Markets in Focus

Timely analysis of market moves and sectors of opportunity

February 28, 2022: The Good, the Bad, and the Ugly

Watch for headlines to dominate the narrative this week as investors monitor the impact of the war in Ukraine, key earnings reports, and a heavy roster of Federal Open Market Committee speakers. The follow-through from Thursday’s bounce was encouraging, as was the improvement in market direction Monday morning, but it’s too early to declare that the worst is behind us, said Matt Orton, CFA, Chief Market Strategist at Carillon Tower Advisers.

“Obviously, market sentiment is incredibly fragile,” he said. “There’s still a lot of uncertainty. To see the actual bottom, there needs to be a full capitulation with respect to downside volume, followed by a surge in breadth on the upside. We haven’t seen that on either side, so where we are right now is no-man’s land on a technical basis. Markets are neither oversold nor overbought after Thursday’s and Friday’s price action. They’re probably going to keep moving in a volatile pattern based on headlines.”

While the short-term, tactical picture still warrants caution, Orton said the fundamental backdrop remains supportive for long-term gains and justifies being opportunistic when the market becomes too fearful. Earnings remain strong, the consumer is healthy and continues to spend, and Orton said he doesn’t believe the events over the past week change the course of the economy to settle into an above-trend level of growth.

“Once we can get through this period, particularly in the United States, what we’re seeing on the geopolitical front is not going to derail the recovery or stronger economic backdrop that we have at home,” he said.

After a week with some very large price swings, Orton said it’s worth breaking down a few prominent themes and trends into three categories: the good, the bad, and the ugly. The last group is likely to provide some tailwinds to the market as reversion starts to unfold, he said. The key question is, how long will that take? The “bad” category is the one to follow closely. Can developments there move into the “good” category or do they continue to deteriorate and get downright ugly? Things can always get uglier, but Orton said that’s why it’s important never to dive in during times of heightened uncertainty, but instead dip our toes slowly.

The Good

Earnings remain strong and margins have held up with little deterioration to expectations for the first quarter and for the calendar year despite inflationary pressures. With 95% of the S&P 500 Index having reported fourth-quarter earnings, the blended earnings growth rate is 30.7% versus the 21.2% that had been expected. This is another meaningful upside surprise, Orton said, and the blended earnings growth rate for calendar year 2021 is 47.6%. Looking ahead, analysts expect earnings growth of 4.7% for the first quarter of 2022, 4.4% for the second quarter, and 8.5% for the full year. While this represents a meaningful slowdown on an absolute basis, Orton noted that analysts continue to expect growth from record levels with only 10 basis points or so of margin compression from current levels.

The strength of the consumer also has been a bright spot. Retail sales continue to surprise to the upside, and personal spending data last week meaningfully beat expectations. A leading “big box” retailer reported very strong earnings, and this week reports from a wide range of other major retailers will provide a more diverse look at the state of the consumer.

“I continue to believe the shift in consumption from goods to services will be a tailwind, and it’s not a zero-sum game,” Orton said. “I was pleasantly surprised when traveling last week to see 100% full (and overbooked) flights, packed airports, busy restaurants, and families out and about.”

Orton said it’s also worth highlighting that the market sell-off has been largely orderly, with little evidence of investors hitting the panic button. Post-COVID, he said investors have tended to own protection (or at least not be systematic sellers of volatility), and this has reduced the need to sell in weakness. This is encouraging and reflects a supportive investment backdrop, he said.

The Bad

Market internals are lousy and remain in a downtrend, and it’s hard not to be skeptical when the market sits below the 200-day daily moving average (DMA), Orton said. Also, there’s no obvious oversold conditions right now. Thursday’s bounce, however, was key in avoiding a test of the next level of support at about 4050 on the S&P 500, and Orton said we’re seeing some divergences that indicate waning downside momentum. Tread carefully in the near-term, he said, and be very targeted when adding into this level of uncertainty. He strongly believes there are opportunities out there.

Watching for a turn upward in the S&P 500

Watching for a turn upward in the S&P 500

Source: Bloomberg, as of 2/25/2022.

