Markets in Focus

Timely analysis of market moves and sectors of opportunity

October 25, 2021: Don’t bet against the American consumer

It’s all about earnings this week with more than 25% of the S&P 500 Index reporting results. The Big Five tech stocks will all report, and this will be critical to the near-term direction of the market, said Matt Orton, CFA, Chief Market Strategist at Carillon Tower Advisers. The price action over the last two weeks has been encouraging, Orton said, with market breadth continuing to improve, the S&P 500 touching a new all-time high, and the Nasdaq Composite Index pushing higher despite an increase in interest rates. The S&P 500® Equal Weight Index has outperformed the cap-weighted S&P 500 over the last two weeks, highlighting that it’s a broad group of companies behind the recent bounce rather than just mega-cap technology.

“Given this broad-based strength, I find it curious that the narrative around third-quarter earnings has been so volatile and generally less positive than I would have expected, shifting between warnings over negative results when supply chain issues are in focus and guarded optimism when results beat and guidance is positive,” Orton said.

The fact of the matter, he said, is that earnings results have been strong. With 23% of the S&P 500 reporting results, 84% of companies have reported a positive earnings-per-share (EPS) surprise, and the blended earnings growth rate stands at 32.7% vs. the 27.5% that had been expected. The blended net profit margin stands at 12.5%, slightly below last quarter’s record 13.1% but well above the 5-year average of 10.9%. Most importantly, the market has rewarded beats. That said, it’s hard to understand why the narrative feels so negative and singularly focused on the companies that are disappointing, Orton said.

Quote Image
You’re starting to see a little bit of relief around some of the supply chain issues.

“Yes, you have some issues with supply chains, and there are labor issues,” he said, “but companies so far have been able to navigate these challenges well and better than we have expected. What we lose due to a lack of inventory or challenges around supply chains is being made up for in part by people being willing and able to spend.”

Orton has consistently maintained that in order to sustainably push to new highs investors need the market of stocks working. At the same time, the Big Five cannot roll over, which is why he said he continues to advocate for balance between growth vs. value and cyclical vs. secular growth. This is also why it’s important to pay close attention to results and guidance this week.

“In particular, I continue to like the backdrop for healthcare and financials,” Orton said. “Also, closely follow the price action in small caps, which continue to underperform.” Overall, the strength over the last two weeks has been healthy and we’re getting close to overbought levels, but he said he continues to side with the long-term trend and remains optimistic going forward.

Market breadth continues to increase,
pushing the broad market to all-time highs

Market breadth continues to increase, pushing the broad market to all-time highs

Source: Bloomberg, as of 10/22/2021

 

Doubting the American consumer is rarely a winning trade

American consumers are fantastic at finding ways to spend money, Orton said. Even when the economy hit a brick wall early last year and we were locked down with few places to go, Americans still opened their wallets, accelerating the already feverish growth of ecommerce. Now, with $2.5 trillion in accumulated savings since February 2020, he said it’s hard to be anything but optimistic – even with the backdrop of inflationary pressures and rising gas prices. Retail sales last week were one indication of robust spending, and we’re also seeing consumer strength reflected in earnings results. At one of the largest credit card companies, billed business (a measure of spending on cards) reached a record in the third quarter, driven by an uptick in goods-and-services purchases. Such spending rose about 18% from a year earlier, but it’s also up 19% from the same period in 2019, before the pandemic took hold.

Supply chain issues also don’t yet seem to be too big of a problem to keep people from spending. When goods are unavailable, Orton noted, many of them can be purchased second-hand. We saw this trend early in the pandemic with the surge in used car prices and robust, and this is reflected in recent earnings from auto retailers. The same goes for clothes, watches, furniture, among other items, as the growth of the second-hand retail market is helping to offset a lack of new goods to purchase. This is worth following closely, however, as news reports last week highlighted that “out of stock” messages on retailers’ websites are up sharply compared with last year. And many companies are signaling that supply will remain tight through the end of the year. When looking at the impact on gross domestic product, it looks like these issues could cause overall goods consumption to contract by nearly 10% , but even with this the level of spending would remain above the pre-pandemic trend.

