of it other than in housing specifically. Certainly, there are big risks given that housing has implications for the rest of the economy as well as a multiplier effect, but it’s not enough to take everything down.”

Negative sentiment and stretched positioning could
provide tailwinds

No surprise: S&P 500 meets resistance at the 200-day DMA

Source: Bloomberg, American Association of Individual Investors, as of 9/9/22

Investors remain defensively positioned

No surprise: S&P 500 meets resistance at the 200-day DMA

Source: Bloomberg, as of 9/9/22

Why weaker retail sales don’t mean a weak consumer

Even as economic growth slows from the rapid post-recession clip, the underlying shift toward services should prevent the economy from falling into recession. Thursday’s report on retail sales for August will help finetune projections for third-quarter gross domestic product (GDP) growth, which Orton said he expects will be back in positive territory. He noted that headline retail sales will likely be negatively influenced by the sharp decline in gasoline prices as well as a modest decline in auto sales. While backto-school purchases may help boost sales elsewhere, heavy discounting likely limited the extent of the projected increase. Continued rotation into services, re-routing consumer dollars away from goods, suggests that a weak number should not be read as a signal of significant deterioration in economic activity, he said.

To the contrary, he said, recent bank data points to households continuing to have elevated savings levels relative to before the pandemic, with little indication that lower-income households are reaching for their credit cards. The decline in gas prices also supported spending elsewhere, with key leisure service sectors such as airlines, restaurants, and lodging rebounding last month. The data also showed a noticeable jump in childcare payments in August – almost reaching pre-pandemic levels. This is important, Orton said, because increased childcare spending may signal that prime-age (25 to 54 years old) parents are returning to the labor market and the trend in increased participation we saw in the last jobs report could continue.

Orton’s playbook remains unchanged

Orton acknowledged that his current outlook for U.S. equities is a bit more constructive than many others’ right now. But he said it’s also important to recognize that the global economy is looking at some big problems that have no easy solutions: First, Europe is staring at a severe energy crisis; second, central banks’ tightening of monetary policy is starting to weigh on demand; and third, China’s zero-COVID policies are constraining its economy and continuing to weigh on other economies. Given these challenges, he said the breadth of global manufacturing purchasing managers’ indices (PMIs) in expansionary territory is already rolling over, declining from 85% in June (35 out of 41 countries) to 56% now (23 out of 41 countries). The 12-month change in the Conference Board Leading Economic Index®, an amalgamation of 10 high-frequency data points that reflect outlooks on economic activity in the coming months, is approaching the vulnerable zone, falling from 12% in April 2021 to 0% in July.

And that is why Orton said he continues to favor maintaining a core defensive bias: leaning into quality as it has a lower/negative beta and historically outperforms during periods where recession risk is elevated. He said his preferred ways to lean into quality remain dividend growth, Growth at a Reasonable Price (GARP), and healthcare, which have all outperformed year to date during market volatility (including a resumption in outperformance over the last two weeks). Dividend growth and GARP also have continued to outperform over the past few weeks, even as the market rebounded. Increasing small-cap positioning on downside also has continued to work and Orton said he continues to favor reducing underweight positioning in small caps as:

  • The Russell 2000® Index has rallied nearly 23% from trough to peak following the June 16 lows. The swift 11%+ drawdown was a perfect example of using downside opportunistically. He noted that the Russell 2000 outperformed last week and said he would not be surprised to see similar outperformance as the market eventually emerges from the current basing process.
  • Valuations remain compelling. The 12-month forward price-to-earnings (P/E) spread between the Russell 2000 and the S&P 500 is currently below the average level during market turbulence during the economic contractions of 2001, 2008, and 2020. Even if the economy weakens from here, he said there still seems to be scope for normalization. Earnings also have been better than expected, providing another tailwind, along with increased breadth and improved internals.

What to watch

This week will be focused on U.S. CPI data which comes out on Tuesday. But there’s plenty of other very important data releases, including small business optimism, retail sales, and consumer sentiment updates.

