news & insights

Election Inertia & 3Q Earnings Drive Markets Over Coming Weeks | We are officially in 3Q earnings season with the banks kicking off earnings and many of the large banks are surprising to the upside, breaking out the bank index. As of this writing, we are twenty-two days away from the Presidential election, which we believe will bring investment inertia – at least until we have the results of who won this apparently neck-and-neck race. Earnings are expected to continue to grow into 3Q24. Yet, with the anticipated inertia and earnings season just getting underway, the equity markets can be choppy. The Bull will buck in October! But we like the behavior of cyclicals stocks, particularly Tech and Tech-related as well the Industrials. These are the leaders of the market and remain favored.

Bond Spreads Widen a Bit | Yields on Treasury bonds have been declining as concerns over inflation have eased. Meanwhile, corporate bond yields have declined as well, but not as rapidly as have Treasury yields -- this as fixed-income investors are now more concerned about a slowing economy and rising bond default rates. As a consequence, spreads between corporate and Treasury bond yields have widened in recent months.

In the September edition of the Chart Book, Managing Director and Head of Advisor Solutions Richard Williams digests the economic data for the month, which revealed consumer confidence pulled back in June but remained within the same narrow range held throughout the past two years as strength in current labor market views continued to outweigh concerns about the future, according to the Conference Board.

On September 18th, the Federal Reserve (Fed) decided to lower interest rates for the first time in two years by 50 basis points (bps). Historically, the Fed begins an easing cycle (lowering interest rates) by 25 bps and lowers by 50 bps only when there are stresses in the economy or banking system. So, a 50 bps cut while the economy is still growing by 2% and the labor market is still at full employment was an extraordinary move. The Fed also positioned markets to expect continued rate cuts into the end of this year and into next year as well. This is a highly unusual action and, in our view, a game changer for markets. Why? This will provide additional liquidity to the markets and should provide confidence to the consumer to keep spending. The move should also stimulate the housing market.

It's A Goldilocks Economy | The September jobs report was significantly stronger than expected. This report alone simply takes the possibility of a 50-basis point rate cut by the Federal Reserve (Fed) in November off the table! But a 25-basis point cut is likely to be served up as the Fed itself said it is recalibrating monetary policy. The Fed is looking to remove the tightness of its policy in favor of moving to what it considers a more neutral rate also known as r* (“r-star”). We still have one more jobs report before the next Fed meeting in November. There is concern now that the recent devastation from Hurricane Helene can impact the jobs data.

Micron & China Ignite the Markets | Last week, we saw the release of a string of key economic data – including the all-important Core PCE (Personal Consumption Expenditures Price Index) – and the data is all supportive of higher equities and lower yields. But what really impacted stocks around the world was the earnings report and outlook for memory chips from Micron (MU), which ignited the semiconductor stocks and Technology overall. Then, in a highly uncharacteristic move, China came out publicly with a bazooka plan to stimulate the economy – and that drove its equity market significantly higher since many are underweight or even short the market.

Tech giants and beyond are set to spend over $1tn on AI capex in coming years, with so far little to show for it. So, will this large spend ever pay off?

It’s that time again! Every four years, Americans take a few minutes out of their day to choose the next President of the United States. Under normal circumstances, voting is a simple, uncomplicated act — but the months preceding it are anything but.

The "Fed Put" Is Alive and Well | After 1½ years of a tightening monetary policy, last Wednesday, the Federal Reserve (Fed) pivoted to a path of easing – and ongoing easing – by lowering the benchmark Fed Funds rate by 50 basis points (0.50%). This was a highly unusual move by the Fed to cut so aggressively with an economy that is still growing strongly at 2% and a labor force at full employment (though, admittedly, it is slowing). Traditionally, a 50 bps cut is done when an economy is under stress or if there is financial stress within the system. The typical (and expected) pace would have been to cut by 25 bps only. What we’re seeing is basically a “Fed put."

Fed's First Cut is 50 Basis Points | The Federal Reserve wrapped up its recent Open Market Committee meeting and, as expected, lowered the current federal funds rate for the first time since 2020. But the central bank surprised some by taking the rather extraordinary step of reducing the rate by 50 basis points (bps), as opposed to the normal 25-basis-point move. Why the big cut? In our opinion, the Federal Reserve is clearly shifting its focus from fighting inflation to protecting the employment environment.

In the August edition of the Chart Book, Sanctuary Wealth Managing Director and Head of Advisor Solutions Richard Williams breaks down the month’s key economic data, highlighting that U.S. consumer prices rose slightly in the month, but underlying inflation showed some stickiness amid higher costs for housing and other services.

Rate Cycle To Shift This Week - Stocks Positioned To Rally | The Federal Reserve (Fed) is meeting this week to determine the state of the economy and inflation. The cross-market expectation is that the Fed will begin a rate cutting cycle – but there is a debate as to whether it will start with a cut of 25 basis points (bps) or 50 bps. We believe that, because the economy is relatively robust, the Fed will begin with 25 bps only. The market is also expecting that rate cuts will continue with 25 bps cuts in November and December as well. The market has already priced in the change in direction in interest rates with 2-Year Treasury yields falling sharply after the August employment report. Technically, 2-Year Treasury yields can fall to 2.0%-1.5% – which is likely what we’ll see next year. If you have not locked in a 5% rate at the short end of the curve, your time is running out.

Weak Payrolls Set A Bearish Tone For Stocks and Bullish Tone For Short Rates | Last week, both the ADP and JOLTS reports showed a weaker employment picture, setting up concerns for the August employment report on Friday. Well, the August employment payrolls data was weaker than expected – across the board. Adding to market concerns were the sharp downward revisions to the July employment data – which reinforces the slowdown in the labor market. This all but assures the Federal Reserve (Fed) will be cutting interest rates this month. (We’re still thinking 25 basis points). This also had the 2-year Treasury yield breaking down – an action that points to short interest rates continuing their decline.

The 10-Year To The Rescue | The movements of the 10-Year Treasury could be much more important to the economy than the fed funds rate -- three-times as important, according to a Fed “rule of thumb” that Nobel Prize winner and former Fed Chairman Ben Bernanke mentions in his 2022 book titled “21st Century Monetary Policy.”

Moving in the Right Direction | Have we reached the Goldilocks “just right” world with the economy growing but not too strong (2Q24 GDP at 3%), the labor market balanced, inflation coming down, S&P 500 earnings growth strong (2Q24 up 11%) and interest rates expected to come down later this month? Well, it appears that these factors should lead to the equity market maintaining a strong return for the year.

More Progress on Inflation | Two important inflation reports were released recently and both indicated that overall pricing pressures have retreated from peaks. Let’s first take a deeper dive into the Consumer Price Index. According to the latest CPI report, the overall inflation rate in July of 2.9% was lower than the prior month’s rate of 3.0%. That good news was supported by a low reading in the monthly core CPI rate, which excludes the impact of food and energy and rose 0.2% from June to July, consistent with subdued readings for the past quarter.

