Market In a Snap! September 22nd, 2023

By: Dave Chenet, CFA, CAIA

 CloseWeekly returnYTD return
S&P 5004,320-2.93%12.52%
Nasdaq Composite13,211-3.62%26.23%
Russell 2,0001,776-3.76%1.34%
Crude Oil90.34-1.47%12.56%
US Treasury 10yr Yield4.43%  
Source: YCharts, Yahoo! Finance, WSJ

After a “Hawkish Pause,” What’s Next for the Fed?

The Federal Open Market Committee (the Fed), as widely expected, decided this week to maintain short-term borrowing costs between 5.25%-5.5%.   Despite its acquiescent pause, the Fed released its forecast for future rates which sent a message to markets that expectations for significant rate cuts in 2024 may be too optimistic.  Currently, the market expects the Fed to maintain the current level of rates before beginning rate cuts in mid-2024 (with three total 0.25% cuts priced in for full-year 2024). 

Throughout the year, we have expected core inflation to persist above the Federal Reserve’s 2% target for longer than what the current market expectations suggest…leading to pain for markets, especially in highly interest-rate sensitive asset classes such as technology stocks and long-term bonds.  Asset prices may be beginning to reflect in this “higher for longer” scenario.

As students of economic cycles, we acknowledge that the remedy for elevated inflation might materialize through a combination of decelerating economic growth and a less robust labor market. Despite the prevailing narrative in financial media advocating for a “soft landing,” we retain a sense of caution regarding the possibility of a recession on the horizon.

In our assessment, investors who are well-prepared stand not only to endure the challenging conditions but also to uncover more appealing risk-to-reward prospects amid this evolving landscape. 


What We’re Reading:

Axios: This economy runs on Girl Power

WSJ: August Home Sales Declined to Slowest Pace Since January

Bloomberg: McCarthy Cancels House Votes, Raising Risk of US Government Shutdown

Reuters: Yellen: No signs US economy in downturn, warns against gvt shutdown

Chart of the Week:

Forward-looking economic data continues to point towards slowing GDP growth in the coming quarters.

Market In a Snap! September 1st, 2023

By: Dave Chenet, CFA, CAIA

 CloseWeekly returnYTD return
S&P 5004,5152.50%17.61%
Nasdaq Composite14,0313.25%34.06%
Russell 2,0001,9203.69%9.42%
Crude Oil85.897.37%7.21%
US Treasury 10yr Yield4.17%  

Source: YCharts, Yahoo! Finance, WSJ

Recap of Aug 24th PCM Webinar with Nosh Engineer – VP Fidelity Investments

Link to Webinar Replay

Last week we had the opportunity to sit down with Nosh Engineer – VP of the Capital Markets group at Fidelity Investments to discuss Fidelity’s economic and market outlook for the rest of 2023 and beyond (Link to the replay above).  Nosh touched on many of the themes that we have been highlighting in this newsletter.  Some highlights of Nosh’s comments were:

Inflation: Nosh noted that while headline inflation has fallen to ~3% as of late, core inflation remains well above 4%.  Nosh expects headline inflation to catch-up to core inflation as higher gasoline prices and tight labor markets keep wage inflation elevated.

Fiscal/Monetary Policy: While the Fed has moved monetary policy to restrictive territory, fiscal policy remains loose with the fiscal deficit ~8% of GDP.  Extended deficits must be funded by higher treasury issuance, pointing to upward pressure on interest rates, which in turn makes treasuries relatively more attractive to investors than stocks.

US Stock market valuation: Investors should be aware that persistently high inflation points to a lower Price/Earnings multiple for the S&P 500.  Valuations trading more in-line with a higher interest rate/inflation environment will most negatively impact the “Magnificent 7” mega-cap technology stocks, however, some of those mega-cap stocks appear more attractively valued relative to respective earnings.

Non-US stock market valuation: While European economies continue to struggle through high inflation and energy concerns, they trade at attractive valuations.  Emerging markets, especially, appear to have a tailwind of fundamental growth and attractive valuations.

We hope that hearing divergent viewpoints on the economy/market is helpful and we will endeavor to continue to hold these webinars to offer a view into our ongoing process of understanding and evaluating the investment thesis of some of the leading institutions on Wall St.