This week's data releases

Monday U.K. Index of Services; monthly GDP, industrial output, and trade balance; India industrial output and CPI; Italy industrial output
Tuesday U.S. CPI, National Federation of Independent Business Small Business Optimism Index; U.K. unemployment; Germany and Spain CPI; Germany ZEW Financial Market Survey; Japan Services Producer Price Index and machinery orders
Wednesday U.S. Producer Price Index; Eurozone industrial output; U.K. Consumer Prices Index; Japan industrial output
Thusday U.S. business inventories, industrial output, retail sales, initial jobless claims and Empire State Manufacturing Survey; Japan trade balance; Australia unemployment
Friday University of Michigan Index of Consumer Sentiment; Eurozone Harmonised Index of Consumer Prices; Italy CPI; U.K. retail sales; China home sales, property investment, retail sales, industrial output, fixed assets and jobless rate

 

Risk Information:
Investing involves risk, including risk of loss.

Diversification does not ensure a profit or guarantee against loss.

Disclosures:
Index or benchmark performance presented in this document does not reflect the deduction of advisory fees, transaction charges, or other expenses, which would reduce performance. Indexes are unmanaged. It is not possible to invest directly in an index. Any investor who attempts to mimic the performance of an index would incur fees and expenses that would reduce return.

This document is a general communication being provided for informational purposes only. It is educational in nature and not designed to be taken as advice or a recommendation for any specific investment product, strategy, plan feature, or other purpose in any jurisdiction, nor is it a commitment from Carillon Tower Advisers or any of its affiliates to participate in any of the transactions mentioned herein. Any examples used are generic, hypothetical, and for illustration purposes only. This material does not contain sufficient information to support an investment decision, and you should not rely on it in evaluating the merits of investing in any securities or products. In addition, users should make an independent assessment of the legal, regulatory, tax, credit, and accounting implications and make their own determinations together with their own professionals in those fields. Any forecasts, figures, opinions, or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions, and are subject to change without prior notice. All information presented herein is considered to be accurate at the time of production, but no warranty of accuracy is given and no liability in respect of any error or omission is accepted. It should be noted that investment involves risks, the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements, and investors may not get back the full amount invested. Both past performance and yields are not reliable indicators of current and future results.

The views and opinions expressed are not necessarily those of the broker/dealer; or any affiliates. Nothing discussed or suggested should be construed as permission to supersede or circumvent any broker/dealer policies, procedures, rules, and guidelines.

Hawkish, dovish, and centrist are terms used to describe the monetary policy preferences of central bankers and others. Hawks prioritize controlling inflation and may favor raising interest rates to reduce it or keep it in check. Doves tend to support maintaining lower interest rates, often in support of stimulating job growth and the economy more generally. Centrists tend to occupy the middle of the continuum between tight (hawkish) and loose (dovish) monetary policy.

The U.S. Consumer Price Index (CPI) measures the change in prices paid by consumers for goods and services. The U.S. Bureau of Labor Statistics bases the index on prices of food, clothing, shelter, fuels, transportation, doctors’ and dentists’ services, drugs, and other goods and services that people buy for day-to-day living. Prices are collected each month in 75 urban areas across the country from about 6,000 households and 22,000 retailers.

The federal funds rate, known as the fed funds rate, is the target interest rate set by the Federal Open Market Committee of the Federal Reserve. The target is the Fed’s suggested rate for commercial banks to borrow and lend their excess reserves to each other overnight.

The University of Michigan Index of Consumer Sentiment is based on monthly telephone surveys in which at least 500 consumers in the continental United States are asked 50 questions about what they think now and what their expectations are for their personal finances, business conditions, and buying conditions. Their responses are used to calculate monthly measures of consumer sentiment that can be compared to a base value of 100 set in 1966.

Equity duration is the cash-flow weighted average time at which investors can expect to receive the cash flows from their investment in a company’s stock. Long-duration stocks include fast-growing technology companies, including those that may not pay any dividends in their early years, while short-duration stocks tend to be more mature companies with higher ratios to dividend to price.

Earnings per share (EPS) is calculated as a company’s profit divided by the outstanding shares of its common stock. The resulting number serves as an indicator of a company’s profitability.

The American Association of Individual Investors Sentiment Survey reflects answers offered each week by AAII members to the question: What direction do they feel the stock market will take in the next six months? Answers are sorted into bullish, neutral, and bearish categories.