Energizing the Future: Primers and Projections for Energy Use | With this month’s Sanctuary Corner, we’re doing a deep dive into the Energy Sector, with a focus on finding the potential pinnacles amid the pitfalls. As we have reported throughout the year, it’s a sector with a bright future – but one that still needs to overcome many challenges, both near- and long-term.

In the July edition of the Chart Book, Managing Director and Head of Advisor Solutions Richard Williams analyzes the economic data for the month, which showed the U.S. economy powered through the second quarter, growing more than expected even as inflation resumed its path back to the Federal Reserve’s 2% target. Also, the LEI for the U.S. declined in June, fueled by gloomy consumer expectations, weak new orders, negative interest rate spread, and an increased number of initial claims for unemployment.

Fed Inches Closer to Rate Cut | The Federal Reserve wrapped up its Open Market Committee meeting and, as expected, held the current federal funds rate steady at 5.25%-5.50%. The rate remains at its highest level since 2000 and above the long-term average of 4.4%. This is the Fed’s plan: keep rates high to push inflation lower.

Equity Markets Recover But Will It Last? | The global equity markets were pummeled last Monday as the Japanese yen strengthened significantly, forcing leveraged investors in the yen carry trade out of their positions. How much more of the yen carry trade needs to unwind? Given that this is a global trade, we may never know the exact amount. But we can look at the Commitments of Traders report and examine the positions of fast money traders. First, the most important thing to note is that the short position or borrowing in yen was at a record – and it was just above the size of shorting seen during the Great Financial Crisis in 2008-2009. Most of the yen short positions have been covered (see accompanying chart). This should allow for reduced volatility in the markets over the coming weeks.

The World is Yenning for a Bottom in the Markets | The Yen carry-trade has been a position in markets for many decades. Money was cheap in Japan, which essentially had a zero-interest rate policy. The carry-trade is borrowing money in Yen and buying other assets. The Bank of Japan’s (BOJ) benchmark rate moved from -0.1 to 0.1 on March 18, 2024, and last Wednesday, the BOJ raised this rate to 0.25. Now that the BOJ has begun raising rates, the carry trade has started to unwind (to undo the trade, you need to sell the asset that is long and buy yen to cover the debt), causing the Yen to Dollar to start appreciating sharply (it’s up 14% since late July!). But Monday morning in Japan (Sunday night in the U.S.), the Yen appreciated 5%, resulting in the Japanese equity market to crash -12.5%. This cascaded into a worldwide sell-off in equities. U.S. Treasuries were a safe haven with interest rates falling sharply.

Too Early, Too Late Or Will It Be Just Right? | Investors have been debating all year whether the economy was slowing – and if so, by how much – and most importantly, what should the Federal Reserve (Fed) be doing with interest rates? The Fed has been claiming to be data dependent, and recent economic data suggests inflation is indeed slowing, but the economy itself is slowing more.

More Progress on Inflation | Two important inflation reports recently indicated that overall pricing pressures have retreated from peaks in 2022. But both also confirmed that inflation remains above the Fed’s target of 2.0% and progress to that level may be hard to achieve. With the Consumer Price Index (CPI) report, there were some positive results. The overall inflation rate in June was 3.0%, lower than the prior month’s 3.3%.

Core PCE Reassures Expectations of a Fed Rate Cut in September | The Core Personal Consumption Expenditures Price Index (PCE) came in 0.1 higher than expected on a year-to-year basis, but this should not stop the Federal Reserve (Fed) from cutting interest rates by 25 basis points in September. Consumers have been slowing down their spending, manufacturing is showing weakness – and so are durable capital goods. And let’s not forget that the unemployment rate has been rising. GDP for 2Q24 came in stronger than expected with a healthy print of 2.8%, but we are seeing a bit of a slowing here as well. So, net-net, the economy is in good enough shape for earnings this year.

From the Trump Bump to the Trump Dump...And Now No Biden Stump | After the first debate between President Joe Biden and former President Donald Trump, the equity market began to price in a win for Trump. This trade got a bump after the assassination attempt on Trump as the betting odds on his win rose sharply. But at the Republican National Convention (RNC) last week, Trump made remarks about Taiwan that cascaded into a sharp sell-off of semiconductor stocks. The move hit the large cap Technology stocks, particularly the Magnificent 7. The market averages also fell, with the Nasdaq 100 down sharply. As we wrote last week, a correction was expected with sentiment very bullish and markets very overbought.

Fireworks to Spark the Bucking Bull | The first half of the year saw the S&P 500 rally 15% while the Nasdaq 100 was up 17%. As we entered July, stocks continued their march higher, reaching the low end of our target range of 5600-5800. We remain comfortable with this target range, but the Bucking Bull will start to shake things up a bit. Still, we maintain that the U.S. equity market is likely to have at least a 20% gain at year-end – on top of the 24% gain in 2023. This would be a top 10 all-time performance for the S&P 500 in two consecutive years.

In the June edition of the Chart Book, Managing Director and Head of Advisor Solutions Richard Williams analyzes the economic data for the month, which revealed consumer confidence pulled back in June but remained within the same narrow range held throughout the past two years, as strength in current labor market views continued to outweigh concerns about the future, according to the Conference Board.

Trump Assassination Attempt Brings More Focus to RNC & VP Nominee | Saturday’s assassination attempt on former President Trump appears to have bolstered his presidential campaign. Trump's survival and defiant response, symbolized by a triumphant fist pump, have energized the Republican Party and improved the betting odds on Trump winning the election in November. This momentum is expected to carry into the Republican National Convention this week in Milwaukee, as we all await the announcement of Trump's vice presidential running mate. So, how will stocks react? The equity market had already begun to price in a Trump victory, which is bullish for stocks. We don’t see anything changing.

Rate Cut Looks More Likely | The Bureau of Labor Statistics (BLS) reported that the U.S. economy generated 206,000 new jobs in June. June’s increase in payrolls and revisions lower to results from May and April took the three-month average to 177,000, below the 12-month average of 220,000 and signaling a cooling job market that -- when combined with unemployment that is creeping higher -- should allow the Fed to reduce interest rates this year.

The Drama of the Election Continues | In an attempt to recover from his disastrous performance against Donald Trump in the June 27th CNN Presidential debate, President Biden sat for a 22-minute taped interview last Friday night with ABC’s George Stephanopoulos. While the goal may have been to alleviate concerns about Biden’s health and cognition, many found the President to be underwhelming in the interview, leaving various questions still open for the Democratic Party. This is leading to more political drama going into November. It will prove to be a long election process – with the ultimate outcome as the top-of-mind concern for most investors.

Transition Theme for 1H24 into Rest of Year: An Object in Motion Stays in Motion | Part of Isaac Newton’s first law of motion is that an object in motion stays in motion. Well, the stock market has had strong motion so far this year, up 14.5% for the first half. We remain bullish and believe the motion of the market stays up. And we still believe that any pullbacks represent a buying opportunity.

More Progress on Inflation | Two important inflation reports recently indicated that overall pricing pressures have retreated from peaks in 2022. But inflation remains above the Fed’s target of 2.0%.