 

As a result of the sell-off year to date, valuations have moved considerably. At the lows on Thursday, the multiple contraction on the S&P 500 was so extreme that the 12-month forward price-to-earnings ratio dipped to 18.5, below the five-year average of 18.6 despite the continuation of strong earnings reports. The Nasdaq Composite Index has seen even more extreme valuation compression, and higher quality tech has been thrown out with the bathwater. The charts aren’t pretty, Orton said, but represent selective opportunity.

Small caps have been battered over the past few months, but Orton noted the Russell 2000® Index outperformed last week and made a higher low during the initial Ukraine-Russia panic. Additionally, he said small caps remain highly oversold relative to large caps, and last Thursday the Russell 2000 hit the cheapest levels since COVID-induced market crash in 2020 and the tech bubble relative to the Russell 1000® Index. Their relative outperformance vs. the S&P 500 last week was encouraging and hopefully we see more follow-through this week, which Orton said would perhaps start to change the “extreme cautiousness” he’s exercised on small caps since last fall.

The Ugly

Meanwhile, investor sentiment has been eviscerated and sits at the lowest levels since the COVID crash. Consumer confidence also remains depressed and the University of Michigan Consumer Sentiment Index sits at its lowest level in 10 years.

“Luckily, feeling bad hasn’t stopped anyone from spending in the economy,” Orton said, “but it has certainly added some hesitancy to buy the dip in the market. I believe these extreme levels of investor confidence are good contrarian indicators and should provide additional support for the market once we start to see a true bounce take place.”

American Association of Individual Investors Sentiment Survey
Bulls to Bears Ratio

American Association of Individual Investors Sentiment Survey Bulls to Bears Ratio

Source: Bloomberg, American Association of Individual Investors, as of 2/25/22.

 

What to watch

Along with some important data and earnings releases, this week is expected to feature more commentary from U.S. Federal Reserve officials, including congressional testimony from Fed Chairman Jerome Powell. Orton said he believes his call for “peak hawkishness” has played out, and he doubted this week will change that given the geopolitical uncertainty. Earnings releases will include reports from companies in business software; data management; video conferencing; artificial intelligence; automotive parts and accessories; cloud computing; and semiconductors; plus retailers in the big box, department store, grocery, electronics, clothing, and discount segments of the market.

Monday U.S. wholesale inventories
Tuesday U.S. Institute for Supply Management Purchasing Managers’ Index manufacturing report
Wednesday Meeting of the Organization of the Petroleum Exporting Countries and non-member producers (OPEC+) meeting; Eurozone Harmonised Index of Consumer Prices; Australian gross domestic product; Bank of Canada rate decision
Thusday U.S. Initial jobless claims, durable goods orders
Friday U.S. non-farm payrolls, unemployment

 

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.

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

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%.

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.

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.

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.

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.

A relative strength index (RSI) is a momentum indicator that tracks the magnitude of recent price changes to analyze overbought or oversold conditions in the price of a particular asset. Typically, RSI values of 70 or higher indicate that an asset is becoming overbought or overvalued. RSI values of 30 or below suggest oversold or undervalued conditions.

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

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

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 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.

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 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 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.

The Russell 2000® Index measures the performance of the 2,000 smallest companies in the Russell 3000® Index, which represents approximately 10% of the total market capitalization of the Russell 3000® Index.

The Russell 1000® Index measures the performance of the 1,000 largest companies in the Russell 3000® Index, which represents approximately 93% 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.

 

CTA22-0149 Exp. 6/28/2022


February 25, 2022: Russia and Ukraine: Where do markets go from here?

The Russian invasion of Ukraine is clearly taking its toll on the markets, but the resiliency we saw Thursday is encouraging, said Matt Orton, CFA, Chief Market Strategist at Carillon Tower Advisers. Despite the nice intraday bounce, the S&P 500 Index still violated critical support levels and the Nasdaq Composite Index remained very close to bear market territory.

“We’ve transitioned quickly from a ‘fear of missing out’ market to a ‘fear of being in’ market,” Orton said. “The corrective process that has been underway for the past few months remains in place, and the critical question is where do we go from here?”

The positive price action Thursday afternoon and Friday morning makes sense given overextended negative sentiment and downright ugly market internals, Orton said. But these conditions alone are not enough to say that we’ve hit the absolute bottom. For that, Orton said we need a downside volume washout followed by equally strong breadth on a rebound. That hasn’t happened yet. But he said that’s not a reason to do nothing.

