Markets in Focus

Timely analysis of market moves and sectors of opportunity

May 10, 2021: Markets have their cake and eat it too

Positive market moves and sentiment seem set to propel equities even higher, but many investors are backing away from big names that worked in 2020, said Matt Orton, CFA, Director and Portfolio Specialist at Carillon Tower Advisers.

“We are seeing divergences in investor behavior,” Orton said. “They are disowning entrenched secular growth themes we’ve been seeing in this market. There is ongoing rotation beneath the surface away from the growth winners of 2020 that investors no longer want to own, or are tired of. However, many of the top 10 S&P 500 names are very nearly oligopolies – industries without the threat of real regulation coming anytime soon in the future, and have the power to keep delivering.”

“Growth and value are not fungible,” Orton continued. “You need to own both, you need to have exposure to both. But if you missed the big value rotation over the past few months and are still looking for exposure to reopening stocks, I think Europe looks particularly interesting – and cheap, compared to the U.S.”

Investors are also uncertain what to do with cash in the current market environment, said James Camp, CFA, Director of Fixed Income and Strategic Income at Eagle Asset Management. “The cash markets are completely dysfunctional right now,” Camp said. “Investors don’t know where to go.”

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There is ongoing rotation beneath the surface away from the growth winners of 2020...

With inflation fears seeming to increase daily, Camp recommends tactical allocation among asset classes, and stresses the importance of active management. “Many financial professionals are asking ‘is the traditional 60-40 equity-bond portfolio dead?’ and our answer is no, 60-40 isn’t dead, but a more tactical approach is needed,” Camp said.

“Given current market trends, active management makes a lot more sense,” Orton added. “Investors can choose their specific places to be as valuations continue to move and the market quickly changes its mind regarding winners and losers.”

Copper hits all-time high

Commodities are another important story for investors to monitor, Orton said. There have been significant moves in the prices of oil and metals, like gold, silver, and copper. “Copper isn’t just for infrastructure, it’s pivotal in the manufacturing of electric vehicles (EVs), which have the potential for future growth,” Orton said. “Given the push in the U.S. infrastructure bill for alternative energy, I think copper should remain well supported.” Copper miners are also being much more prudent about expanding capacity, which helps mitigate the left tail seen in 2011 when prices last made highs.

Historical Price of Copper

Historical Price of Copper

Source: Bloomberg, as of 5/7/21.

 

Labor market gap

What’s the actionable takeaway from the disappointing jobs report last week that fell 700,000 jobs short of the expected 1 million? “One jobs report doesn’t break an overall trend,” Orton said. “It’s probably an anomaly, and it highlights the distortions that policy can cause in the overall economy.”

Orton points to the pandemic and the shutdown of the U.S economy as a root cause of the gap between demand and supply in the labor market. However, Orton believes the situation will be transitory: “Jobmatching will occur, eventually a lot of policies that have had a hand in distorting the job market are going to be expiring, like the eviction and mortgage moratoriums in June, and extended unemployment benefits in September. Schools will also reopen in September, and I believe that will provide an impetus for people to get back to work.”

What to watch this week

Earnings reports will start to slow but the conference and event schedule picks up. We get a slew of international economic data and Fed-speak will likely present actionable events.

Data releases this week
Monday Chicago Fed President Charles Evans speaks
Tuesday Brazil inflation data released, more Fed-speak from John Williams (New York Fed), Lael Brainard (Governor, U.S. Federal Reserve), and Mary Daly (San Francisco Fed)
Wednesday Indian and U.S. consumer price index data, comments from Richard Clarida, Vice Chairman of the Federal Reserve, as well as 10-year bond auction
Thursday 30-year bond auction and jobless claims
Friday University of Michigan inflation expectations and retail sales

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, and 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 which 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 professional advisers. 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 S&P 500® Index measures changes 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 London Metal Exchange (LME) is a commodities exchange that deals in metals futures and options.
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 consumer price index measures the average change in prices over time that consumers pay for a basket of goods and services.

 


CTA21-0311 Exp. 9/10/2021



May 3, 2021: Secular growth themes are here to stay

Markets were unchanged last week after a deluge of earnings reports, including most of the mega-cap tech names. And investors certainly weren’t disappointed, said Matt Orton, CFA, Director and Portfolio Specialist at Carillon Tower Advisers. Blowout earnings across the market – notably from mega-cap technology – helped the major indices again hit new all-time highs. But in some cases, the earnings beats were apparently “too good” and had many analysts clamoring that things just can’t get any better. Orton said he is not so sure that’s a good reason to sell – the $12 billion revenue beat (not just revenue) that the manufacturer of iPhones posted is bigger than the trailing 12-month revenue of 330 S&P 500 companies!