The Investment Council Report (ICR) provides a brief overview of the Council's perspectives of the economy and the major asset classes: equities, fixed income, and alternatives.

In the May edition of the Chart Book, Managing Director and Head of Advisor Solutions Richard Williams reviews the month’s economic data which showed consumer confidence improved in May after three consecutive months of decline, as reported by the Conference Board.

July Can Be A Fizzle | We are now concerned about near-term prospects because Wall Street analysts have (finally) caught up to us with their own market outlook. Over the past few weeks – and especially last week – many analysts raised their targets on the S&P 500 to 5600. [We had raised our target range to 5400-5600 back in February!] Plus, everyone is now talking about the seasonality of a summer rally, highlighting that both July and August during an election year have been, historically, good performing months. Unfortunately, when the market view is in consensus, the opposite usually happens.

June Is Bustin' Out All Over | As we have been saying: “Buy In May and Sell By Labor Day” because the market and select stocks are breaking to record all-time highs! The moves are primarily in Technology and Tech-related companies connected to artificial intelligence (AI) – but not only in these areas. So, what’s driving the breakouts? Inflation data last week from the Consumer Price Index (CPI) and Producer Price Index (PPI) was much better than feared.

Artificial intelligence (AI) is the elephant in the room that everyone DOES want to talk about. And they should… because it’s still a challenge for investors to get their heads wrapped around the extent of AI’s impact. AI is the catalyst for an enormous paradigm shift in… everything.

Very Strong Jobs Report | What’s wrong with strong job growth? Absolutely nothing! It’s great that the U.S. economy remains strong, with more jobs getting added and wages getting better (even if only slightly). But this latest flex from the jobs markets puts into question the ability of the Federal Reserve (Fed) to cut interest rates anytime soon.

Inflation Data Keeps the Bull Running | Following four months of higher than expected inflation data, last Friday’s Core PCE (Personal Consumption Expenditures Price Index) for April came in as expected at 2.7%. This provides much relief to both the bond and equity markets. Year-to-year PCE is still declining – this is a key move. Note that there have been bumps along the way, but the overall trend has been consistent. In our view, this data allows the Fed to possibly cut rates 25 basis points before November’s presidential election. It also allows risk assets to have only minor corrections.

Yield Curve Headed Toward Upward Slope | The yield curve has been inverted for months now. But what has changed over the past year is that the inversion isn’t so steep.

Supercharged: Nvidia EPS Skyrockets, While Economic Growth Continues to Surprise to the Upside | Nvidia (NVDA) might very well be the greatest corporate success story of all time. Hyperbole? Not when you think about how it started, what it has accomplished so far, and what it is poised to do – especially as a company with no immediate competition.

The Investment Council Report (ICR) provides a brief overview of the Council's perspectives of the economy and the major asset classes: equities, fixed income, and alternatives.

Dow Hits 40,000 Milestone As Inflation Fears Ebb | Equity and bond markets are telling us that inflation is not a major concern as interest rates fall sharply and the Dow Jones Industrial Average (DJIA) closes above the 40,000 milestone, putting the Dow in new record territory, alongside the S&P 500 and Nasdaq 100. Last week, producer prices came in higher than expected – but revisions were sharply down – and consumer prices came in soft enough that all this inflation data was good enough to pick equities up and push rates down. Inflation fears are definitely ebbing, if not disappearing. Also fueling the equity market’s rally is the continued parade of corporate earnings coming in significantly higher than expectations. With profit margins stable to improving and interest rates falling, we see the valuations of the price-earnings multiple expanding.

Vigilant Fed Focused on Inflation | The Federal Reserve wrapped up its latest Open Market Committee meeting and, as expected, held the current federal funds rate steady at 5.25%-5.50%. The rate remains at its highest level since 2000 and is above the long-term average of 4.4%. This is the Fed’s plan, of course: keep rates high to push inflation lower.

Don't Sell in May - Summers Are Strong the Bull Bucked by it's Running Again | There is an old Wall Street adage that says, “Sell in May and go away!” But we believe differently! We say, “Buy in May and sell by Labor Day!” Seasonally, the summer months are strong with equity markets generally peaking in the month of August. When we review the price momentum indicators Moving Average Convergence/Divergence (MACD) and Relative Strength Index (RSI), they remain strong and point to a continued improvement in stock prices. But volatility measured by the VIX index has fallen sharply, which indicates that equities can have intermittent periods of pullbacks. However, we continue to believe that the S&P 500 and Nasdaq 100 can reach new records, and the summer months are likely to get us to these highs.

Historically, April has proven to be a down month, so the 5% correction the market experienced during the month is not out of line. (We typically see 5% corrections three times a year.) But following the April rains (and occasional downpours), we can expect stocks to rally in May – and in fact, there’s been an early start as markets have thus far rallied. Why? There are three keys to the market blossoming right now: the Federal Reserve has taken the possibility of hiking interest rates this year off the table completely; fears about inflation are clearly ebbing; and corporate earnings continue to roll in significantly above expectations.

In the April edition of the Chart Book, Managing Director and Head of Advisor Solutions Richard Williams digests economic data for the month which showed price pressures remain stubbornly high resulting in sticky inflation and further complicating the Federal Reserve’s plan to cut interest rates this year.

Simple Rules Offer Insights on Fed Policy | A systematic approach to understanding potential actions is more important than ever. The Fed’s Monetary Policy Report contains a section on “Monetary Policy Rules.” The March 2024 section says, “Policymakers regularly consult the prescriptions of a variety of simple interest rate rules without mechanically following the prescriptions of any particular rule.” The report also says, “The policy rates prescribed by these rules have now declined to values that are close to the federal funds rate.”

The Bull Bucked But It's Running Again | As expected, last week was a barrage of datapoints that caused our Bull to buck. But by the time the dust settled, the Bull was off to the races again, just in time for the Derby. Here are the highpoints: Federal Reserve Chairman Jerome Powell removed any concern that the Fed might be on a path of raising interest rates again. One less thing to worry about. The Fed has also surprised on its approach to ongoing Quantitative tightening: the market was expecting the Fed to cut the amount it’s running off of its balance sheet from $60 billion a month down to $30 billion – it’s actually dropping down to $25 billion a month. This slowing the pace of run-off is a form of easing by the Fed. So, no threat of raising rates plus such a greatly reduced run-off equals a double bullish message from the Fed.

From Stagflation Scare to Strong Tech Earnings | Last week, the 1Q24 GDP report had growth coming in below expectations (1.6% vs. 2.5%) with the quarterly Core PCE (Personal Consumption Expenditures Price Index) coming in higher than expected (3.7% vs. 3.4%). This spooked markets that the economy was heading toward stagflation and instilled fear that the monthly Core PCE would come in much higher than expected year to year. But it came in only slightly higher at 2.8% vs. 2.7%. Investors were relieved. We also found that the consumer is still in spending mode, with overall spending remaining at a healthy level. But the real shock last week was the strength of earnings coming from the technology space, particularly Alphabet, the parent company of Google, which not only beat expectations, but issued its first dividend and added to its share buyback. Shares rocketed up 10% higher on the day, to a record all-time high, restoring confidence that the equity markets can power even higher.