Defensive stocks provide consistent dividends and stable earnings regardless whether the overall stock market is rising or falling. Companies with shares considered to be defensive tend to have a constant demand for their products or services and thus their operations are more stable during different phases of the business cycle.

A futures contract is a legal agreement to buy or sell an asset at a predetermined price at a specified time in the future, which is known as the expiration date. Futures contracts are financial derivatives that allow investors to speculate on the direction of a particular asset and are often used to hedge the price movement of the underlying asset to help prevent losses from undesired price changes.

The Bloomberg CFTC CME e-mini S&P 500 net non-commercial futures positions index tracks positioning for non-hedging traders and provides a view of how investors and speculators are positioned. Data is based on the weekly Commitments of Trader (COT) reports, which show open interest for markets in which 20 or more traders hold positions equal to or above the reporting levels established by the Commodity Futures Trading Commission (CFTC). A trader is determined to be commercial or non-commercial using the following rational: All traders’ reported futures positions are classified as commercial if the trader uses futures contracts in that particular underlying for hedging as defined in the CFTC’s regulations.

Purchasing Managers’ Index data are compiled by IHS Markit for more than 40 economies worldwide. The monthly data are derived from surveys of senior executives at private sector companies. PMI data features a headline number, which indicates the overall health of an economy, and sub-indices, which provide insights into other key economic drivers such as gross domestic product, inflation, exports, capacity utilization, employment, and inventories.

The Conference Board Leading Economic Index® for the United States is designed to signal peaks and troughs in the business cycle, to be highly correlated with real (adjusted for inflation) GDP, and to be a predictive variable that anticipates (or “leads”) turning points in the business cycle by around seven months. It is comprised from 10 components: Average weekly hours in manufacturing; Average weekly initial claims for unemployment insurance; Manufacturers’ new orders for consumer goods and materials; Institute for Supply Management® Index of New Orders; Manufacturers’ new orders for nondefense capital goods excluding aircraft orders; Building permits for new private housing units; S&P 500 Index; Leading Credit Index; Interest rate spread (10-year Treasury bonds less federal funds rate); Average consumer expectations for business conditions.

Headline measures of economic activity such as inflation, price trends or gross domestic product include all economic activity and are often referred to as nominal measures. Real measures of economic activity are adjusted for inflation, in some cases by excluding more volatile prices for things like food and fuel.

Beta is a measure of the volatility or systemic risk of a security or portfolio compared with the market as a whole.

Growth at a reasonable price (GARP) is a stock investment strategy that seeks to combine tenets of both growth and value investing in the evaluation and selection of individual stocks. GARP investors look for companies with consistent earnings growth above broad market levels but try to avoid companies with very high valuations. By trying to avoid the extremes of either growth or value investing, GARP investors often end up focusing on growth-oriented stocks with relatively low price-to-earnings multiples in normal market conditions.

Price-to-earnings (P/E) ratios measure a company’s current share price relative to its earnings per share. The ratio is used to help assess a company’s value and is sometimes referred to as the price multiple or earnings multiple.

Forward price-to-earnings (forward P/E) is a version of the ratio of price to earnings that uses forecast earnings for the P/E calculation. The earnings used in this ratio are an estimate and therefore are not as reliable as current or historical earnings data.

Internals refer to quantitative market indicators that investment professionals monitor to spot trends and forecast movements within securities markets. A subset of technical indicators, internals include a number of formulas and ratios, such as the number of stocks moving in the same direction as a larger trend, the ratio of securities with rising and falling prices, the ratio of new highs to new lows, and price and volume indicators that are seen as indicators of overall market sentiment.

The U.K. Index of Services, released monthly by the U.K. Statistics Authority, tracks movements in the volume of output for services industries in the U.K. using seasonally adjusted figures.

India’s Consumer Price Index measures change over time in general level of prices of goods and services that households acquire for the purpose of consumption. It is produced by the Price Statistics Division of the National Statistical Office in the Ministry of Statistics and Programme Implementation.

The National Federation of Independent Business’s Small Business Optimism Index surveys small and independent business owners on 10 equally weighted and seasonally adjusted variables, including their hiring, investment, and inventory plans, as well as on their economic expectations, assessment of the state of the economy, labor market, credit conditions, and earnings trends. The monthly change of each variable contributes proportionally to the overall monthly change in the index.