“I think it’s crazy to use earnings being too good as an explanation for a stock not reacting to the earnings report, but that is essentially what happened last week,” Orton said.

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There are absolutely reasons to own the market. You certainly don’t want to sell right now.

If anything, the incredible results of Big Tech highlight how many of the secular growth themes accelerated by the pandemic are here to stay, he said, so any weaknesses like we saw in a couple of mega-cap tech companies are probably long-term buying opportunities.

So far 60% of S&P 500 companies have reported first-quarter earnings with 86% beating estimates. But companies aren’t just beating estimates, Orton said – they’re blowing them away. In aggregate, companies are reporting earnings that are 22.8% above the estimates, which would mark the second-highest earnings surprise percentage reported by the index since FactSet began tracking this metric in 2008.

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Analysts increased estimates coming into this quarter, contrary to their usual behavior.

“This is with heightened expectations,” Orton said. “Analysts increased estimates coming into this quarter, contrary to their usual behavior, so that is definitely meaningful.”

Moreover, the blended earnings growth rate also continues to increase and now stands at 45.8% (up from 33.8% last week). Positive earnings surprises reported by companies in multiple sectors (led by the information technology, communication services, and consumer discretionary sectors) were responsible for the significant improvement in overall earnings for the index during the past week.

April was a strong month with broad-based participation

April was a strong month with broad-based participation

Source: Bloomberg, as of 4/30/21.

 

 

S&P 500 moved higher in April with best breadth on record

S&P 500 moved higher in April with best breadth on record

Source: Bloomberg, as of 4/30/21.

 

Sell in May go away?

After a spectacular run for global stocks following last March’s crash, going away in May is starting to sound like an appealing idea. And historically, there is some evidence that the calendar poses some headwinds during the summer months, Orton said. It certainly might seem like a reasonable conclusion to expect to see some headwinds materialize given the under-reaction in stocks to blowout earnings and increased sensitivity to every inflation report, but Orton said he is still not convinced these are compelling enough reasons to leave. Market indicators suggest we’ve worked off overbought conditions through time and not price, and as investors digest all of the good earnings news coupled with the continued dovish position of the U.S. Federal Reserve, the set-up continues to look good. Also, small caps have lagged thus far in the second quarter and with earnings coming in incredibly strong, Orton said we could see the space start to show signs of life again.

“There are absolutely reasons to own the market; you certainly don’t want to sell right now,” he said. “The fundamentals are incredibly strong so if we do have any sort of correction, that presents a great opportunity to put capital to work. You want to have a shopping list so you’re ready to act as weakness during this recovery has been very short-lived.”

May tends to be an uneventful month

May tends to be an uneventful month

Source: Bloomberg, as of 4/30/21.

 

What to watch

This week we get another barrage of earnings reports as well as important economic data that might give some hints on inflation. Orton said to pay attention to the Institute for Supply Management manufacturing report, construction spending, factory spending, and the March jobs report at the end of the week.

Data releases this week
Monday Manufacturing data in both the U.S. and EU as well as inflation data in South Korea
Tuesday Trade balance, durable goods, and factory orders in the U.S.
Wednesday Services purchasing managers’ report in the U.S.
Thursday Jobless claims in the U.S. and trade data in China
Friday Payrolls and unemployment rate in the U.S. as well as inflation data in Mexico.

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, and 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 which 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 professional advisers. 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 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.

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.

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

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. A Services PMI® above 49.2 over time indicates that the overall economy, or gross domestic product (GDP), is generally expanding; below 49.2, it is generally declining.

The S&P 500® Index measures changes 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 MSCI ACWI® (All Country World Index) measures the performance of large and mid-cap stocks across 23 developed markets (DM) and 24 emerging markets (EM) countries. DM countries include Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Hong Kong, Ireland, Israel, Italy, Japan, Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, the UK, and the U.S. EM countries include Brazil, Chile, China, Colombia, Czech Republic, Egypt, Greece, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Pakistan, Peru, Philippines, Poland, Qatar, Russia, South Africa, Taiwan, Thailand, Turkey, and United Arab Emirates.

 


CTA21-0289 Exp. 9/3/2021