Markets in Focus

Timely analysis of market moves and sectors of opportunity

May 24, 2021: Market churn offers opportunities

The macroeconomic uncertainty giving the market indigestion will likely stay around for a while, but can present opportunities for redeploying capital, said Matt Orton, CFA, Director and Portfolio Specialist at Carillon Tower Advisers. “Inflation expectations, the continuing growth-value rotation, and choppy investor sentiment are not going to be resolved in the near term,” said Orton. “We will likely only know in hindsight. I believe that’s why investors should consider leaning into the volatility.”

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... just because a quality stock is underperforming now doesn’t mean investors should necessarily get rid of it.

Orton pointed to an unprecedented nine straight days of positive correlation between long-term bonds and equities as an indicator of uneven sentiment. “There is a narrative that fixed income is not providing the protection it once did, and I believe that is misguided,” said Orton. “Rather, these dynamics speak to the need for an active approach to investing: to pick your spots instead of tracking an index.” Orton also views significant dispersion – the difference between the best and worst-performing sectors – within indices like the S&P 500 as a potential opportunity for stock-pickers.

S&P 500 Information Technology sector seeing increased breadth


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


Growth is down, but not out

The consolidation in the 10-year breakeven inflation rate set the stage for growth investing to bounce back from extreme oversold conditions. While the rotation in value vs. growth might be in the early innings, value indices are overextended and need some breathing room before we can see meaningful long-term gains. As investors sold “expensive” stocks to rotate into value, Orton said some very good names were “thrown out with the bathwater” and late last week investors took notice. “There is likely still more room to go before markets work through this extreme,” he said. “However, watch the NYSE FANG+ Index. It held onto key support last week, but a breach could trigger more meaningful downside.”

“Good-quality IT names with strong earnings are being cast aside due to the growth-value dynamic,” Orton continued. “This is not unexpected, but just because a quality stock is underperforming now doesn’t mean investors should necessarily get rid of it.”

Small caps decouple from inflation expectations

Small-cap stocks have been consolidating for 15 weeks since their best two-quarter performance on record. The Russell 2000® Index closed below its 50-day moving average for 10 trading days and Orton emphasizes that this bears following, especially if the price action remains weak. Small caps historically perform well in rising inflationary environments, particularly when coming off a very low base. However, that relationship has broken down recently with rising price expectations.

“Perhaps this is because the massive rally earlier this year baked in all the good news, or perhaps it’s a result of dampened sentiment,” said Orton. “If we see a bounce, I think small caps could be an interesting opportunity.”

Small caps setting up for bounce?


Source: Bloomberg, monthly data as of 4/30/2021.


European equities continue to outperform

European equities have disappointed so many times in the past, but this time it really does seem real. The Euro Stoxx 50 Index is up 13% so far in 2021, outperforming the S&P 500 in the opening five months of the year for the first time since 2017 and topping all other major regional benchmarks.

Euro equities outperform in rising inflation environments


Source: Bloomberg, of 5/21/2021.


“In addition to European equities providing another way for equity investors to get exposure to value and the economic reopening, I would also point out that they tend to outperform in rising inflation environments,” said Orton. “Historically, profit margins of European companies have had a high correlation with inflation rates due to their composition favoring cyclical factors. Following record earnings beats and improving economic data, I think the year-to-date outperformance of European equities has room to continue.”

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

Diversification does not ensure a profit or guarantee against loss.

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 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 NYSE® FANG+™ Index is an equal-dollar weighted index designed to track the performance of highly traded growth stocks of technology and tech-enabled companies in the technology, media & communications, and consumer discretionary sectors.

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.

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.

The Russell 2000® Index measures the performance of the 2,000 smallest companies in the Russell 3000® Index, which represents approximately 8 percent of the total market capitalization of the Russell 3000® Index.

The breakeven inflation rate represents a measure of expected inflation derived from 10-Year Treasury Constant Maturity Securities (BC_10YEAR) and 10-Year Treasury Inflation-Indexed Constant Maturity Securities (TC_10YEAR). The latest value implies what market participants expect inflation to be in the next 10 years, on average.

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.

The Consumer Price Index measures the average change in prices over time that consumers pay for a basket of goods and services.

The Producer Price Index (PPI) program measures the average change over time in the selling prices received by domestic producers for their output.

The EURO STOXX 50 index is a blue-chip index designed to represent the 50 largest companies in the Eurozone.

The MSCI Emerging Markets® Index measures the performance of large and mid-cap stocks across 24 emerging markets (EM) countries. 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.

The MSCI EAFE® (Net) Index measures the performance of performance of large and mid-cap securities across 21 developed markets, including countries in Europe, Australasia and the Far East, excluding the U.S. and Canada. The MSCI EAFE® (Net) Index subtracts any foreign taxes applicable to US citizens but not applicable to citizens in the overseas country.


CTA21-0343 Exp. 9/24/2021