Correction Underway But Still Need A Bottom | The long-awaited correction has arrived. So, as expected, April has brought us showers with the occasional thunderstorm. But remember, corrections always feel bad and generally have negative news. But we believe this is just a normal correction. Historically, the equity market has three-or-four 5% corrections and one 10% correction per year. The S&P 500 is now testing its 100-day moving average for what would be a 7%-8% correction. The risk is that the S&P 500 and Nasdaq 100 test the 200-day moving average for a 10%-11% correction. The economy is showing signs of continued improvement, with the Atlanta GDPNow model estimating economic growth for 1Q24 at 2.9%. In our view, this correction is a buying opportunity, and our position is supported by the strong economic growth and the better-than-expected earnings that have been reported so far.

Raising 1Q GDP Growth Forecast to 2.4% | The final reading of U.S. Gross Domestic Product expanded in the fourth quarter at an annualized rate of 3.4%, up from the second estimate of 3.2%. Consumer spending, designated as Personal Consumption Expenditures (PCE), contributed 2.2 points of the increase. Our 2024 GDP forecast is still for 2.0% growth. We have raised our 1Q24 GDP forecast to 2.4% from 2.3% and lifted our 2Q estimate to 1.5% from 1.3%.

After a particularly strong first quarter, the equity market is already in a correction, in our view. We continue to believe the S&P 500 can reach 5600-5800, for an additional uptick of 9%-13% from the market close of Friday, April 12. We see the Technology and Artificial Intelligence related industries as continuing to be the market’s leadership and the strongest drivers of returns. We believe any correction should be limited to 5–10%.

As You'd Expect, It's All About Expectations | Last week, inflation data came out on the Consumer Price Index (CPI) and the Producer Price Index (PPI) with the reports essentially canceling each other out – but creating equity market volatility and a spike up in interest rates. CPI reported first and came in hotter than expected, kicking off the volatility moves in the markets. Then PPI came in softer than expected and the markets rallied. Looking at year-to-year data, inflation shows it has become sticky, staying near current levels – this is especially true on the Services side. Remember CPI and PPI data are both backward looking. For a forward-looking perspective, we turn to wages/earnings as the historically best predictor of inflation. Average hourly earnings year-to-year are still falling. This suggests inflation should have the ability to continue to trend downward this year.

Strong Economic Data, Strong Jobs Data and Loud Fed Speak | A minor NY-area earthquake was not the only thing to rattle Wall Street last week. Stronger ISM manufacturing data, along with conflicting and confusing commentary from a boatload of Federal Reserve officials, drove market volatility. One of the more hawkish commentators was Minneapolis Fed President Neel Kashkari who, in an interview with Pensions & Investments, went as far as to say, “If we continue to see inflation moving sideways, then that would make me question whether we need to do those rate cuts at all". He also noted that if inflation continued to come in stronger than hoped, he anticipates the Fed would hold its benchmark policy rate at the current 5.25%-5.50% range for a longer period of time. If that still did not work, further rate increases are "not off the table” according to Kashkari, but “they are also not a likely scenario given what we know right now," he said.

In the March edition of the Chart Book, Managing Director and Head of Advisor Solutions, Richard Williams, provides an overview of the month’s economic data which revealed U.S. job growth blew past expectations in March and wages increased at a steady clip, suggesting the economy ended the first quarter on solid ground and potentially delaying anticipated Federal Reserve interest rate cuts this year.

Bond Spreads Narrow | Yields on Treasury bonds have been rising in recent weeks on concerns over stubbornly high inflation. Meanwhile, yields on corporate bonds have risen, but not as rapidly as Treasury yields -- this as investors remain optimistic about the potential for economic and profit growth (and thus lower default rates). As a consequence, spreads between corporate-bond yields and Treasury-bond yields have narrowed.

April Fools - The Market Fooled Many in 1Q | Coming into 2024, many anticipated a significant economic slowdown and possible recession, making many investors cautious on the equity markets. The fixed income markets expected six to seven rate cuts this year. Then that thinking was adjusted downward to three cuts – a number recently given support by Fed Chair Jerome Powell. But now with the latest inflation data from CPI and PPI coming in higher than expected, backing a strong economy, some are now saying the rate cuts could be as few as two – or none at all. Despite all this concern, stocks rallied 10% over the first quarter – so a projected annualized return would exceed 40%. WOW! Put that in your Easter basket! Equities have rallied based on improving earnings and margins. Corporates have been able to adapt to a higher interest rate and inflationary environment. As we pointed out last week, it’s not just the U.S. improving.

Fed's Bullish Comments Stir Optimistic Markets | Last week the Federal Open Market Committee (FOMC) met and decided to hold interest rates steady, while reaffirming their dot plot forecast for three rate cuts at some point this year. The Fed raised its forecast for GDP to 2.1% from 1.4%, and it also raised its inflation outlook to 2.6% from 2.4%, while lowering its unemployment rate outlook to 4.0% from 4.1%. As a result, the fixed income and equity markets both celebrated with rates going down and stocks going up enough to hit the 20th record all-time high. We expect stocks to maintain their gains into the end of 1Q24 (this Thursday, as the markets are closed on Friday). But, next week, as we start the new quarter, don’t be surprised if the Bull bucks a little. We’re still seeing a Bucking Bull throughout the year.

India Leads the Way in Global Growth | Global economic growth is expected to pick up slightly in 2025, according to the World Economic Outlook from the International Monetary Fund. The moderate acceleration is attributed largely to emerging markets, led by India and China, and the expectation that global inflation will moderate.

Inflation Data Comes in Hot, So Yields Spike & Stocks Correct | Last week, it was all about inflation, and both the Consumer Price Index (CPI) and the Producer Price Index (PPI) came in slightly higher than expected. Higher inflation spooked the fixed income market, causing interest rates to rise, and higher rates led to stocks correcting. Remember: one month is not a trend. Also, the Federal Reserve (Fed) does prefer the Core Personal Consumption Expenditures (PCE) measure for inflation, and PCE’s last report was 2.85% year-to-year. But this higher point in inflation will most likely keep the Fed holding interest rates as is– the FOMC meets on March 19-20. The markets are expecting the Fed to cut rates in June. The data so far would suggest this is the case, but everyone will be listening to Fed Chair Jerome Powell’s comments and looking at the Fed Dot Plot, which displays the interest rate projections of individual FOMC members.

There has yet to be a significant pullback in the market in 2024. In fact, our industry work indicates that the current rally is broadening. Many industries that are lagging the S&P 500 in performance are rallying, a sign that the rally is broadening out. The rally is taking place not only in the U.S., but also in other parts of the world. Japan’s market has made new all-time highs after a bear market that lasted over 30 years, and Europe is also breaking out to new all-time highs. For now, the Bull isn’t bucking as much as expected – it’s flat out running. With the end of the 1Q24 nearing, the likelihood is the market will maintain its rally. Investors generally want to book a good quarter of returns. We could see some April showers hit the market with some consolidation of gains, but the rain should provide continued blossoms for the market.