What We’re Reading:

WSJ: Chinese Stocks Are In A Slump – and Value Investors Are Excited

WSJ: Student Loans Are Emerging From Deep Freeze, and Borrowers Are Confused

Morningstar: August Jobs Report: Fed LIkely to Pause Rate Hikes As Hiring Frenzy Cools

Chart of the Week:

To support Nosh’s point about valuations and yields, this chart overlays the S&P 500 forward 12m P/E in blue with the Real (inflation adjusted) treasury yield in purple (inverted in this chart).  Typically as real yields rise, stock valuations fall. 2023 has seen a rebound in market valuation but real yields rising above their 2022 peak.  Markets seem to be betting on inflation falling and rates returning to low, supportive levels.

Market In a Snap! July 28th, 2023

By: Dave Chenet, CFA, CAIA

 CloseWeekly returnYTD return
S&P 5004,5821.01%19.34%
Nasdaq Composite14,3162.02%36.79%
Russell 2,0001,9811.02%12.66%
Crude Oil80.365.02%0.41%
US Treasury 10yr Yield3.79%  

Source: YCharts, Yahoo! Finance, WSJ

Recap of Presidio Capital Management Webinar We had hoped to share a replay of the webinar that we hosted this week with special guest, John Tousley, CFA, Managing Director – Goldman Sachs.  However, due to an unnamed staff member selecting ‘pause recording’ instead of ‘record’ (don’t worry, Dustin, I won’t tell anyone it was you), we do not have a recording to share with those of you who were unable to attend.  So, instead, below are a few highlights from the conversation:  

  • Dustin hosted John Tousley for this conversation.  John is the Global Head of Market Strategy for Goldman Sachs Asset Management.  He is regularly featured on financial news television and consults with institutional investors on delivering successful long-term outcomes.
  • Dustin laid out the case for investor caution, including Fed rate hikes and ‘higher for longer’ rates in the face of persistent inflation causing problems for consumers & corporations (credit card/auto loan delinquencies, rising borrowing costs, lower corporate profit margins and reduced hiring).  Dustin made the point that the current AI/tech rebound may be too optimistic in light of the economic backdrop.
  • John presented the case for optimism.  He highlighted potential for the Fed to stop hiking rates, improving economic activity indicators, and an AI-driven productivity boom.  Despite his view of a “soft” landing, John expressed a Flat & Fat thesis, where equity gains are constrained by higher interest rates. 
  • Dustin and John took a deep dive into the investment landscape and highlighted opportunities for investors in each asset class.
    • Cash: While a tactically useful asset class to take advantage of a potential pullback, cash yields will likely fall with interest rates.
    • Fixed Income: Despite 2022’s challenges, fixed income is an important part of a diversified portfolio.  In today’s environment, it offers yield and the potential to be a ballast to the more volatile equity positions.  Investors should be selective, however, of the credit risk within their fixed income positions.
    • Stocks: While Tech/AI has been the story thus far in 2023, there is opportunity for a “catch-up” in cyclical areas of the market, including small/mid cap and non-US markets.
    • Real Assets: In a period of global economic recovery and sustained higher levels of inflation, certain commodities look attractive.
  • Overall, both Dustin and John stressed the importance for investors to build an investment plan that is designed specifically around their unique risk and return requirements.  In a market environment of high interest rates and a fully-valued stock market, investors should be prepared to stick to their plan throughout the inevitable ups and downs of the market cycle.

What We’re Reading:

WSJ: US economy grows at slowest pace in 5 months.  Inflation ‘sticky,’ S&P says

Morningstar: Fed’s Powell Talks Tough After Rate Hike, But a Pause Seen Likely From Here

Chart of the Week:

A chart from Bank of America featuring the AAII investor survey data shows a significant divide between stock positioning of retail investors (dark blue) and professional investors (light blue).  This gap will likely close – either by professional money managers chasing returns, or volatility causing retail investors to reduce their fully-loaded equity allocations.

Market In a Snap! June 30th, 2023

By: Dave Chenet, CFA, CAIA

 CloseWeekly returnYTD return
S&P 5004,450.382.35%15.91%
Nasdaq Composite13,787.922.19%31.73%
Russell 2,0001,888.733.67%7.36%
Crude Oil70.450.86%-12.27%
US Treasury 10yr Yield3.81%  

Source: YCharts, Yahoo! Finance, WSJ

The First Half of the Year Is in the Books!

