Markets and Investing
April 01, 2022
Review the latest portfolio strategy commentary from Mike Gibbs, managing director of Equidad Portfolio and Technical Strategy.
The 10% 10-day move in the S&P 500 was impressive (has only occurred a few times over the past decade) and came in the face of negative newsflow. Headlines do suggest some positive developments on the Russia/Ukraine war with potential de-escalation, but the situation remains very fluid. In the event of a ceasefire, we are not convinced the S&P 500 is set to move appreciably higher given our view that investor focus will shift back toward an increasingly hawkish Fed as it attempts to stave off high inflation. The market currently expects 8 more 25bps rate hikes this year (at the remaining 6 meetings), implying a 2.37% Fed funds rate by year-end. With the 2-year Treasury yield used as a gauge of where the market sees the Fed funds rate heading, the 10yr-2yr spread has become very narrow (just 3bps today).
This narrow yield curve is resulting in investor concern, considering its historical precedent of inverting prior to economic contractions and bear markets. To be sure, an inverted yield curve is a negative indicator for credit conditions, leaving the economy and equity market more susceptible to negative macro shocks. But we would refrain from a knee-jerk reaction should the 10y/2y spread invert given the long lead time that can occur before market weakness. For example, bull markets have peaked on average ~12 months following the past six 10y/2y inversions (since 1978). Also, we view the 10-year vs 3-month yield as a better indicator of economic conditions, due to it being preferred by the Fed along with it utilizing one market yield (10-year) and one policy rate (3- month) rather than two market yields (10-year and 2-year). The 10-year vs 3-month is still wide at 181bps; and the ultimate pace of Fed rate hikes over the next 12 months will be highly influenced by the economic environment and inflationary trends. Our base case expectation remains that inflation will moderate over the course of the year, and this may ease pressure on the Fed’s rate hike cycle.
Technically, the market’s advance over the past couple of weeks pushed above multiple resistance levels- breaking the downtrend that has been in place year-to-date. We remain positive on the market backdrop and believe equities will be higher over the next 12-months, but we would not be surprised for further choppiness over the coming months as the market digests the recent volatility while gaining further information/clarity on the obvious headwinds (i.e. Russia/Ukraine war, high inflation, Fed policy). With this in mind, we would use weakness in favored stocks as opportunity.
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