Spain’s Consumer Price Index, published by the National Statistics Institute, seeks to provide a statistical measurement of the evolution of the set of prices of goods and services that the resident population in family dwellings in Spain consumes. This index is compiled with nearly 210,000 prices reported by some 29,000 establishments distributed in 177 municipalities throughout the country. The data collection on 462 items is carried out in the traditional way (by personal visit to the establishments on the corresponding dates), as well as by telephone and e-mail. In addition, by automated means (such as scanner data or web scrapping), data is collected for another 493 items. For some tariffed items, information is obtained from the corresponding official publications.

The ZEW Financial Market Survey is produced monthly by the Zentrum für Europäische Wirtschaftsforschung (the Center for European Economic Research) and is based on a survey of about 350 economists and analysts on the economic future of Germany in the medium term.

The Japan Services Producer Price Index, released monthly by the Bank of Japan, tracks changes in prices paid for services that include advertising; leases and rentals; real estate services; transportation and postal activities; information and communications; finance and insurance; sewage and waste disposal; motor vehicle and machinery repair; health and hygiene; call centers, hotels, and architectural, civil engineering, legal, accounting and other professional services.

The U.S. Producer Price Index (PPI), published monthly by the U.S. Bureau of Labor Statistics, measures the average change over time in the selling prices received by domestic producers for their output.

The U.K. Consumer Prices Index is a measure of consumer price inflation in the United Kingdom based a wide range of household spending, including on food, alcoholic beverages and tobacco, clothing and shoes, housing and utilities, health, transportation, communication, recreation, education, restaurants and hotels, and miscellaneous goods and services.

The Empire State Manufacturing Survey is a monthly survey of manufacturers in New York State conducted by the Federal Reserve Bank of New York.

The Eurozone Harmonised Index of Consumer Prices is a composite measure of inflation in the Eurozone based on changes in prices paid by consumers in the European Union for items in a basket of common goods. The index tracks the prices of goods such as coffee, tobacco, meat, fruit, household appliances, cars, pharmaceuticals, electricity, clothing, and many other widely used products.

The Italy Consumer Price Index, released monthly by the Italian National Institute of Statistics (ISTAT) measures changes over time in prices for a representative basket of goods and services consumed by Italian households.

The S&P 500 Index measures change in stock market conditions based on the average performance of 500 widely held common stocks. It is a market-weighted index calculated on a total return basis with dividend reinvested. The S&P 500 represents approximately 75% of the investable U.S. equity market.

The Russell 2000® Index measures the performance of the 2,000 smallest companies in the Russell 3000® Index, which represents approximately 7% of the total market capitalization of the Russell 3000® Index.

Frank Russell Company (“Russell”) is the source and owner of the trademarks, service marks and copyrights related to the Russell Indexes. Russell® is a trademark of Frank Russell Company. Neither Russell nor its licensors accept any liability for any errors or omissions in the Russell Indexes and / or Russell ratings or underlying data, and no party may rely on any Russell Indexes and / or Russell ratings and / or underlying data contained in this communication. No further distribution of Russell Data is permitted without Russell’s express written consent. Russell does not promote, sponsor, or endorse the content of this communication.

 

CTA22-0548 Exp. 1/12/2023


Sept. 6, 2022: Being bearish is fashionable

Equities posted their third week of losses and the S&P 500 Index started the week at 8.85% below its Aug. 16 high. Any attempt at a rally last week was met with selling pressure, leaving markets oversold and sentiment going from bad to worse. Even what should have been welcome news from a not too hot, not too cold U.S. jobs report was quickly sold on headlines out of Europe.

So how long will this dark outlook persist?

“The bears are in control right now and the pessimistic narrative seems to be this season’s newest trend,” said Matt Orton, CFA, Chief Market Strategist at Carillon Tower Advisers. “All we hear on a daily basis is how bad things are, but when you look at the data, both from an earnings and a fundamental perspective, it really doesn’t point to any catalysts that I believe would lead the market sustainably lower. Could we drift lower and retest the June lows? Certainly based on recent price action. But that’s not my base case.”