Quote Image
We’ve transitioned quickly from a ‘fear of missing out’ market to a ‘fear of being in’ market.

“It makes sense to be opportunistic in select areas and to put money to work in smaller increments,” Orton said. “While there are more questions around Europe right now, I continue to believe that international developed markets look attractive for many reasons, but tread carefully in the very short term.”

Going forward, Orton said he believes three things will determine the degree to which this geopolitical uncertainty is likely to hang over the markets:

  • How long the military offensive lasts and how effective it is
  • The extent of Western sanctions and dislocation to European energy and trade flows
  • Will technical indicators wash out enough so we can see a decisive move higher?

After spending a few days talking with clients at a conference, Orton outlined his thoughts on the most common questions he received.

What is the potential impact on trade?

Although Russia accounts for less than 2% of global exports, it is a much more significant player in oil and gas. Additionally, it is the largest exporter of wheat (with Ukraine not far behind), fertilizers, and several metals. As a result, Orton said potential disruptions to trade in these commodities could reverberate for a while, in both their supply and price. This could impact the recent improvement we’ve seen in supply chains, he said, which would weigh on manufacturing processes, particularly for semiconductors.

What is the impact on Eurozone growth?

With relatively small direct trade and financial links with Russia, Orton said the main impact of the conflict on Eurozone growth is likely to come from the effect that higher energy prices have on household real incomes and corporate profit margins. Similar to inflation and interest rates, the precise impact on growth ultimately depends on the degree of sanctions, he said. In most scenarios, Orton said he would expect a fiscal response to cushion the impact.

Does this change your positive view on European equities?

The potential for slower growth and higher inflation tends not to be a good recipe for equities, Orton said. The STOXX® Europe 600 Index is already off 11% from its January highs, and these conditions likely put some caution on buy-the-dip flows. Orton said his biggest market concern is the impact on European banks, which are vulnerable to potential disruptions from sanctions as well as from uncertainty about the European Central Bank’s reaction going forward. He said he remains cautiously optimistic, given very strong earnings revisions for the Stoxx 600 as a whole, but we will need to watch carefully going forward.

Has your outlook on U.S. equities changed at all given the recent volatility?

No, Orton said. He said he believes there are opportunities in financials where we’ve seen strong earnings revisions but relative underperformance lately as the yield curve flattened. The U.S. Federal Reserve (Fed) hasn’t changed its tone, Orton noted, so we should see a liftoff of interest rates in March. Energy remains a sector to consider as well, he said, even if oil prices should fall after the spike we’ve seen on recent Russian actions. That’s because record free cash flow, an increase in cash returned to shareholders, and expansion discipline all provide support to energy. Orton said he acknowledges the potential for near-term risks in energy given overextended technicals, but servicer companies still look strong right now. Most notably, he said, technology has seen strong dip-buying and so he has been a proponent of adding to higher-quality tech holdings on the recent extreme weakness. Orton said there is still scope for this to continue: The Nasdaq has underperformed the S&P 500 by nearly 5% year to date, and we’ve seen more than 5 percentage points of price-to-earnings multiple compression despite strong earnings results, positive revisions, and increasing margin projections. Orton said there has been “absolute destruction” in technology — with 76% of the Nasdaq’s constituents now in a bear market — and so he said there are some opportunities in high-quality companies.

What impact will the conflict have on Fed policy?

The U.S. economy is less vulnerable to the conflict than Europe’s, and inflation will remain the Fed’s main concern, Orton said. Thursday we heard from a range of Federal Open Market Committee participants, including both hawks and doves. While participants agreed that the Russia-Ukraine conflict increased uncertainty, it did not seem to change their thinking on a March rate hike. Federal Reserve Bank of Cleveland President Loretta J. Mester, a hawk, reiterated her support, with further increases in the coming months, unless there is an “unexpected turn in the economy.” Similar comments were recently echoed by San Francisco Fed President Mary Daly, a dove who did not “see anything right now” that would change the timing of the Fed’s first rate increase. Federal Reserve Bank of Richmond President Tom Barkin, who occupies a center position between hawks and doves, and Federal Reserve Bank of Atlanta President Ralphael Bostic, who leans hawkish, likewise did not consider a change in liftoff being their central case.

 

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.

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.

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.

