Confused? – Don’t Worry, So is Wall Street!
By David Nelson, CFA CMT
If you’re confused about the chaotic market action since the start of the year, don’t worry, you’re not alone. So is Wall Street. On most weekends, I spend time sifting through data and listening to what other talking heads have to say, if for no other reason to challenge my own theories.
Data by FactSet
If you want some opposing opinions look no further than two of the biggest, Goldman Sachs and JP Morgan. Goldman’s David Kostin points out that during the last 12 months the Russell 2000 has underperformed the S&P 500 by 2500 basis points or a full 25%, the worst 12-month relative performance since 1999. David also believes tightening financial conditions, slowing growth and a flattening yield curve will force continued small cap underperformance.
On the other side of town JP Morgan believes investors should buy the dip in the Russell and other cyclical stocks believing recession is priced in, an outcome they don’t endorse.
Twelve months from now, one of them is going to be wrong.
I’ll take the over
One of the few areas of agreement on the street are that the Fed will hike multiple times this year with only two data points in dispute.
- Will they hike every meeting?
- Will March be 25bps or a full 50?
With inflation at 40-year highs and a robust employment report featuring an hourly earnings print of +0.7% and +5.7% year on year, I’ll take the over.
Source: Board of Governors Federal Reserve
As Chetan Jindal manager of the Greenwich Ivy Long/Short Fund (GIVYX) pointed out on the Belpointe D2 Show on Thursday, Fed hiking cycles usually last years.
The good news is that despite a 10-year yield at the highest levels since pre the pandemic it is still well below the fearsome 3% last seen during the 4th quarter of 2018. The 3% breach triggered a massive rotation out of equity into bonds as traditional fixed income buyers like insurance companies, pension plans and endowments suddenly were able to match future liabilities with something other than equity. All in, yields have a long way to go before fixed income is a competitive asset class. Make no mistake! Each stair step higher brings fixed assets closer to the promised land forcing equity multiples lower.
Data by FactSet
Falling prices are the obvious input to lower valuation multiples but they can also come from rising earnings and or increased profit margins. Growth solves a lot of problems.
Earlier I used the word chaotic and certainly last week fits that mold. Back-to-back sessions with Meta (FB) on Thursday suffering the largest ever loss ($232 Billion) in market cap followed on Friday by Amazon (AMZN) adding $191 Billion also a record.
Let’s end today’s post on a positive note. Despite the challenges, earning’s estimates the Holy Grail for Quant investors like me are still trending higher albeit at a slower pace. Also in the plus column, the S&P managed to put in a convincing week closing above the 200-day moving average.
Data by FactSet
Technically markets have a lot of work to break out of the recent downtrend. If you’re looking for a signpost look to the slope of the 200-day moving average. It says more about the health of the market than the level of the index or talking heads, including yours truly.
*At the time of this article some funds managed by David were long AMZN