The initial pullback from the August highs was expected after markets got ahead of themselves, Orton said. The whipsaw price action over the past month, including some large intraday moves, also shouldn’t be surprising and he said he believes it’s likely to continue until after the Federal Open Market Committee (FOMC) meeting on Sept. 21. Until then, every economic data release and U.S. Federal Reserve (Fed) speaker will be scrutinized through the lens of a 50- or 75-basis point (bps) interest rate increase and what to expect for the terminal fed funds rate. While it might be fashionable to be bearish now, Orton said don’t forget about the other side of the ledger.

Consequently, he suggests keeping a few things in mind. Equities and bonds had their worst first-half performance in more than 50 years. The S&P 500 is still down 16.8% year to date, while the Nasdaq Composite Index is down 25.4%. Valuations have compressed meaningfully and earnings estimates have in fact been revised lower. There is a lot of bad news already baked in, and Orton said it’s hard to see how more meaningful downside would be sustainable unless the macroeconomic backdrop deteriorates from here. We continue to see signs that inflation has peaked while consumer spending in the aggregate has generally held up, and the latest jobs data suggests that the labor market might finally be starting normalize. To be sure, the charts are ugly, newsflow is a challenge especially with the energy crisis in Europe, financial conditions continue to tighten, and seasonal headwinds shouldn’t be ignored. It’s very likely we see some further downside from here, Orton said, especially if financial conditions continue to tighten.

That said, Orton believes it’s important not to lose sight of how much damage has already been done and the more positive fundamental backdrop that the recent price action suggests. He said he continues to favor using any additional meaningful downside opportunistically. The core defensive positioning that he has recommended all year has outperformed as the market has moved lower and he said he continues to advocate for leaning into dividend growth, growth at a reasonable price (GARP), and quality more generally across all assets. Healthcare is a sector that has provided strong relative performance due to its GARP characteristics (especially up-market cap), and from a seasonal perspective it also looks attractive to Orton.

“In the very near term, I believe extreme caution is warranted,” he said. “The charts are very ugly, and everyone wants to sell. But, for longer-term investors, that’s why I say use downside opportunistically, because if you can weather some of the shorter-term pain, now is a good time to watch for long-term opportunities because the bearish narrative and selling pressure is so pervasive. I believe the setup looks increasingly better for long-term investors. You just have to pick and choose your places.”

Orton’s playbook: Lean into Dividend Growth and
Growth at a Reasonable Price (GARP)

No surprise: S&P 500 meets resistance at the 200-day DMA

Source: Bloomberg, as of 9/2/22

Earnings have been revised down – perhaps enough

The earnings apocalypse didn’t materialize in the second quarter, but that hasn’t stopped gloomy earnings projections from just being kicked down the road. Every day Orton said he hears that analysts are way too optimistic about the prospects of their companies and need to come back to the dismal reality that we’re apparently in.

“I believe that’s just too extreme and ignores the fact that earnings estimates actually have come down and much more than average,” Orton said. It also ignores the strength we saw in the second quarter despite incredibly negative expectations from the same people: For the quarter, the blended earnings growth rate for the S&P 500 came in at +6.3% versus the 3.9% that had been expected, and the S&P 500’s net profit margin matched that of the first quarter at 12.3%.

So where do analyst projections stand now? During July and August, analysts lowered earnings-per-share (EPS) estimates for the third quarter by a larger margin than average with the bottomup EPS estimate decreasing by 5.4% from $59.44 to $56.21. This is meaningfully higher than the historical average revisions over the past five, 10, 15, and 20 years (-1.9%, -2.7%, -3.5%, and -2.9% re spectively). Analysts also decreased forecasts for the fourth quarter by -3.5% (from $60.73 to $58.60) and for next year by -2.8% (from $250.61 to $243.68).

“I don’t believe the narrative that we necessarily have to have massive earnings downgrades really holds any water,” he said.

Goldilocks jobs report largely ignored

The August jobs report presented compelling evidence of cooling labor conditions and kept the debate between a 50- or 75-bps rate hike alive for the September FOMC meeting. Headline payroll growth was broadly in line at 315,000 new jobs, albeit with significant downward revisions. But Orton said the real story was the uptick in the labor force participation rate to a post-COVID high of 62.4%. That drove a rise in the unemployment rate to 3.7% – not economic weakness – and led to lower-than-expected wage growth of 0.3%.