A yield curve is a line that plots yields (interest rates) of bonds having equal credit quality but differing maturity dates. The slope of the yield curve gives an idea of future interest rate changes and economic activity.

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.

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.

The STOXX® Europe 600 Index represents 600 large-, mid-, and small-capitalization companies across 17 European countries: Austria, Belgium, Denmark, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Norway, Poland, Portugal, Spain, Sweden, Switzerland, and the United Kingdom.

 

CTA22-0135 Exp. 6/25/2022


February 22, 2022: Near-term uncertainty eclipsing supportive fundamentals

Risk appetite continues to be driven by uncertainty over two big factors: the intensity of monetary policy normalization by developed market central banks and rising geopolitical tensions. This combination pushed the S&P 500 Index to close within 1% of the January lows last Friday, down more than 8% so far this year.

Yet even as headlines dominate the narrative for now, “I don’t think this really changes the long-term equation,” said Matt Orton, CFA, Chief Market Strategist at Carillon Tower Advisers. “We’re in a corrective process with a positive long-term uptrend. It’s not unprecedented. It’s just something we have to work through in the short term.”

What’s happening isn’t surprising given weak internals, and Orton said it’s possible that the market re-tests or breaks through the lows of Jan. 27. Again, he said, keeping a sense of perspective is important: “Bearish narratives are taking hold, and it’s very easy to get sucked in. Frankly, I think calls for heightened recession risk are misguided and miss the forest for the trees.”

On the one hand, Orton said, inflation is uncomfortably high, the economy is decelerating, and corporate earnings expectations are starting to come down. But on the other hand, earnings are still growing nicely, corporate margins are near their highs, and margin expectations have barely budged despite elevated cost and labor inflation. Retail sales again surprised to the upside as economists continue to underestimate the consumer. Purchasing Managers’ Index reports remain comfortably in expansion territory, and Orton said economic growth should remain above trend into 2023. And a flattening yield curve doesn’t mean a recession. Overall, he said, fundamentals remain supportive. Unfortunately, the market is stuck between a rock and a hard place with two big drivers of near-term uncertainty dominating the narrative.

The chart isn’t pretty, but the long-term uptrend remains

The chart isn’t pretty, but the long-term uptrend remains

Source: Bloomberg, as of 2/18/2022.

 

In this environment, “I continue to believe that we need to let the market come to us – to be opportunistic on the downside and not chase the market higher,” Orton said. He said he believes there are opportunities in financials where we’ve seen strong earnings revisions but relative underperformance lately as the yield curve flattened. Energy remains attractive as well, even if oil prices should fall on a resolution of Russia-Ukraine tensions, as record free cash flow, cash returned to shareholders, and expansion discipline all provide support. International developed markets continue to outperform year to date and are Orton’s preferred way to get more exposure to value and cyclicality going forward, rather than looking to the U.S. where he said these parts of the market have become somewhat expensive on average. Orton said he also continues to see some opportunities in higher-quality technology companies as the significant rate-driven price-to-earnings multiple compression seems to be coming to an end.

“We need to keep separating prime vs. speculative tech and use further drawdowns to take advantage of the increased dispersion that I believe we’re going to continue to see,” he said. “The tech space will remain one of differentiation, creating the potential to be active and opportunistic.”

Peak hawkishness can provide tailwinds

Orton said he continues to believe that we’ve hit the point of “peak hawkishness” with a full seven rate hikes priced in at the start of last week and a sharp rise in the probability of a 50-basis point (bp) rate hike in March. It looks like that played out last week with little for the hawks in the U.S. Federal Reserve’s meeting minutes or from remarks by Fed officials. Fed Governor Lael Brainard, Federal Reserve Bank of New York President John C. Williams, and Federal Reserve Bank of Chicago President Charles L. Evans all made it clear on Friday that a hike is coming next month, but that it will just be a regular, 25-bp one. This confirmed the slide in the March-dated overnight index swaps, which extended Monday to show approximately 15% odds for a 50-bp hike. Longer-dated swaps have also retraced, with the December swaps now seeing odds of about 80% for six hikes, after fully pricing in seven on Feb. 12. With what should be the most aggressive rate hike cycle priced into the market, Orton said he hopes this will provide some relief from the valuation compression that has been plaguing higher duration sectors.

