Markets in Focus
Timely analysis of market moves and sectors of opportunity
The last few weeks provide an excellent example of why investors should look at long-term trends instead of stressing over the day’s headlines, said Matt Orton, CFA, Director and Portfolio Specialist at Carillon Tower Advisers. “Debate continues over COVID-19 vaccines, various infrastructure packages, the debt ceiling, and through it all the S&P 500 is nearly unchanged,” Orton said.
Beneath the surface, there have been some more notable developments. The S&P 500 experienced a 4% drawdown, which led to the first oversold condition in nearly 400 days. The Chicago Board Options Exchange (CBOE) Volatility Index, or VIX, spiked to its highest level since May. But just as the bears started to get excited, the long-term trend held and markets bounced higher. The key question now is whether the market will continue to push higher or if it’s still vulnerable to more downside.
The S&P 500 went 380 days since its last “oversold” condition (based on the 14-day Relative Strength Index). “This alone is quite impressive — it was the second longest streak since 1950,” Orton said. “In addition to this historical context, it’s worth noting that credit markets held up well over the past few weeks, giving me confidence that there’s nothing more pernicious we need to worry about.” It also looks like rates will continue to move higher, which would be supportive of small caps and cyclical sectors, both of which would be supportive of improved market breadth.
Respect the upward trend:
S&P 500 quickly reversed oversold conditions
Source: Bloomberg, as of 9/24/2021.
In addition to getting support from higher yields, the more cyclical parts of the market should benefit as virus-induced economic slowdowns ease. Airfare spending has started to increase after meaningfully slowing down due to the surge in cases of the delta variant. Separately, spending on restaurants and brick-and-mortar retail actually held up well in the face of rising cases. And while the expiration of federal unemployment benefits impacted spending for low income households, it wasn’t enough to impact aggregate spending, which actually improved from August levels. Overall, the economy and the consumer are on solid footing going forward.
“With the worst of the COVID-19 pandemic hopefully behind us, I think the setup looks attractive for small caps and cyclicals,” Orton said. “This is especially true as we head into earnings season where expectations are incredibly high for the growthier parts of the market and have room to improve elsewhere.”
Ten-year yields have been building a base for the past few months and seem to have broken out above a key resistance level. If they can hold above 1.38 to 1.40%, Orton expects upward momentum to continue, especially given the more hawkish tone from the U.S. Federal Reserve (Fed). This would be supportive for small caps and cyclicals, both of which have underperformed since March.
Yields appear to be breaking out
Source: Bloomberg, as of 9/24/2021.
Cyclicals may be poised to outperform
Source: Bloomberg, as of 9/24/2021.
A strong earnings season could also be a tailwind for smaller and cyclical stocks since expectations are very high for the larger growth companies. “I would keep my eye out for a rotation from growth toward cyclicals perhaps in October,” Orton said. He also points to market conditions as supportive of active investment managers who can benefit as dispersion increases and market breadth widens.
“When cyclicality starts to broadly outperform, that is when active management matters,” Orton said.
|Monday||U.S. durable goods, U.S. Federal Reserve (Fed) governors Evans, Williams, and Brainard speak|
|Tuesday||Fed Chair Jerome Powell and Treasury Secretary Janet Yellen testify before the Senate Banking Committee, Fed governors Bostic and Bullard speak|
|Wednesday||Energy Information Administration (EIA) crude inventories, Eurozone economic/consumer confidence, and U.S. pending home sales|
|Thursday||Fed governors Williams, Bullard and Evans speak, Powell and Yellen testify before the House Financial Services Committee, and U.S. initial jobless claims|
|Friday||Fed governors Harker and Mester speak, University of Michigan sentiment report, Institute of Supply Management (ISM) manufacturing, Eurozone CPI data, U.S., U.K., France, Germany and Eurozone manufacturing Purchasing Manager Indexes (PMI)|
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 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 Chicago Board Options Exchange (CBOE) Volatility Index, or VIX, is a real-time market index that represents the market’s expectation of 30-day forward-looking volatility. Derived from the price inputs of the S&P 500 index options, it provides a measure of market risk and investors’ sentiments.
The Relative Strength Index (RSI) is a momentum indicator that measures the magnitude of recent price changes in stocks or other assets, providing indications about bullish or bearish price momentum. Typically, assets are considered overbought when the index is above 70% and oversold when it is below 30%.
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 U.S. 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 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 8 percent of the total market capitalization of the Russell 3000® Index.
The Russell 1000® Growth Index measures a growth-oriented subset of the Russell 1000 Index, which tracks approximately 1,000 of the large-sized capitalization companies in the United States equities market.
The Russell 1000® Value Index measures a value-oriented subset of the Russell 1000® Index, which tracks approximately 1,000 of the large-sized capitalization companies in the U.S. equities market.
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.
CTA21-0600 Exp. 1/27/2022