In the February edition of the Chart Book, Managing Director and Head of Advisor Solutions Richard Williams digests the month’s economic data showing that U.S. consumer prices rose more than expected in January amid a surge in the cost of rental housing, but the pick-up in inflation did not change expectations the Federal Reserve will start cutting interest rates this year.

A Goldilocks Week of News | Last week, Jerome Powell, Chair of the Federal Reserve, spoke before Congress in his semi-annual testimony, and his comments left the markets believing that the Fed will lower interest rates later this year. Powell said the Fed is waiting to have confidence that inflation is moving toward 2% in a sustainable way. Then on Friday, the February jobs report was released, and it had something for both the bulls and the bears. The jobs numbers were higher than expected, but the unemployment rate rose to 3.9% from 3.7%. Despite those tea leaves, what the markets focused on most was the sharp downward revisions made to last month’s strong jobs data. With this mixed bag of news, interest rates fell across the yield curve while the S&P 500 hit another record high – creating a Goldilocks week. The gains in stocks were short-lived as profit takers took action and stocks closed down slightly for the week.

Fear Index Calms | After a stressful fall -- when the VIX Volatility Index climbed to 22 in October -- the important “fear index” has calmed and the S&P 500 has pushed higher. Is the coast clear? Well, on the positive side, we anticipate that the U.S. economy will avoid a recession into 2025, the Federal Reserve will start to lower interest rates later this year, and earnings growth is poised to accelerate over the next few quarters.

The favorite inflation gauge of the Federal Reserve (Fed) is the Personal Consumption Expenditures Price Index (PCE), which came in last week lower than expected at 2.8% year-to-year. AND… this is the 12th consecutive month for which the data has come in lower than the prior month. Inflation is on the right track: falling! Down, down, down it goes. Both the equity and fixed income markets responded positively. Yields – also falling on weaker construction and ISM Manufacturing data – fell on both the 10- and 2- Year Treasuries. At this time, rates look to stay lower and not break to the upside. Continued improvement in inflation and rates falling has sparked a continued rally in the equity markets.

NVIDIA Earnings Trump Fed Comments - Markets Hit All-Time Highs | In last week’s release of the minutes from the last FOMC meeting, there were some hawkish comments that underscored ongoing concerns about inflation. The comments focused on the risks of cutting interest rates too quickly, and there was stated apprehension that the inflation process could stall. But the Fed minutes did not negatively impact the direction of the markets as NVIDIA (NVDA) again reported blowout earnings, revenue, and future financial growth due to the demand for its artificial intelligence (AI) products. NVIDIA’s gross margins are staggering – coming in at the mid-70s percent range, which is much higher than other semiconductor companies. The equity markets took the results as a huge positive and drove stocks to record all-time highs on the Dow Jones Industrial Average (DJIA), S&P 500, Nasdaq 100, New York Stock Exchange Composite, and the Wilshire 5000.

Supply Chain Getting Back On Track | The transportation and supply-chain industry moves goods from producers to consumers. In the early days of COVID-19, consumer demand plummeted. But as the world shifted to remote working, freight demand surged.

Here Comes The Bucking Bull - A Potpourri of Thoughts | Last Friday delivered another surprise inflation data point with the Producer Price Index (PPI) coming in higher than expected. Data is often choppy from month to month, but the clear trend for PPI for Final Demand on a year-to-year basis is down and below 2%. Still, the higher Consumer Price Index (CPI), along with the higher PPI, is putting pressure on interest rates – and that’s causing some bucking for the fixed income and equity markets.

The U.S. still dominates world indices, but when we compare the S&P 500 to the MSCI All Country World Index (ACWI), the S&P had a significant breakout in 2015 from a 17-year trading range. The U.S. equity market is still in the early stages of leading global indices. As the global economy expands its digital footprint, we believe U.S. companies will spearhead the development of new technologies, particularly in the burgeoning field of Artificial Intelligence. We do see select opportunities to invest overseas, but the U.S. will maintain its leadership, in our view.

Global Leading Markets: US, Japan and Europe - What's Next? | It’s not just the U.S. equity market that’s rallying, but global markets – such as Europe and Japan – are also rallying. This is a broad global move! And when you look at the rallies in the local currencies, Japan is leading the way.

Raising GDP Estimate for 2024 | Our analysis of recent data leads us to conclude that U.S. consumers have more horsepower than we thought. We are raising our forecast for 2024 GDP growth to 2.0% from 1.7% and are raising our 1Q forecast to 2.3% from 0.7%.

In the January edition of the Chart Book, Managing Director and Head of Advisor Solutions, Richard Williams, reviews the first month of the year’s economic data which showed that the U.S. economy grew faster than expected in the fourth quarter amid strong consumer spending.

Early Spring Expected and Stocks Already Celebrating | Punxsutawney Phil says it will be an early spring, but the market’s not waiting – stocks are already celebrating! The Bull is still running.

Good Growth, Good Spending With Lower Inflation | Stocks took a tumble early in the year with a brief small correction, but ever since, they’ve been rallying. Last week, we got economic growth numbers for 4Q23 GDP on a real annualized basis, and the data came in much stronger than expected at 3.3% with expectations at 2.0%. The inflation data out last week also came in much better than expected, with Core PCE on a year-to-year basis hitting a 2 handle at 2.9%. Personal spending data is up 6.5% on a year-to-year basis – and that says the consumer remains strong. So far, the consumer is contributing more to the economy than most economists have expected. The data we are getting does not get much better than this! In our view, the Federal Reserve should be able to cut interest rates in the first quarter of this year.

Housing May Start to Thaw | The housing market was “frozen” in 2023, as sellers didn’t list homes because they had very low mortgage rates, this according to Zillow’s co-founder Spencer Rascoff. But in a Wall Street Journal interview, he added that the market is “starting to thaw.” One reason is that life, work, and family situations have changed for many homeowners and their residence no longer meets their needs.

Initial Jobless Claims Have Fallen Sharply - Job Market Still Strong | The employment backdrop appears to remain robust with initial jobless claims falling below 200,000. The economy also is maintaining its positive momentum as 4Q23 GDP growth is estimated to be 2.4%. Therefore, we can expect the Federal Reserve to be scrutinizing inflation measures as the key signal for when it should consider reducing interest rates.

The Investment Council Report (ICR) provides a brief overview of the Council's perspectives of the economy and the major asset classes: equities, fixed income, and alternatives.

CPI Date Was Warm but PPI Unexpectedly Falls for Third Month | Last week, the Consumer Price Index (CPI) for December came in slightly warm, pushing interest rates up and causing volatility in the equity market. Data can be choppy month to month, but the key point to remember is that the major trend in inflation remains down. Producer Prices (PPI) on the other hand came in softer than expected for the third straight month and remains negative. A key reason why Federal Reserve Chair Jerome Powell has said that interest rates are near or at peak levels is because inflation measures are pointing to lower inflation ahead.