“Meanwhile, the switch to alternatives has presented a viable alternative and has helped offset supply shortages, so it’s too early to start sounding the alarm,” Orton said. “Still, it’s important to start seeing some progress in 2022.” That change could be coming. Orton noted that manufacturing and service Purchasing Managers’ Indexes for most countries around the world are still above 50.

“That’s expansionary territory,” he said, “and you’re starting to see a little bit of relief around some of the supply chain issues.” Shipping stocks have plunged recently, with the Baltic Dry Index down 22%, a potential sign that supply challenges may have peaked and that an inflection point may be near.

Ratio of returns for the S&P 500
Consumer Discretionary Sector vs. Consumer Staples Sector

Ratio of returns for the S&P 500 Consumer Discretionary Sector vs. Consumer Staples Sector

Source: Bloomberg, as of 10/22/2021

 

While supply chain and labor market snarls have been tormenting investors for much of the year and are far from solved, Orton said they remain — for now — the tolerable downside of trends that investors are happy to celebrate: robust demand in a reopening economy. Throw in an earnings season showing that damage to profit margins remains light, and Orton said it explains why the S&P 500 is up 5.5% in October, a month skeptics had circled as a tough one.

One area of the market that hasn’t received much attention despite strong earnings results so far and general insulation from some of the most severe labor force and supply chain woes is healthcare, Orton said. It’s the third worst-performing sector year to date behind consumer staples and utilities. Yet he noted that 100% of healthcare companies that have reported so far have beaten expectations with the third highest percentage beat. And expectations are on the rise heading into the rest of earnings season.

“With the backdrop of an aging population with growing chronic diseases and a return to elective surgeries, there are some very interesting opportunities,” Orton said. “The healthcare sector has finally started to get some attention, and there is room to run.”

Healthcare poised for a tailwind

Ratio of returns for the S&P 500 Consumer Discretionary Sector vs. Consumer Staples Sector

Source: Bloomberg, as of 10/22/2021

 

This week's data releases:

Monday ifo Institute Business Climate Index for Germany
Tuesday U.S. consumer confidence
Wednesday U.S. durable goods orders; Australian Consumer Price Index
Thursday U.S. jobless claims, Third-quarter gross domestic product, European and Japanese central bank rate decision, German inflation
Friday U.S. personal income; French inflation

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 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.

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.

Secular stocks are characterized by having consistent earnings over the long term constant regardless of other trends in the market. Secular companies often have a primary business related to consumer staples most households consistently use whether the larger economy is good or bad.

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.

A blended net profit margin combines actual net profit margins from companies that have reported earnings and estimated margins for companies that have yet to report.

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 Baltic Dry Index is a shipping and trade index created by the London-based Baltic Exchange to measure changes in the costs of transporting raw materials such as coal and steel.

The Health Care Select Sector SPDR® Fund (XLV) is an exchange-traded fund that tracks healthcare stocks within the S&P 500 Index, weighted by market capitalization.

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.

The Australian Consumer Price Index is a quarterly report from the Australian Bureau of Statistics measuring household inflation. It includes statistics about changes in price for a wide range of categories of household spending.

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 S&P 500® Equal Weight Index is the equal-weight version of the S&P 500. It includes the same constituents as the capitalization-weighted S&P 500, but each company in the S&P 500 Equal Weight Index is allocated a fixed weight, or 0.2% of the index total at each quarterly rebalance.

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

The Russell 3000® Index measures the performance of the 3,000 largest U.S.-traded stocks, which represent about 98% of the total market capitalization of all U.S. incorporated equity securities.

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.