Halfway through 2023, little on Wall Street has gone according to plan.  Entering the year, many Wall Street banks were preparing for a rocky first half based on the expectation that the Fed monetary policy tightening would spill over to the economy and lead to recession.   While the Fed did indeed continue its path to higher rates, the stress in the banking system was enough to lead the Fed to pause (although, Fed Char Powell insists that the pause will be momentary and rate hikes will continue to be necessary).  Despite economic risks piling up, investors cheered the AI boom and resumed torrid buying of tech stocks.  As we turn the page to the 2nd half of the year, we pause to reflect on the following economic and market indicators which will drive asset class returns going forward:

  • Interest Rates & Inflation: The 2022 broad market sell-off was prompted by the reversal of ultra-low interest rates as policy markers combatted rampant inflation.  We have seen inflation moderate, yet Core PCE (the Fed’s preferred measure of inflation) remains above 4% and is showing few signs of a quick return to the 2% mandate.  Meanwhile, short-term interest rates are at their highest levels since 2007, the yield curve is more inverted than it has been since the 1980s, and the Fed is insistent that it will continue to tighten until inflation reaches 2%.
  • Earnings & Valuations:  S&P 500 corporate earnings fell in the first quarter and 2nd quarter expectations are expected to continue to show lower earnings as higher wages and interest rates reduce profit margins (from still very high levels); yet the rally in share prices has pushed the Price to Earnings ratio to 19.2x, almost a 10% increase since the beginning of the year.
  • Economic Growth: Forward-looking economic indicators, such as the ISM Manufacturing Purchasing Managers Index, credit conditions, the yield curve and initial employment claims point to slower economic growth.

With the year half-way through, the same Wall St banks which predicted a rocky first half and a buoyant second half of the year are raising their year-end expectations and painting a rosy picture of a ‘goldilocks’ scenario of a prolonged pause from the Fed, moderating inflation and tech stocks living up to their very optimistic expectations.  While market rallies can extend beyond “reasonable” levels, investors may be well-served by taking some profit and seeing how the growth/inflation picture plays out.


What We’re Reading:

Federal Reserve: Accumulated Savings During the Pandemic: An International Comparison with Historical Perspective

CNBC: Decision of when to retire has little to do with how much you’ve saved for retirement, report finds

McKinsey: The economic potential of generative AI: The next productivity frontier

The Economist: Americans love American stocks.  They should look overseas.

Chart of the Week:

    Source: CNN Fear/Greed Index

Market In a Snap! June 12th – June 16th, 2023

By: Dave Chenet, CFA, CAIA

 CloseWeekly returnYTD return
S&P 5004,409.592.58%14.85%
Nasdaq Composite13,689.573.25%30.79%
Russell 2,0001,875.470.56%6.72%
Crude Oil71.442.82%-10.99%
US Treasury 10yr Yield3.76%  

Source: YCharts, Yahoo! Finance, WSJ

A New Bull Market for Stocks?

The S&P 500 closed the week at a level more than 20% above the lows of October ’22, meeting one definition of a “bull market.”  Bull markets are historically favorable for equities and credit and coincide with a healthy environment for corporations to grow revenues and profits.  Before celebrating the return of the bull, however, prudent investors may want to closely examine some common bull market economic indicators that could either confirm or reject the bull market thesis, including:

  • Accelerating economic growth: Today’s leading indicators point to slowing growth, increasing jobless claims, restrained spending & borrowing and poor consumer confidence.
  • Accelerating corporate profits: long-term gains in stocks are driven by corporate profits; S&P 500 earnings/share peaked in early 2022 and stand 13% below Q1 ’22 levels.
  • A healthy US consumer: The US consumer contributes approximately 68% to US GDP growth.  Consumer spending may have peaked as the post-covid spending, which was encouraged by excess savings and government stimulus has waned.  Inflation-adjusted retail spending is 4% below its 2022 levels and tighter credit conditions and higher interest rates may keep spending constrained.
  • Broad-based stock gains:  Small-caps and cyclicals typically lead the way coming out of a bear market as they tend to more sensitive to economic changes.  To this point, small-caps & cyclicals have yet to take the reigns from their large-cap technology counterparts.