“This is exactly what we need to see to start getting confident that labor-driven inflation has peaked,” he said. “Unfortunately it was overshadowed by an announcement from Gazprom, the Russian energy supplier, that it would suspend gas deliveries through the Nord Stream pipeline indefinitely.”

The importance of this Goldilocks jobs report cannot be understated, Orton said. Fed Chairman Jerome Powell has described labor conditions as “particularly strong” and “clearly out of balance.” While the August data will not materially change his assessment, it does suggest the trend is evolving favorably. For this reason, the key focal points in the coming week turn from data to Fedspeak, in particular speeches from Vice Chair Lael Brainard on Wednesday and Powell on Thursday. The minutes of the July FOMC meeting hinted that policy makers were keen to moderate the pace of tightening soon. These upcoming speeches will provide a platform to provide interpretation of recent events and guide market expectations for the Sept. 21 policy decision before the communications blackout period begins at the end of the week.

The pace of hiring is downshifting

No surprise: S&P 500 meets resistance at the 200-day DMA

Source: Bloomberg, U.S. Bureau of Labor Statistics, as of 8/31/22



It’s also worth pointing out that the Institute for Supply Management’s manufacturing survey last week showed further signs of easing inflationary pressures with the prices paid sub-component moving to its lowest level in over two years. Orton noted that the Services ISM® Report on Business®, released Tuesday, continued to show a positive economy with robust business activity and some slight moderation in prices paid.

What to watch

Central bank meetings are front and center globally this week with the European Central Bank expected to raise rates 75 bps. Along with a variety of global indicators, the week will bring earnings reports from companies in software; electric vehicle manufacturing; video games; convenience stores; clothing and accessories; sporting goods; cloud security; electronic signature services; and grocery stores.

This week's data releases

Monday Switzerland gross domestic product (GDP); Caixin China General Services Purchasing Managers’ Index
Tuesday U.S. Services ISM® Report on Business®; Australia central bank interest rate decision; Japan household spending; Germany factory orders
Wednesday U.S. Fed Beige Book; Canada central bank interest rate decision; Germany industrial output; China trade report; Australia GDP
Thusday U.S. initial jobless claims; European Central Bank interest rate decision; Japan GDP
Friday U.S. wholesale inventories; China Consumer Price Index and China Industrial Sector Producer Price Index; Brazil Consumer Price Index; France industrial output

 

Risk Information:
Investing involves risk, including risk of loss.

Diversification does not ensure a profit or guarantee against loss.

Disclosures:
Index or benchmark performance presented in this document does not reflect the deduction of advisory fees, transaction charges, or other expenses, which would reduce performance. Indexes are unmanaged. It is not possible to invest directly in an index. Any investor who attempts to mimic the performance of an index would incur fees and expenses that would reduce return.

This document is a general communication being provided for informational purposes only. It is educational in nature and not designed to be taken as advice or a recommendation for any specific investment product, strategy, plan feature, or other purpose in any jurisdiction, nor is it a commitment from Carillon Tower Advisers or any of its affiliates to participate in any of the transactions mentioned herein. Any examples used are generic, hypothetical, and for illustration purposes only. This material does not contain sufficient information to support an investment decision, and you should not rely on it in evaluating the merits of investing in any securities or products. In addition, users should make an independent assessment of the legal, regulatory, tax, credit, and accounting implications and make their own determinations together with their own professionals in those fields. Any forecasts, figures, opinions, or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions, and are subject to change without prior notice. All information presented herein is considered to be accurate at the time of production, but no warranty of accuracy is given and no liability in respect of any error or omission is accepted. It should be noted that investment involves risks, the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements, and investors may not get back the full amount invested. Both past performance and yields are not reliable indicators of current and future results.

The views and opinions expressed are not necessarily those of the broker/dealer; or any affiliates. Nothing discussed or suggested should be construed as permission to supersede or circumvent any broker/dealer policies, procedures, rules, and guidelines.

Oversold is a term used to describe a security believed to be trading at a level below its intrinsic or fair value.

Basis points (bps) are measurements used in discussions of interest rates and other percentages in finance. One basis point is equal to 1/100th of 1%, or 0.01%.