The Bull is Out of the Gate. It Will Buck All Year. Get A Good Grip. | The year began by digesting short-term overbought conditions in both equities and Treasuries after a sharp rally in those markets that ran for 2½ months. We believe any corrections provide investors opportunities to re-enter those markets. Volatility, however, will likely rise during the year: that’s why we’ve called this the Year of the Bucking Bull.

Job Growth Remains Strong | The Bureau of Labor Statistics (BLS) reported that the U.S. economy generated 216,000 new jobs in December, above the consensus of 170,000.

In the December edition of the Chart Book, Managing Director and Head of Advisor Solutions, Richard Williams, breaks down the month’s economic data to close out the year. With exceptional results from all the major market indices, positive market momentum continued in December as investors believed that the Fed has engineered a soft landing and await a series of possible interest rate cuts in 2024.

Strong Jobs Data Bucks The Bull In Bonds & Stocks | The December Jobs data came in last week much stronger than expected, bucking the Bull by pushing rates higher and raising volatility for equities. But revisions to the November data were downward, revealing a weaker month. Stronger employment is, in fact, great for the economy. Wages did tick up a bit higher, which is also a positive for consumer spending, but the market still fears this is a bearish indicator for inflation. Overall, the jobs report was good news, but with both stocks and bonds overbought coming into 2024, the strong data can fuel a continued correction in both markets. Still, we remain buyers of both markets.

Thank You, 2023!!! We Welcome 2024 With Open Arms! | In 2023, the Bull ran for stocks, as expected, and (finally!) for the fixed income markets as well. It was simply a spectacular year. In generations to come, when investors are looking at past returns, they will not nitpick and come up with excuses for why stocks had such a good year. A retro look at the data should prove that earnings troughed and the markets were able to determine when interest rates had peaked. Remember: equity markets discount six months into the future.

Declining Mortgage Rates - A Gift For Builders | Recently, the 30-year mortgage rate dipped below 7% for the first time since August and the 10-year Treasury yield dropped below 4% for the first time since July.

The Investment Council Report (ICR) provides a brief overview of the Council's perspectives of the economy and the major asset classes: equities, fixed income, and alternatives.

In the November edition of the Chart Book, Managing Director and Head of Advisor Solutions, Richard Williams, analyzes the month’s economic data which showed consumer confidence increased in November, following three consecutive months of decline, but many consumers remained preoccupied with rising prices, global conflicts and higher interest rates.

Wow! An Early Holiday Present For Investors As The Fed Signals Rate Hikes Are Done | In a move that surprised the markets last week, Chair Jerome Powell said in his news conference, “We believe that we are likely at or near the peak rate for this cycle.” This comment came after the FOMC decision to hold rates flat. On top of that came the FOMC Dot Plot forecasting three interest rate cuts in 2024 for a total of 75 basis points.

Job Growth Cooling with Low Recession Risk | The U.S. economy generated 199,000 new jobs in November, above our forecast of 145,000 and the consensus of 180,000. October’s result was unchanged at 150,000. November’s increase in payrolls took the three-month average to 204,000, which is below the 12-month average of 240,000. The unemployment rate dropped to 3.7% from 3.9%. These statistics support our view that the job market is cooling and that there is less than a 50% chance of a recession in 2024.

Jobs for November Surprise with Strength; Rates Rise | On Friday, the November jobs data came in stronger than expected with nonfarm payrolls hitting 199,000 while expectations were sitting at 185,000. The unemployment rate fell to 3.7% from 3.9%. This followed positive JOLTS (Job Openings and Labor Turnover Survey) data, which showed job openings continuing to fall. (One possibility for the stronger data could be striking workers coming back – but there’s a lag in that reporting.) Remember: data is often not linear – it likes to zig and zag. But overall, employment does appear to be slowing – and this data point certainly does not give the Federal Reserve room to consider cutting interest rates any time soon!

The third-quarter earnings season is largely completed. As usual, it turned out much better than Wall Street expected. S&P 500 earnings from continuing operations rose 6.6% year-over-year, compared to the preliminary forecast for a 1% decline.

November Delivers A Bountiful Harvest But The Market Gift-Giving I November was one of the top 25 performing months in the history of the equity market (dating back to 1871) – and the 11th best since 1950. While not every year following such a solid performance was positive, most of them were, and since 1950, even the bad years were not as bad as the worst years. This matches well with both the Presidential election and decennial (10-year) cycles for equities that we described in the Sanctuary 2024 Year Ahead Outlook. While Year 4 of the decennial cycle is not often the strongest year, Year 4 of the Presidential election cycle is usually not the weakest. Since 1952, the stock market rose just shy of 8% during election years, with only 3 of the 18 elections showing down years: 1960, 2000 and 2008, with the incumbent party losing in each of those years. (Note: 1984 was nearly flat at a 0.73% lift; that year, the incumbent won.) Last month proved to be the best November before an election year since at least 1952. Only in November 1935 did the market perform better in a November before a Presidential election year.s Not Over Yet |

It's All About Interest Rates | The S&P 500 has been tracking the direction of the 10-year Treasury yields. So, what is the next move in rates? In the chart below, we look at the 10-year yield, which has fallen sharply from 5% to 4.4%. The yield came down to test the 100-day moving average near 4.3% and held. The rate is oversold and can rally up to test the 50-day moving average near 4.6%. We expect this will put pressure on equites, which are very overbought near-term and into important resistance near 4550-5000 on the S&P 500. The VIX volatility index also confirms that a pullback can occur as it has fallen sharply and is very oversold. But we would view any pullback as a buying opportunity as we are expecting the S&P 500 to track up to 5200-5400 in 2024. Volatility brings opportunities.

Last week, we had the Consumer Price Index (CPI) and Producer Price Index (PPI) for the month of October, and both came in better (lower) than expected. This sparked a decline in 10-year Treasury yields, boosting a continued rally in the equity market. The market again is expecting that the Federal Reserve (Fed) will be on hold with rates and is expecting interest rate cuts by the middle of next year. The rally has been so strong in stocks that short-term, stocks prices are overbought. The VIX volatility index confirmed this by falling sharply to levels that historically point to an increase in volatility for stocks. This week is a holiday week, and traditionally stocks rally into a holiday. So the risk is that in early December, stocks will get choppy with a small pullback.

Click "Learn More" to view the November 20, 2023 Economy At A Glance Report

We believe 2024 will be the year that the Bull returns to the bond market, and that the Bull keeps charging ahead for equities with the S&P 500 reaching new highs in 2024. But we expect periods of volatility (bucking) for both markets, as investors try to forecast when the Federal Reserve (Fed) will raise interest rates and possibly begin to cut. In fact, the market is already expecting rate cuts to begin in May 2024. Based on this year’s market behavior, if rate cuts don’t come, equities and bonds will continue to experience volatility. As for interest rates, we believe the 40-year secular decline was completed in 2020-2021, and a new upward secular cycle for interest rates has begun. Our outlook for 2024 is a countertrend bull market where rates fall across the curve. We don’t believe the economy will move into a recession next year, but economic growth will slow. If interest rates fall, a bonus could be recovery for manufacturing and housing, two pockets of the economy that had gone into recession. We expect the consumer to remain resilient as household net worth reaches a record high. Spending should remain selective. Female spending power certainly revealed itself with Taylor Swift and Beyoncé accounting for record spending on concerts and in the hospitality & leisure industry, which benefited from the superstars’ global tours. It is forecast that the two tours and two movies contributed 0.7 percentage points to growth in U.S. consumer spending and 0.6 percentage points to GDP in Q3. Importantly, consumer debt levels are manageable, and the consumer can even take on more debt. So don’t give up on the U.S. consumer in 2024.