 


CTA21-0667 Exp. 2/25/2022



October 18, 2021: A positive outlook for growth and value

Despite the worries investors face — peak growth, inflation, stagflation, the specter of rising taxes, supply chain bottlenecks, and a confounding labor market, among others — the market regained its footing last week with the S&P 500 Index notching its best week since July. The S&P 500 and Nasdaq indices both broke downward trends, decisively moving back above their 50-day daily moving averages (DMA), said Matt Orton, CFA, Chief Market Strategist at Carillon Tower Advisers.

“Importantly, along with the rise you saw breadth start to increase across the market,” Orton said. “Equal-weighted indices did very well last week, which tells you it just wasn’t the mega-cap technology stocks that were outperforming.”

Earnings so far are providing the positive catalyst Orton expected with strength across the big banks. Even more important than the results themselves, he said, is the positive look they have provided into the state of the American consumer. Credit card spending has remained healthy, retail sales surprised to the upside, and the banks were confident enough to release additional cash they had set aside for pandemic losses. Looking forward, concerns over supply chain disruptions and rising yields continue to weigh on investor sentiment, especially toward technology giants days before the start of a key earnings season for the group. That could set up for beats to be rewarded, Orton said, especially if management commentary on the implications of bottlenecks are better than feared. The next technical hurdle for the S&P 500 will be around 4550, the highs from earlier in September. Reaching and closing above there will be confirmation of a higher high, which Orton said is just the sort of thing we need for the broader bull market mentality to resume.

Quote Image
Balance will be very important going forward. Even with rising rates, you can’t ditch growth.

“Overall, I’m encouraged by the recent price action and continue to be very optimistic on U.S. equities,” he said. “I also believe that balance will be very important going forward. Even with rising rates, you can’t ditch growth.” There are some cyclical parts of the market like metals & mining companies that have underperformed recently but can do well with elevated commodity prices and above-trend economic growth, he said. Financials are still attractive and provide an offset to higher duration areas of the market in a rising rate environment. That said, Orton said secular growth remains very important, especially if we have hit “peak everything.” He still likes information technology, where top-line growth remains incredibly strong and secular growth drivers remain firmly in place. Healthcare is also very attractive, he said, because while it has underperformed the broader market for a long time, certain industries like providers and services, as well as equipment and supplies, offer exposure to key secular trends.

“Having growth exposure will be important in an environment where economic growth is decelerating — even if it remains well above trend,” he said. “Stock selection will be critical, and I expect that to start playing out as we head into the busiest few weeks of earnings.”

Recent price action and improvement in breadth is encouraging

Recent price action and improvement in breadth is encouraging

Source: Bloomberg, as of 10/15/21.

 

The consumer is holding up well — and has money to spend

There might be plenty of inflation, but there’s not much evidence of stagflation and the consumer seems to be doing all right. Earnings results from the big banks showed a rebounding economy and a healthy consumer. September retail sales figures also were better than expected across the board, and even came with a bonus upward revision to prior data. Nominal sales are not quite at the peak registered in April, but are nevertheless holding steady at an elevated level. That’s very encouraging given the near-term inflationary picture with persistent supply chain bottlenecks, Orton said.

“Even as inflation expectations increase, I believe that the consumer can weather this quite well for now, even with higher energy prices added to the mix,” he said. The stock of accumulated savings as a result of the pandemic hasn’t shrunk, helping to insulate the consumer somewhat from price increases. Additionally, he said it’s unlikely this will be drawn down swiftly due to shortages of goods and labor. While the vast pile of money hasn’t accrued to all socioeconomic groups equally — seniors and the already wealthy have experienced the biggest gains — Orton said perhaps this might also provide the pressures needed to restore some sense of order to the labor market.

Consumers have not drawn down their pandemic savings
Accumulated U.S. savings in excess of pre-pandemic run rate (Feb. 2020=0)

Accumulated U.S. savings in excess of pre-pandemic run rate (Feb. 2020=0)

Sources: U.S. Bureau of Economic Analysis, Bloomberg, as of 9/30/21.

