Investing often comes down to perspective and time frame
ANTHONY SAGLIMBENE – CHIEF MARKET STRATEGIST, AMERIPRISE FINANCIAL
WEEKLY MARKET PERSPECTIVES — April 24, 2023
Although U.S. stock averages again finished lower last week, the S&P 500 Index (down 0.1%) was little changed on the week. The Index has moved lower by less than 1.0% for three straight weeks, the longest streak since August 2021. In fact, all of the major U.S. stock averages moved less than 1.0% in either direction last week, indicating investors are having difficulty figuring out where stocks should head next. The NASDAQ Composite lost 0.4% on the week, while the Dow Jones Industrials Average fell by 0.2%. The Russell 2000 Index, which measures U.S. small-cap stocks, rose +0.6%. Notably, small-cap stocks have lagged large-caps this year, with the Russell 2000 Index trailing the S&P 500 by roughly 600 basis points year-to-date and underperforming the NASDAQ by 1360 basis points. In our view, the relative weakness in small caps this year is in recognition of investors' fear a U.S. recession may be on the horizon, and the general belief small-cap companies are less insulated from the risks associated with a domestic slowdown. Instead, investors have sought perceived safety in larger-cap companies with global footprints, stronger balance sheets, and more identifiable growth trends (e.g., see the performance this year in the NASDAQ).
On the week, Consumer Staples (+1.7%), Real Estate (+1.6%), and Utilities (+1.1%) outperformed, while investors pared back exposure to Communication Services (down 3.1%) and Energy (down 2.5%). One of the factors that weighed on Energy last week was weakening oil prices due to demand fears. West Texas Intermediate (WTI) crude dropped 5.6% last week to $77.81 per barrel, following four straight weeks of gains. Gold finished the week down 1.3% and ended below $2,000 per ounce. The U.S. Dollar Index moved marginally higher on the week but is down more than 3.5% from the beginning of March. And in fixed income, U.S. Treasury prices were a bit weaker, with the 2-year Treasury yield ending the week at 4.17% and the 10-year Treasury yield finishing at 3.57%. Notably, the 2-year yield has increased by 41 basis points since hitting its closing low for the year on April 5. Not surprisingly, stocks have had more difficulty building upward momentum, given the backup in rates this month.
“From one simple perspective, stocks are positioned exactly where they should be today, and given the backdrop of the last two years. In our view, the S&P 500’s level in early January 22’ seems too optimistic, considering today’s rate, profit, growth, and inflation environment. Yet, the Index lows in October seem too pessimistic, given inflation has consistently moderated lower, labor conditions remain solid, growth is slowing and not plummeting, and the Fed appears close to ending its rating hiking cycle.”
Anthony Saglimbene - Chief Market Strategist, Ameriprise Financial
Investors may need to come to terms with a ‘Higher for longer’ rate environment
In our view, the Federal Reserve and earnings remain the key overhangs on the market at the moment. Fed speeches from several FOMC members last week pointed to a higher for longer message on rates. This squarely pushes back on the idea the committee would consider cutting its fed funds target rate later this year, which the market continues to believe will be the case. Moreover, the preliminary looks at April manufacturing and services activity last week showed that the Fed may still have work to do to reduce inflation.
April S&P flash U.S. manufacturing PMI expanded for the first time in six months, with the production component rising at its fastest pace since May 2022, driven by increased employment and a return to new order growth. Notably, employment accelerated at its fastest pace since September 2022. Similarly, April S&P flash services PMI expanded at its fastest pace in a year, with employment accelerating at its fastest pace since July 2022. Unfortunately for the Fed, services inflation rose at its most accelerated pace since May 2022. Bottom line: The economy may be showing signs of slowing (March’s continued decline in Leading Indicators as an example), but areas of the economy are still running too hot for the Fed to consider cutting rates. In our view, investors will have to come to terms with a higher for longer rate environment at some point if economic data, like PMIs, remain firm over the coming months. From our vantage point, this would likely produce additional headwinds for stock prices.