The federal funds rate, known as the fed funds rate, is the target interest rate set by the Federal Open Market Committee of the Federal Reserve. The target is the Fed’s suggested rate for commercial banks to borrow and lend their excess reserves to each other overnight.

Valuation compression, also referred to as multiple compression, is an effect that takes place when a company’s earnings rise, but its stock price does not move in response. This decreases the company’s financial multiple, and this often reflects a change in investor expectations. In the case of a company that posts flat earnings, a multiple compression could see the stock price fall or, in the event that the company reports falling earnings, the stock price could fall faster than the earnings.

Defensive stocks provide consistent dividends and stable earnings regardless whether the overall stock market is rising or falling. Companies with shares considered to be defensive tend to have a constant demand for their products or services and thus their operations are more stable during different phases of the business cycle.

Growth at a reasonable price (GARP) is a stock investment strategy that seeks to combine tenets of both growth and value investing in the evaluation and selection of individual stocks. GARP investors look for companies with consistent earnings growth above broad market levels but try to avoid companies with very high valuations. By trying to avoid the extremes of either growth or value investing, GARP investors often end up focusing on growth-oriented stocks with relatively low price-to-earnings multiples in normal market conditions.

Blended earnings combine actual results for companies that have reported earnings and estimated results for companies that have yet to report.

Earnings per share (EPS) is calculated as a company’s profit divided by the outstanding shares of its common stock. The resulting number serves as an indicator of a company’s profitability.

A bottom-up EPS estimate is an aggregation of the median EPS estimates for all the companies in an index.

Headline measures of economic activity such as price trends or gross domestic product include all economic activity and are often referred to as nominal measures. Real measures of economic activity are adjusted for inflation, in some cases by excluding more volatile prices for things like food and fuel.

The Purchasing Managers’ Index (PMI) measures the prevailing direction of economic trends in the manufacturing sector. It is created by the Institute for Supply Management (ISM), and consists of an index summarizing whether market conditions as reported in a monthly survey of supply chain managers are expanding, staying the same, or contracting.

The Services ISM® Report on Business® is produced by the Institute for Supply Management (ISM) and is based on data compiled from purchasing and supply executives in a wide variety of industries nationwide. Survey responses reflect the change, if any, in the current month compared to the previous month in supplier deliveries along with seasonally adjusted business activity, new orders, and employment.

The Caixin China General Services PMI, compiled by IHS Markit, tracks sales, employment, inventories, and prices in China’s services industry. It is based on data compiled from monthly replies to questionnaires sent to purchasing executives in more than 400 companies. Survey responses reflect the change, if any, in the current month compared to the previous month based on data collected mid-month. A reading above 50 indicates expansion, while anything below that points to contraction.

The China Consumer Price Index (CPI), released monthly by the National Bureau of Statistics of China, measures changes over time in prices of goods and services in eight categories and 268 basic divisions covering consumption by urban and rural residents, including food; tobacco and liquor; clothing; residential costs; household articles and services; transportation and communication; education, culture, and recreation; healthcare; and other articles and services.

The China Industrial Sector Producer Price Index (PPI) is released monthly by the National Bureau of Statistics of China and reflects the trend and level of prices change when the products are sold for the first time. The survey of industrial producers covers the prices of industrial products in 40 major industrial categories and more than 1,300 basic categories.

Brazil’s Extended National Consumer Price Index (IPCA), calculated by the Brazilian Institute of Geography and Statistics, measures the inflation rate for selected retail products and services, including food and beverages; housing; household articles; wearing apparel; transportation; health and personal care; personal expenses; education; and communication. The index is constructed to cover 90% families living in 13 geographic zones: the metropolitan areas of Belém, Fortaleza, Recife, Salvador, Belo Horizonte, Vitória, Rio de Janeiro, São Paulo, Curitiba, Porto Alegre, as well as the Federal District and the cities of Goiânia and Campo Grande.

The S&P 500 Index measures change in stock market conditions based on the average performance of 500 widely held common stocks. It is a market-weighted index calculated on a total return basis with dividend reinvested. The S&P 500 represents approximately 75% of the investable U.S. equity market.

The Nasdaq Composite Index is the market capitalization-weighted index of over 2,500 common equities listed on the Nasdaq stock exchange.

 

CTA22-0540 Exp. 1/06/2023