 

On the supply chain and inflation front, the recent data has been uncomfortable and hasn’t showed signs of improving, Orton said, but he expects that supply chain issues will get resolved. Even if they didn’t, he said it’s not sufficient for these issues to persist to get an ongoing inflationary pressure. They would have to get worse and drive prices higher still, rather than prices just remaining at elevated levels. Orton also noted that the rate of increase in container shipping prices has been slowing, and have even come down for two weeks in a row for the first time since April. Looking at breakeven inflation rates, he noted that inflationary expectations decrease with time and the sharpest increase has been at the short end of the yield curve.

What to watch

Earnings will be the key focus this week with big reports coming from every sector, plus economic data on building housing starts, home sales, and business outlook indicators from the Federal Reserve Bank of Philadelphia, U.K., and Eurozone.

Monday China gross domestic product, U.S. industrial output
Tuesday U.S. housing starts
Wednesday U.S. Federal Reserve beige book, U.K. and Eurozone consumer price indexes
Thursday U.S. jobless claims, Federal Reserve Bank of Philadelphia’s Manufacturing Business Outlook Survey, U.S. home sales
Friday U.K. retail sales, IHS Markit Flash Eurozone Composite Purchasing Managers’ Index

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 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.

Duration incorporates a bond’s yield, coupon, final maturity and call features into one number, expressed in years, that indicates how price-sensitive a bond or portfolio is to changes in interest rates. Bonds with higher durations carry more risk and have higher price volatility than bonds with lower durations.

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.

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.

Secular stocks are characterized by having consistent earnings over the long term constant regardless of other trends in the market. Secular companies often have a primary business related to consumer staples most households consistently use whether the larger economy is good or bad.

Stagflation, first described after the oil shocks of the 1970s, is an economic condition that includes slow economic growth (or even declines in gross domestic product), relatively high unemployment, and inflation.

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 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.

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.

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 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 Federal Reserve Bank of Philadelphia’s Manufacturing Business Outlook Survey is a monthly survey in which manufacturers in the Third Federal Reserve District, which includes Pennsylvania, New Jersey, and Delaware, indicate the direction of change in overall business activity and in various measures of activity at their plants: employment, working hours, new and unfilled orders, shipments, inventories, delivery times, prices paid, and prices received.

The IHS Markit Flash Eurozone Composite PMI (Purchasing Managers’ Index) is based on about 85% of the final number of replies received each month from a survey of a representative panel of private sector firms across the countries in the European Union.

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 3000® Index measures the performance of the 3,000 largest U.S.-traded stocks, which represent about 98% of the total market capitalization of all U.S. incorporated equity securities.

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.

 


CTA21-0653 Exp. 2/18/2022



October 11, 2021: Resist ‘headline hype.’ Watch earnings.

The price action over the past few weeks has left U.S. equity markets in a somewhat fragile position, but the long-term uptrend remains in place, said Matt Orton, CFA, Chief Market Strategist at Carillon Tower Advisers.

“Investor sentiment has started to recover from washed-out levels, and the market was able to hold onto gains after a very ugly Monday last week,” Orton said. “The daily and intraday price action last week showed a number of U-turns — down Monday, up Tuesday, down Wednesday morning and up in the afternoon — but the key here is that markets held the lows of Monday and strongly bounced into the back part of the week.”

Even the Nasdaq, despite the spotlight on the biggest social media company and a continued rise in interest rates, was able to recover and end the week in the green. As Orton has discussed before, when sentiment becomes overly bearish and price momentum becomes oversold, the risk/reward profile going forward tends to be favorable. He said there are certainly risks that the market corrects further and tests the 200-day daily moving average (DMA), but he said he believes investors should be opportunistic in market weakness.

S&P 500 bouncing off oversold levels as market breadth improves
(But risks remain)

S&P 500 bouncing off oversold levels as market breadth improves (But risks remain)

Source: Bloomberg, as of 10/8/21.