“There are certainly areas of opportunity in this market,” Orton said. “This is why focusing on active management and stock picking is important. We can see from the earnings we’re getting that a lot of companies are doing really well, are insulated from some of the valuation compression we’re seeing, and are independent of these bearish narratives. So it matters where you are, it matters what you own, and there are opportunities to pick up good companies, good sectors, and good pockets of the market going forward.”

What will it take for small caps to work?

Meanwhile, Orton said, the fundamental backdrop for small caps is positive: They tend to outperform when rates are rising, particularly real rates as well as after inflation has peaked. They also should be supported by analyst expectations for strong top- and bottom-line growth in the second half of 2022 and 2023. So, he asks, what’s holding them back? The Russell 2000® Index has meaningfully underperformed the broader market since peaking early last year, and small-caps have been particularly challenged over the past few months, but showed glimmers of hope last week as they outperformed the rest of the market on a relative basis. Orton said he believes issues of quality (i.e., the “anti-quality” characteristics of small caps collectively, such as the high percentage of non-earners in the index) have kept investors away and challenges with concentration across a handful of sectors and industries also have hindered performance. This is perhaps why active managers have been very successful in adding alpha and should continue to find good opportunities to outperform going forward, Orton said.

Key sectors like healthcare and information technology in the Russell 2000 need to improve before the overall index can truly find its footing, Orton said. Perhaps a relaxation of hawkish sentiment will allow earnings results to push higher quality small-cap software and semiconductor names higher. Abysmal performance from biotechnology has meaningfully decreased its weight within the index, but it still remains a meaningful weight and a drag on healthcare performance.

What to watch

This week provides a good look into the state of the consumer with strong earnings reports Tuesday from one “big box” home improvement chain and a major department store chain, and more reports scheduled from companies in shoe and apparel retailing; e-commerce; live entertainment; hotels and casinos; rental cars; beer brewing; pharmaceuticals; digital payments; cryptocurrency trading; and personal finance.

Monday IHS Markit Purchasing Managers’ Index reports (PMIs) for Europe
Tuesday Markit U.S. PMI
Thusday U.S. new home sales
Friday U.S. personal income and spending; University of Michigan Index of Consumer Sentiment

 

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.

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 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.

A yield curve is a line that plots yields (interest rates) of bonds having equal credit quality but differing maturity dates. The slope of the yield curve gives an idea of future interest rate changes and economic activity.

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.

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%.

Swaps markets is a term for the over-the-counter market between private parties (usually firms and financial institutions) to trade in swaps, which are customized contracts between two parties to exchange sequences of cash flows (as from forward contracts or bonds) for a set period of time.

An overnight index swap is a hedging contract in which a party exchanges a specific cash flow with a counter-party on a specified date and uses an overnight rate index such as the federal funds rate as the agreed-upon exchange for one side of the swap.

Growth investing is a stock-buying strategy that focuses on companies expected to grow at an above-average rate compared to their industry or the market.

Value investing is an investment strategy that involves picking stocks that appear to be trading for less than their intrinsic or book value.

Cyclical stocks have prices influenced by macroeconomic changes in the economy and are known for following the economy as it cycles through expansion, peak, recession, and recovery.

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.

A relative strength index (RSI) is a momentum indicator that tracks the magnitude of recent price changes to analyze overbought or oversold conditions in the price of a particular asset. Typically, RSI values of 70 or higher indicate that an asset is becoming overbought or overvalued. RSI values of 30 or below suggest oversold or undervalued conditions.

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

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

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.

Alpha is a measure of the difference between a manager’s actual returns and its expected performance, given its level of risk as measured by Beta. A positive Alpha figure indicates the manager has performed better than its Beta would predict. A negative Alpha indicates the manager performed worse than expected based on its level of risk. Thus it is possible for a manager to outperform an index and still have a negative Alpha. In general, however, the higher the Alpha the better.

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 Eurozone Services PMI (Purchasing Managers’ Index) is produced by IHS Markit and is based on original survey data collected from a representative panel of around 2,000 private sector service firms. National data are included for Germany, France, Italy, Spain, and the Republic of Ireland. These countries together account for an estimated 78% of Eurozone private sector services output.

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 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 10% 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.

 

CTA22-0127 Exp. 6/22/2022