Last week, there were a number of Federal Reserve (Fed) speakers making the rounds, sharing their points of view – but the one that impacted the equity market the most was Fed Chair Jerome Powell. He came out with unexpectedly hawkish comments. It appears that he wants to damp down any expectations that the Fed is done raising rates, as the market is already pricing in rate cuts beginning in May of next year. He pulled out his favorite phrase from former Fed Chair Paul Volcker, that the Fed will be “Keeping At It.” He said if there was strong economic growth, it might warrant a response and, if it becomes appropriate to tighten policy, the Fed will do so. He also highlighted that inflation remains well above the Fed’s target of 2%, and that the labor market is tight. Based on Powell’s comments, the stock market – which was on a record winning streak – began to give up some of its recent gains. But the S&P 500 shrugged this off last Friday, breaking above key resistance of 4400 and closing at 4415.

In the October edition of the Chart Book, Managing Director and Head of Advisor Solutions, Richard Williams, breaks down the month’s economic data which showed the U.S. economy grew at an annualized rate of 4.9% in the third quarter as higher wages helped fuel consumer spending and businesses restocked at a brisk clip to meet the strong demand.

Federal Reserve's Pause Drives Holiday Year-End Rally in Bonds and Stocks | Federal Reserve (Fed) Chair Jerome Powell and the FOMC decided to leave interest rates at 5.25%-5.50% for a second month in row and for the third time this year. His comments last week were balanced, though many interpreted his comments to be more dovish, suggesting the Fed is done raising interest rates for 2023. This sparked a rally in the 10-Year Treasury and yields fell sharply. Short covering in the bond market likely took place. That rally then sparked a strong rally in the stock market. Chair Powell did keep the door open for additional rate hikes if needed, but he stressed that the Fed would proceed carefully. The November jobs data supported the Fed’s decision to stay on hold. The November jobs report from last Friday was indeed bullish, coming in on the weaker side, and the revisions to last month were also showing a slowing jobs market. The unemployment level rose slightly to 3.9% from 3.8%. This continued to drive yields across the curve downward, continuing to fuel the rally in stocks.

Dollar In Rally Mode | As U.S. interest rates have surged, yield-hungry investors are moving toward U.S. securities to take advantage, thus boosting the dollar.

Last week, we saw some economic reports that indicated just how strong the US economy really is. Third quarter GDP was reported at a 4.9% annualized quarterly rate, stronger than the expected 4.5%. On top of that, Durable Goods Orders, anticipated as a 1.9% month-to-month increase, came in at a blistering 4.7% increase. However, prices remained under control, as the PCE Core Deflator, the Fed’s favorite inflation measure, reported at 3.7% year-to-year, just as expected. There is still the risk that the Fed will raise interest rates an additional 25 basis points. However, we believe the Fed will proceed cautiously given the ongoing threat of an escalation in the Middle East.

Last week, Federal Reserve Chair Jerome Powell spoke at the New York Economic Club. Overall his comments were balanced, but there was a little for everyone (Bulls and Bears). Powell said economic “growth is now running for this year above its longer-run trend” – which is a surprise. He also said it is hard to know how the economy can grow with higher interest rates. In addition, he said there were signs that the labor market is getting back to balanced, that the bond market has tightened credit conditions, and importantly, inflation is still too high and above the Fed’s target of 2%. He reiterated previous comments that the Fed will proceed carefully. We believe the Fed will indeed be careful, especially with the threat of a larger war building in the Middle East. But if economic and inflation data come in too strong, the risk is that the Fed will raise interest rates an additional 25 basis points.

Click "Learn More" to view the October 23, 2023 Economy At A Glance Report

Equity Markets Positioned to Rally into Year-End | As we move into November and December, the strongest seasonal period for the equity market is upon us. October is known for its higher-than-average volatility, but more importantly, it is the month of important bottoms. We are buyers of this market. The risk to the rally? Higher oil prices. Unless events in the Middle East escalate and cause oil prices to rise sharply, the market is positioned to rally. The equity market is overbought in the very short term but is now oversold on the weekly stochastic. So, the market can be choppy going into the end of October, but we are buyers on pullbacks. Technology remains the leadership with semiconductors our favorite. Industrials and Energy are emerging leadership. During times of war, Aerospace & Defense tend to perform well. Infrastructure “build and rebuild” is a long-term economic trend, along with onshoring and reshoring. Farming is using technology and is expected to use artificial intelligence. Supplies of oil are limited compared to demand. Energy prices are expected to remain firm. Positioning Into Year-End | We remain bullish equities going into year-end and look for the seasonal rally to begin soon. We do anticipate a little more choppiness near-term and would be buyers on any pullback. We favor Cycicals over Defensives, Growth over Value, Large Cap over Small Cap, Quality over Low Quality, and leadership remains Technology. Emerging leadership is shared by Industrials and Energy. The Federal Reserve (Fed) will likely tread a little more cautiously given the events that are occurring in the Middle East. If economic data remains strong and crude oil stays below $100, the risk would be an additional 25 basis point rate hike before the end of the year.

Last week, both the Producer Price Index (PPI) and the Consumer Price Index (CPI) came in slightly higher than expected. Inflation year-on-year continues to look to have peaked and is falling. The pace has gotten choppy, and this is normal. But with CPI above the Federal Reserve (Fed) target of 2% inflation, the risk is that interest rates will remain high as the Fed plays defense and considers an additional 25 basis point hike before the end of the year.

There is never anything good about war and the destruction and massacre of a country. Global war is ugly but often has little impact on the U.S. economy because is it far away and does not impact the economy. The recent breakout of war between Hamas and Israel should not impact the U.S. economy unless crude oil prices surge. This is the crude reality. Stock prices move based on earnings and if this war does not significantly impact the earnings outlook negatively, stocks should not have a substantial impact. But should crude oil surge above $100 and stay above this level (see chart below) this outlook could shift more negatively, especially given the fact the U.S. Strategic Oil Reserves are at a 40-year low.

In the September edition of the Chart Book, Managing Director and Head of Advisor Solutions Richard Williams reviews the month’s economic data which showed consumer confidence fell again, marking two consecutive months of decline, while U.S. employment unexpectedly accelerated.

Click "Learn More" to view the October 9, 2023 Economy At A Glance Report

Congress averted a government shutdown, for at least the next 45 days. It is possible that we can be in the same position come mid-November, but the pressure valve is being released for the time being. Still, the delay gives Congress time to come up with a solution on appropriations. So, Congress is simply kicking the can down the road.