 

“The key is to be very selective as companies and sectors start to react to idiosyncratic factors as we head into earnings season,” Orton said. “This presents opportunities for those who are prepared and focused on the real fundamental drivers of growth.

Earnings season will be the key market driver

Earnings season kicks off in earnest this week with banks leading the way. It will be an opportunity to get more detailed information about the state of the consumer and expectations going forward. There’s also some key economic releases including retail sales and the September consumer price report. For the third quarter, the estimated earnings growth for the S&P 500 Index is 27.6%, which increased over the quarter from 24.2% on June 30, according to FactSet. It’s also worth noting that over the past five quarters, actual earnings reported have exceeded expectations by an average of 19.1% with 84% of companies beating estimates. However, Orton said, these big beats haven’t all been rewarded lately as investors have been acutely focused on guidance given myriad uncertainties, including inflationary pressures and uncertainty over the proposed infrastructure bill and federal tax changes.

Quote Image
The key is to be very selective as companies and sectors start to react to idiosyncratic factors as we head into earnings season.

“For third quarter results, guidance will be especially critical to the direction of share prices given the volatility and softness of some recent economic data,” Orton said. “Big beats that come with caveats about inflationary concerns or an inability to pass along prices will likely be sold.” For some additional context, 21 companies in the S&P 500 have already reported results, and 15 of them cited supply chain disruptions having a negative impact on earnings. Labor costs and shortages also were frequently mentioned.

S&P 500 Earnings Growth: End of Quarter Estimate vs. Actual

S&P 500 Earnings Growth: End of Quarter Estimate vs. Actual

Source: FactSet, as of 9/30/2021.

 

Orton said he believes that we can see strong results from the big banks when they report next week, hopefully setting a positive tone as we move into the busiest part of the earnings calendar. Merger and acquisition activity should remain robust, and rising rates coupled with a steepening curve should provide a boost to margins, he said. And while financials broadly remain near all-time highs, on a relative basis they still remain below their highs vs. the S&P 500 earlier this spring and well below pre-COVID levels.

Orton also spotlighted three other areas that may provide opportunities for upside:

  • Mega-cap technology: Analysts expect the Big Five technology companies to report quarter-over-quarter profit declines. Given both cyclical and secular tailwinds that continued to play out during the quarter, Orton said he thinks there may be room for a positive surprise.
  • Healthcare: “Healthcare is meaningfully underperforming the rest of the market despite solid fundamentals, and it had a really rough September,” Orton said, “but if you’re looking for a part of the market that has pricing power, a lot of healthcare companies do. In particular, medical device companies are interesting given pricing power and a resumption in people seeing doctors and having voluntary procedures as delta concerns fade.”
  • International equities: Many companies in Europe and Japan have pricing power and have been able to increase margins in the face of inflation, Orton said. He also noted that energy companies overseas are less expensive than their U.S. counterparts, a setup that creates interesting dynamics as oil prices rise and shortages are felt more acutely globally than in the U.S. Moreover, he noted that earnings growth has been delayed in international developed markets compared with the U.S., creating the potential for better earnings growth. This is a good way to add diversification and get value or cyclical exposure, he said.

Don’t get caught in the headline hype

Orton said he couldn’t help but notice a surge in headlines using “twindemic” or “stagflation” over the past week. It’s only normal to expect cases of the flu to pick up this winter as the economy has continues to reopen and more students are back in school. And of course yearover-year flu data will be off the charts this winter, simply because most people were still working and learning from home last year. But this won’t derail the economic recovery, Orton said, and it shouldn’t be a cause for concern by investors. Similarly, we will likely see COVID-19 cases increase again around the holidays, but given the availability of boosters for the most vulnerable population and the large spring and summer surge due to the delta variant, Orton said his base case is not to see the same negative impact on economic activity or consumer confidence that we had last year.