Despite the strong rally from October lows, the market is still 8% below the January ’22 peak.  The history of bear markets is littered with convincing rallies that brought bulls out of hibernation only to see then see markets sputter.  Time will tell if this is a head fake or the start of a new bull market. 

What We’re Reading:

Bloomberg: AI Proves Mightier Than the Fed for Stocks Divorced From Economy

WSJ: China Cuts Rates to Prop Up Flagging Recovery

Chart of the Week:

Market In a Snap! May 30th – June 2nd, 2023

By: Dave Chenet, CFA, CAIA

 CloseWeekly returnYTD return
S&P 5004,282.371.83%11.53%
Nasdaq Composite13,240.772.04%26.51%
Russell 2,0001,830.913.28%4.34%
Crude Oil71.97-1.78%-10.45%
US Treasury 10yr Yield3.69%  

Source: YCharts, Yahoo! Finance, WSJ

Market Recap: The Stock Market And The Bond Market Disagree

Stocks and bonds are sending conflicting signals about the economy.  While stock markets are anticipating corporate profits to soon break out of their second consecutive quarterly decline, their bond counterparts are taking a much more pessimistic view of future economic growth.  Current expectations surrounding profits point to S&P 500 2023 full-year profits of $222/share, roughly unchanged from 2022 and 2024 profits to grow 12%.[1]  On the other hand, the bond market anticipates that economic growth will weaken & the Federal Reserve will deem it necessary to reduce short-term interest rates by 1% over the next 12 months. 

While bond investors tend to focus on return of capital rather than return on capital and therefore often focus on risk management, they seem to be pricing in the narrative that given Fed rate hikes impact the economy on “long and variable lags”, the full economic impact of tightened monetary policy to control inflation has yet to be fully appreciated.  Higher interest rates have already led to stress in the banking sector, reduced borrowing, higher cost of capital, lower inflation-adjusted consumer spending and increased public and private debt.  Despite mounting data pointing to impending recession, the labor market remains healthy and will be highly scrutinized by investors and economists in the months to come.

In our view, investors should consider the warning signals being sent by the bond market.  Recessions are normal parts of the business cycle and often act to quell asset price bubbles.  These periods represent opportunities for disciplined investors who understand their tolerance for volatility and the time horizon for which they are investing.  We believe that it is foolish to try to perfectly time the market, but prudent to listen to what the data and market signals are telling us.    

What We’re Reading:

The Fed Beige Book

WSJ: Consumer Confidence Slips to Six Month Low

Chart of the Week:

Consumer spending has largely been fueled by debt as credit card balances have risen substantially.  Combined with the highest credit card rates in over two decades, the narrative of a strong consumer holding up the market may soon change.


Market In a Snap! May 22nd-May 26th, 2023

By: Dave Chenet, CFA, CAIA

 CloseWeekly returnYTD return
S&P 5004,205.450.32%9.53%
Nasdaq Composite12,975.692.51%23.97%
Russell 2,0001,773.020%1.00%
Crude Oil72.773.13%-9.21%
US Treasury 10yr Yield3.81%  

Source: YCharts, Yahoo! Finance, WSJ

Market Recap: Have We Already Entered Recession and Should We Care?

The wall street aphorism that the market is not the economy has rung true so far this year.  US Large Cap stocks are up almost 10% through the first five months of the year, powered higher by the high-flying tech stocks, despite signs that the ongoing unwind of fiscal and monetary stimulus is slowing growth and leading to pockets of stress in the markets. 

The minutes released this week from the Federal Reserve’s May meeting showed the central bank’s delicate decision: continue to raise rates to fight inflation that remains persistently high and risk tipping the economy into recession or refrain from further hikes to stabilize the economy but risk inflation reaccelerating.  Economically, manufacturing data, corporate profits, constrained bank lending, rising consumer debt/delinquencies and higher borrowing costs all point to slowing growth.  Eventually the slowing growth picture will reduce demand-side pressure on inflation and will allow the Fed to lower interest rates to more accommodative levels, however, a recession would likely also lead to lower corporate earnings and lower stock prices in the short-term.