Big Tech will likely set the tone for the remainder of Q1 earnings
On the earnings front, roughly 18% of S&P 500 companies have reported Q1’23 results, with 76% reporting earnings per share (EPS) growth above analyst estimates — which aligns with longer-term averages. The main takeaway for investors at the start of the earnings season is that expectations were pretty low coming in, and the market is holding up relatively well thus far, which should be viewed as a positive. However, S&P 500 companies are on pace to post their largest year-over-year EPS growth decline since Q2’20. This week, 60 S&P 500 companies will report profit results, including 14 Dow 30 components.
This week’s earnings results from some of Big Tech’s heavyweights will be most notable. Alphabet, Microsoft, Meta, and Amazon are all on deck this week, and their results could play a key role in shaping how investors interpret the rest of the earnings season. Last week’s mixed results from regional banks, with deposit headwinds and lower expected net interest income, may be overshadowed this earnings season if America’s largest companies on the planet can maintain profitability and growth targets. With that said, valuations across Big Tech have materially expanded this year while forward expectations for profits have declined. In our view, this creates the risk of disappointment and may expose Big Tech stocks to increased volatility if companies fail to meet expectations. Higher rates are also a risk to Big Tech, as future profits become less valuable when discounted back to current risk-free interest rates. Nevertheless, we believe high-quality companies with more predictable earnings streams, and secular drivers, should be targets for excess cash should the earnings season and higher rates produce pullback opportunities. Your Ameriprise financial advisor can help with strategies that include dollar cost averaging and targeted recommendations across the Tech/Tech-related space that may provide longer-term buying opportunities should near-term conditions not meet investor expectations.
Historical perspective: The S&P 500 sits in the middle of its two-year range despite major headwinds
Pulling the lens out a bit, investors may be surprised to learn that the S&P 500 Index basically stands where it stood two years ago. A recovery from a 100-year pandemic. Historic fiscal and monetary support echoing across the economy. Surging growth, leading to multi-decade high inflation and the lowest unemployment rate in a generation. Swift and aggressive monetary tightening over the last year combined with a list of head-spinning macro events (too numerous to list in this commentary). And after all that, the S&P 500 closed last week lower by a little more than 1.0% over the previous two years.
Think about that for a moment. That two-year period includes a good chunk of the gains seen in mid-to-late 2021, including the roughly +14.5% gain the S&P 500 posted from mid-April 21’ to the market’s top in early January 22’. The two-year period also includes the roughly 25.0% decline the broad-based U.S. stock barometer suffered from its January 22’ top to the mid-October low of last year. And finally, let’s throw in the roughly +18.0% rebound the Index has posted since its October lows. Notably, the Index now sits in the middle of its 2-year range, offering little insight into whether stocks are headed back to their January 22’ highs or down to the October 22’ lows.
From one simple perspective, stocks are positioned exactly where they should be today, and given the backdrop of the last two years. In our view, the S&P 500’s level in early January 22’ seems too optimistic, considering today’s rate, profit, growth, and inflation environment. Yet, the Index lows in October seem too pessimistic, given inflation has consistently moderated lower, labor conditions remain solid, growth is slowing and not plummeting, and the Fed appears close to ending its rating hiking cycle. That said, uncertainty remains high, and recession risk is elevated.
But consider this, investing often comes down to perspective and time frame. For example, over the last two years, there have been points along the way investors would have been disappointed or delighted to know the S&P 500 would be down roughly 1.0% over that span. But extend the lens out just one year (which includes the heart of the pandemic), and the S&P 500 is higher by roughly +51% cumulatively over the last three years. Not bad, given the extraordinary circumstances and events stocks have had to navigate over that period. As a long-term investor, we believe this perspective helps ground decisions and adds a calmer mindset to help navigate the day's issues. Particularly, if one has the fortitude to avoid jumping in and out of the market based on dynamics that seem consequential in the moment but often have less impact on returns as time marches forward.
Lastly, regional surveys from the Federal Reserve, April Consumer Confidence (Tuesday), a first look at Q1’23 GDP (Thursday), March PCE (Friday), and various reads on home sales and prices line the week’s economic reports.
The views expressed are as of the date given, may change as market or other conditions change, and may differ from views expressed by other Ameriprise Financial associates or affiliates. Actual investments or investment decisions made by Ameriprise Financial and its affiliates, whether for its own account or on behalf of clients, will not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not account for individual investor circumstances.