Stagflation is also creeping into discussions, he said, as supply chain dislocations, rising energy prices, and a perplexing labor market all contribute to increasing inflation expectations. While economic growth is certainly slowing, it is slowing to a still above-trend rate and also drawing out the duration of the recovery. This is not the type of slowing growth we expect to see in a stagflationary environment, he said. Wages are also rising, which helps to offset the impact of higher prices, shielding lower-income households from the sting of inflation. This, Orton said, should help to keep spending on track to support future growth.

What to watch

Corporate earnings season kicks into high gear with reports from more than half a dozen banks and financial services companies, as well as a leading airline, a managed care and healthcare company, and a cryptocurrency exchange platform.

Monday U.S. fixed income markets closed for Columbus Day
Tuesday U.S. Job Openings and Labor Turnover Survey, U.S. 3-year and 10-year Treasury auctions
Wednesday U.K. gross domestic product, U.S. Consumer Price Index, U.S. 30-year Treasury auction
Thursday China Consumer Price Index, U.S. jobless claims, U.S. Producer Price Index
Friday Empire State Manufacturing Survey 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, 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 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.

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.

Secular stocks are characterized by having consistent earnings over the long term constant regardless of other trends in the market. Secular companies often have a primary business related to consumer staples most households consistently use whether the larger economy is good or bad.

Stagflation, first described after the oil shocks of the 1970s, is an economic condition that includes slow economic growth (or even declines in gross domestic product), relatively high unemployment, and inflation.

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 Job Openings and Labor Turnover Survey (JOLTS) program produces monthly data on job openings, hires, and separations compiled by the U.S. Bureau of Labor Statistics.

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 China Consumer Price Index (CPI) measures inflation by tracking the change in the prices of a basket of goods and services that are typically purchased by Chinese of households.

The Producer Price Index, produced 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 prices included in the PPI are from the first commercial transaction for many products and some 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 Nasdaq Composite Index is the market capitalization-weighted index of over 2,500 common equities listed on the Nasdaq stock exchange.

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 3000® Index measures the performance of the 3,000 largest U.S.-traded stocks, which represent about 98% of the total market capitalization of all U.S. incorporated equity securities.

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.

 


CTA21-0632 Exp. 2/11/2022



October 4, 2021: Key market drivers remain in place

September wasn’t a good month for the markets with the S&P 500 Index putting in its worst performance since March 2020, closing down -4.76%. It’s important to remember, however, that the S&P 500 has been up for the past seven consecutive months and that September is usually a weak month from a seasonality standpoint, said Matt Orton, CFA, Director and Portfolio Specialist at Carillon Tower Advisers.

Quote Image
We’re going to get some meaningful takeaways with respect to inflation, pricing power, and the state of the consumer.

“While the seasonality headwinds don’t go away for another week or so, I would note that investor sentiment has weakened meaningfully and sits near the lows we saw last September following a 7.5% correction,” Orton said. “Near-term uncertainty around the infrastructure package, the direction of interest rates, and stagflation creeping back into the market narrative may still weigh on sentiment, but I expect this to turn into a tailwind soon.”

Earnings season is also coming up, and Orton anticipates that “we’re going to get some meaningful takeaways with respect to inflation, pricing power, and the state of the consumer — all of which will be important for driving where the market goes long-term.” He said he also thinks it will be especially important to follow the degree of beats and revisions. Earnings revisions have been slowing and while Orton said he doesn’t expect to see any estimate cuts, there may not be the increases that we have been accustomed to over the past year. This type of environment should benefit active stock pickers who can allocate to companies with differentiation and pricing power, he said.

Investor sentiment nearing lows from last September’s correction

Investor sentiment nearing lows from last September’s correction

The bull-to-bear ratio is based on the American Association of Individual Investors Sentiment Survey.
Source: Bloomberg, as of 10/1/2021

 

Stagflation creeps back into the market dialogue

With the rise in rates intersecting with concerns over supply chains and inflationary pressures, there is heightened concern that we may be facing a stagflationary environment should these trends continue.