Disciplined investors may be well-served by paying close attention to the economic data and prepare their portfolio for rockier times ahead.  To quote another aphorism (or maybe a JFK quote): the time to repair the roof is when the sun is shining.

What We’re Reading:

FOMC Minutes from May Meeting

Strong US consumer spending, inflation readings put Fed in tough spot

Morningstar: What’s the Best-Performing Asset Type During a Recession

Chart of the Week:

The Bureau of Economic Analysis (BEA) compiles two measurements of economic output – Gross Domestic Product (GDP) and Gross Domestic Income (GDI).  In theory, these two measurements should be equivalent – they both track the aggregate output of the US economy.  In the short term, however, the two can deviate.  Economists argue that the GDI might more quickly predict recession as its inputs may be more timely than the output-focused GDP components.  Today, the GDI (blue line in the chart above) is signaling that we may have entered a recession – despite a modest pickup in the GDP estimate. 

Market In a Snap! May 15th-May 19th, 2023

By: Dave Chenet, CFA, CAIA

 CloseWeekly returnYTD return
S&P 5004,193.201.64%9.18%
Nasdaq Composite12,664.303.04%20.94%
Russell 2,0001,773.721.91%0.95%
Crude Oil71.772.72%-10.58%
US Treasury 10yr Yield3.69%  

Source: YCharts, Yahoo! Finance, WSJ

Market Recap: Is the Tech Trade Back?

After leading the markets to the downside last year, US large-cap stocks have been the best performer year-to-date.  The equal-weighted S&P 500 index is +1.14% for the year vs. a +9.44% rally for the market-cap weighted S&P 500 index.  On a single stock basis, Nividia and Meta (formerly Facebook) have more than doubled in value over the course of the year.  Two main factors are responsible for the rally in tech shares:

  1. The AI Boom: investors have been enamored with companies that may be exposed to the wave on Artificial Intelligence (AI) applications.  An analysis by Societe Generale finds that removing the 20 stocks most widely owned by AI-focused funds would reduce the S&P 500 performance by roughly 10% year-to-date).
  • Expectations of an Upcoming Fed Pivot:  Despite efforts from Chairman Powell and other Fed presidents to convince the markets that the Fed may indeed continue to hike rates if inflation does not return to the 2% level, the market expects central bankers will soon be cutting rates.  Current market pricing reflects the assumption that the Fed will cut short-term borrowing costs by 0.5% by year-end.  This shift to (more) accommodative monetary policy will likely benefit the interest-rate sensitive technology sector.

Investors may be well served to closely examine their risk tolerance and time horizon before chasing after returns in tech stocks, however. We highlight a few factors which could derail the rally:

  1. Stagflation: slowing growth (whether an official recession or not) combined with persistently sticky inflation will both challenge earnings for tech stocks and valuations.  The Fed may be disinclined to acquiesce to the market’s desire for lower rates and the lofty valuations supporting the tech rally may be forced to moderate.
  2. Valuations: investors must not only consider the quality of the companies that they own, but also the price they pay to own those companies.  U.S. “Mega-Cap” stocks (the eight stocks that currently represent almost 25% of the market cap of the S&P 500) are trading at near-record valuations relative to the remaining 492 stocks in the index.

As always, we encourage investors to maintain portfolios that cater to their unique investment time horizon and risk profile.  In the long-term, a disciplined process which focuses on risk management and diversification leads to superior results.

What We’re Reading:

Professor Jeremy Siegel: Summarizing, I Remain Cautious On the Markets

Natixis: Why Everyone’s Talking About…Stagflation

Reuters: Artificial intelligence gives real boost to U.S. stock market

BofA Strategist Says Sell US Stocks as AI Seen Forming a Bubble

FT: Stonks: Thank you AI hype

Chart of the Week:

Market In a Snap! May 8th – May 12th, 2023

By: Dave Chenet, CFA, CAIA

 CloseWeekly returnYTD return
S&P 5004,124.04-0.29%7.41%
Nasdaq Composite12,284.740.40%17.37%
Russell 2,0001,740.85-0.99%-0.94%
Crude Oil70.02-1.43%-12.62%
US Treasury 10yr Yield3.46%  