Orton said he thinks we have long accepted that the economic recovery would be bumpy in the short term, but it’s fundamentally solid. The frictions due to supply chain issues have persisted longer than Orton initially anticipated due to the delta variant, but as vaccinations continue to increase across the world and the impact of delta recedes, he said he expects we will start to get back on track.

In this environment, Orton said he believes cyclicality can outperform, but not at the expense of growth. A big reason for that is that the big five mega-cap technology companies that make up nearly a quarter of the S&P 500 have incredibly solid business models, so even if interest rates rise, that doesn’t necessarily mean those companies need to go down, especially since, in terms of valuation, they are not grossly overvalued.

“An significant point about the longer term uptrend of the market is that the key drivers are still in place,” Orton said. “And even if rates continue to move higher, the biggest companies continue to post incredibly strong earnings, and even if the economy slows down these companies will still continue to earn.”

S&P 500 sector dispersion lowest in decades

Looking at sector performance during the third quarter, Orton noted that the dispersion between the best- and worst-performing sectors was the smallest in any quarter since the sector indices were first calculated in 1989. The biggest gain was 2.3%, posted by financial stocks, and the largest drop was 4.6% for industrial shares. This 6.9% gap between first and last place beat the prior smallest dispersion which was 8.1% in the third quarter of 1989. Orton said he expects that sector dispersion will increase as investors get more selective around investments moving into year-end, and this should benefit active managers.

“We continue to see the areas of the market with the highest levels of dispersion — small-cap growth, for example — posting the strongest active manager results,” he said.

S&P 500 Third Quarter Sector Performance

S&P 500 Third Quarter Sector Performance

Source: Bloomberg, as of 9/30/2021.

 


Quarterly spread between best- and worst-performing sectors in S&P 500

Quarterly spread between best- and worst-performing
sectors in S&P 500

Source: Bloomberg, as of 9/30/2021.

 

What to watch

Debt ceiling and infrastructure talks continue to be front and center this week amid more hints that credit ratings agencies could take the U.S. credit rating down a notch if the drama continues. The week also brings economic reports on factory orders, consumer credit, the jobs report, and earnings from two companies that produce soft drinks and alcoholic beverages, respectively.

The jobs report on Friday is going to be important in terms of the timing of the U.S. Federal Reserve’s plans to taper its bond-buying program, Orton said. “If it’s a disappointment,” he said, “there might be conversations of putting it off. If it’s really strong, which I doubt, there might be conversations of pulling it forward.”

Monday Organization of Petroleum Exporting Countries and other producers (OPEC+) meets virtually, Federal Reserve Bank of St. Louis President Jim Bullard speaks, U.S. factory orders and durable goods
Tuesday Eurozone Producer Price Index data, Services ISM® Report on Business®
Wednesday Federal Reserve Bank of Kansas City President Esther George speaks, U.S. Energy Information Administration crude oil inventory report, Eurozone retail sales, ADP® National Employment Report
Thursday People’s Bank of China Governor Yi Gang addresses regulation of big tech, Federal Reserve Bank of New York President John Williams speaks, U.S. jobless claims
Friday U.S. payrolls report

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.

Stagflation, first described after the oil shocks of the 1970s, is an economic condition that includes slow economic growth (or even declines in gross domestic product), relatively high unemployment, and inflation.

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.

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 Eurozone industrial producer price index (PPI) tracks transaction prices for the monthly industrial output of various economic activities in the European Union. The index measures price changes from the seller’s perspective and serves as an early indicator of inflationary pressures in the economy and records the evolution of prices over longer periods of time.

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 ADP® National Employment ReportTM is a monthly measure of the change in total U.S. nonfarm private employment derived from actual, anonymous payroll data of client companies served by the payroll, tax service and human resources management company ADP. The report measures changes within a group of nearly 26 million U.S. workers and is produced by the ADP Research Institute® in collaboration with Moody’s Analytics.

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.

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 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.

 


CTA21-0621 Exp. 2/4/2022