Source: YCharts, Yahoo! Finance, WSJ

Market Recap

Despite inflation reports which showed the pace of inflation continues to moderate – both as measured by the Consumer Price Index and the Producer Price Index, markets finished the week lower, weighed down by little progress towards resolving the US debt ceiling.  Should congress fail to reach a debt ceiling agreement, the Brookings Institute estimates that the treasury could continue to make interest payments on government debt but would have to cut other outlays by 25%.  [1]Lower government spending would slow economic growth and borrowers may require a higher interest rate to lend to the government, thus leading to lower bond prices and lower stock market valuations.  Lower asset prices and higher borrowing costs would lower consumer and business confidence.  In an economy that many believe may already be on the precipice of recession, failure to reach an agreement would certainly increase recessionary risk.  Even if a deal is reached, the economy would not be out of the woods.  A deal would likely include spending cuts and act as a tightening of fiscal policy – at a point in time when the Fed has just raised borrowing costs and continues its $95b/month reduction in the size of its balance sheet.  Policymakers face a significant challenge – continue fiscal and monetary accommodation to support current growth but risk inflation and lack of progress towards containing ballooning deficits and levels of government debt.  Regardless of the outcome, current low levels of market volatility may prove to be overly complacent.

What We’re Reading:

CBO: Update to Budget Outlook 2023 to 2033

FT: US fiscal alarm bells are drowning out a deeper problem

WSJ: Druckenmiller Warns of Risk of US Hard Landing

CNBC: Jamie Dimon warns panic will overtake markets as U.S. approaches debt default

Chart of the Week:

The Consumer Price Index continued to moderate in April yet remains above the Federal Reserve’s 2% mandate.  As reflected in the chart above, goods inflation has moderated from the COVID-related supply chain issues, yet services inflation remains high.  Core Services inflation will likely continue to moderate (housing and wage growth tend to be leading indicators), yet we believe that it is likely inflation will remain above the level in which the Federal Reserve is likely to cut interest rates.


Market In a Snap! May 1st – May 5th, 2023

By: Dave Chenet, CFA, CAIA

 CloseWeekly returnYTD return
S&P 5004,136.25-0.80%7.73%
Nasdaq Composite12,235.410.07%16.90%
Russell 2,0001,759.88-0.43%0.05%
Crude Oil71.21-6.11%-11.1%
US Treasury 10yr Yield3.45%  
Source: YCharts, Yahoo! Finance, WSJ

Market Recap

A very volatile week in markets saw the major indices rally on Friday to finish the week only modestly lower.  The week was highlighted by the Federal Reserve decision announcement on Wednesday to hike the federal funds rates by 0.25% to 5.0-5.25%.  While the rate increase was largely anticipated, remarks by Fed Chair Powell skewed more hawkish than the market had hoped.  Powell signaled to the market that the Fed intends to remain “data dependent” and will keep the flexibility to continue to hike rates should inflation remain high. 

As depicted in this week’s Chart of the Week, the market has a very different expectation than the Fed.  The current futures pricing reflects a 99.9% probability that the Fed will cut rates at least once by the end of the year and a 97% chance that the Fed will cut by at least two 0.25% decreases.  The median expectation is for the Fed to cut by 0.75% by year-end.  Consistent with market prognostications are economist forecasts; the Atlanta Fed GDP Now forecasting tool estimates that the economy will grow at a 2.7% pace in Q2, vs economist expectations of no growth.

Market rate-cut expectations and economists’ call for stalling growth paint a stark picture for near-term risk assets.  The Federal Reserve has acknowledged that its actions impact the economy through “long and variable lags.” The ongoing bank turmoil and credit crunch may be early indications of building stress in the financial system, however, the Fed has drawn its line in the sand and is messaging that, while a pause may be justified, it has yet to see the case for rate cuts.  Moreover, and under-reported in the financial press, the Fed has been unflinching in its ongoing balance sheet reduction.  History tells us that “Mr. Market” is usually more prescient than the Fed, but, in our view risks to near-term asset prices are mounting.  Investors will be well-served by employing a disciplined approach that is structured around their unique investment time horizon and financial plan. 

What We’re Reading:

Non-Farm Payroll Data Surprises with Strong Performance

WSJ: The Covid-19 Crisis is Officially Over.  Everything changed.

Coucil of Economic Advisers: The Potential Economic Impacts of Various Debt Ceiling Scenarios

Chart of the Week:

Source: CME Group