Fed Sticks the Soft Landing but Higher Rates Rattle Markets | It was a big week last week with the FOMC meeting and the quarterly release of the Dot Plots, plus initial jobless claims fell sharply. All this rattled the rates market, moving interest rates at the short- and long-end to cycle highs, taking stocks down with the bond market. So, let’s review the FOMC meeting. We don’t believe anything new was learned. As expected, the Federal Reserve (Fed) held rates steady at 5.25% and said it will continue to reduce holdings on the Fed’s balance sheet, which is known as quantitative tightening. The Fed has consistently said “higher interest rates for longer,” and this point was driven home in the Dot Plots. The market was hoping for two rate cuts next year. What we see though is possibly one more rate hike this year of 25 basis points and maybe one rate cut next year. The real interest rate cuts expected by the Fed are not until 2025. The Dot Plot revealed the expected Fed Funds rate to be 5.6% this year, 5.1% in 2024, and 3.9% in 2025. This is what the bond and stock markets did not like, and their reaction drove both 2- and 10-year Treasury yields to cycle highs with technical breakouts. As a result, we expect 2-year Treasuries to reach the 6% area and 10-year Treasuries up to the 5% area.

Click "Learn More" to view the September 25, 2023 Economy At A Glance Report

Inflation Data Comes in Hot but the Market Yawns | The Consumer Price Index for August came in at 3.7% year-to-year, slightly higher than the consensus estimate of 3.6% year-to-year. Most of the increase was due to shelter costs. But the services side of the data came in softer than expected, and this was the data point that the bond market seemed to focus on more.

Initial Jobless Claims Fall Sharply | A good leading indicator of the job market is initial jobless claims. Claims had been rising – indicating the job market was slowing – only to give this up last week when claims fell sharply and back down to levels we’ve not seen since February. The Federal Reserve (Fed) is data dependent when it comes to determining the future of higher interest rates. The initial jobless claims data point will likely not change the Fed’s view of holding rates at their next September meeting. But if this trend continues, then the market will likely begin pricing in higher rates. In addition, there are other market pressure points from the world of labor, including higher wage negotiations from UPS, the possible Auto Workers (UAW) strike, and, of course, the continued strike by 11,000 film and television writers, members of the Writers Guild of America (WGA), and the 65,000 actors in the Screen Actors Guild-American Federation of Television and Radio Artists (SAG-AFTRA). Future higher wages could be an additional pressure on future interest rates. Investors should expect “higher for longer” as the most likely scenario for the rest of the year.

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Moving Into Fall, Then to Year-End: Positioning Will Be Important | There is always the unexpected! Of all things, Taylor Swift’s Eras Tour and Beyoncé’s Renaissance Tour have added significantly to consumer spending over the past several months, resulting in stronger economic growth – this has been a shock to economists and frankly to the world. Both tours are expected to generate nearly $5 Billion each – that’s $10 Billion in consumer spending in the U.S. alone. The Atlanta Fed GDPNow model (not an official Fed forecast) is predicting 5.6% 3Q23 real GDP growth. This is growth that the Federal Reserve is likely to see as above-trend economic growth. Well, this is good for corporate profits and it’s reflected in steadily rising earnings estimates for the S&P 500. The estimated earnings growth rate now stands at 11%-12% for 2024, which is quite strong. Companies have also learned to run their businesses more efficiently, with improving margins being a highlight of 2Q23 earnings. Speaking of 2024, it’s a Presidential election year. (Can’t wait, right?) Don’t be surprised if President Biden tries to stimulate economic growth. But his recent legislation already increases spending, which will begin to kick into high gear in 2024-2026. The Fed is expected to be on hold with interest rates but stressing higher for longer. The Fed is data dependent, and if the economic data is as expected or softer, then a hold on interest rates is what we’ll get. But if the data shows any signs of inflation or even risk to inflation, then the Fed is likely to raise rates again. Fed Chair Jerome Powell closed his Jackson Hole comments with his consistent theme of “Keeping At It” —a nod to the book title of former Fed Chair Paul Volcker, the crusher of inflation in the early 1980s. This indicates that Chair Powell is committed to also crushing inflation and will do what is necessary to accomplish this task.

In the August edition of the Chart Book, Managing Director and Head of Advisor Solutions Richard Williams digests the month’s economic data with headlines that include Fitch Ratings downgrading the sovereign credit rating of the U.S. to AA+ from AAA and consumer confidence falling due to rising prices, namely groceries and gasoline, erasing back-to-back increases in June and July.

Inflation Steady, Jobs Data Weakening But Manufacturing Strong - Stocks and Bonds Flip Flop | Last week, the Federal Reserve’s favorite inflation gauge – the Core Price Consumption Expenditure (PCE) – came in line with expectations, but it does remain elevated. JOLTS (the job openings and labor turnover survey) and employment data came in softer than expected, indicating early signs of a weakening employment picture. The important number was the unemployment rate rising to 3.8% from an expected 3.5%. Payrolls did come in stronger than expected, though wages were lower. But then manufacturing data showed strength. Both stocks and bonds had responded positively, then flipped to negative on manufacturing data. The market still expects that the Fed to be on hold with interest rates for September. But the question remains open for whether the Fed will raise interest rates again at their subsequent meeting (Oct. 31-Nov. 1). As of now, the market is not expecting a rate hike in November.

Jackson Hole Commentary: Hawkish Powell Ready to Ruffle Feathers | Federal Reserve Chair Jerome Powell’s speech from Jackson Hole last Friday did not have any sign that interest rates would be coming down any time soon. In our view, the bias in his speech was clearly hawkish. He ended where he began at last year’s meeting, “We will keep at it until the job is done.” This is a nod to former Fed Chair Paul Volker and the title of his book, Keeping At It. The Fed has been extremely transparent on where it stands on monetary policy and has delivered on its promises to fight inflation with rates rising the fastest in history, from 0% to 5.25%. What we take away from Fed Chair Powell’s speech is that if the data does not support a slowdown in inflation, the Fed will not hesitate to continue to raise rates. Powell said, “We intend to hold policy at a restrictive level until we are confident inflation is moving down.” The risk here is rates on both the front-end and back-end of the yield curve remain elevated and can move higher. With the short-end above 5% and the long-end looking to push up into the 5% area pressure on equities will continue, especially since stocks are priced rich with a price-earnings ratio at 20x.

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Markets Oversold Short-Term But Still Overbought Medium-Term: Expect Volatility | In a week jam-packed with data and news, it’s important we keep an eye on the big picture. As we have been writing, the equity market has entered a seasonal correction after extraordinary gains of 15% on the S&P 500 and 30% on Nasdaq. Corrections refresh a market but can be unsettling. It is normal to correct one-third to one-half of a move, therefore we have been expecting a 5%-10% pullback on the S&P 500 and 10%-16% on Nasdaq. As of Friday’s close, the S&P 500 is down 5.2% and Nasdaq is down 8.0%. Short-term, the market is very oversold, but on the medium-term, it’s overbought. This could lead to a very choppy (up and down) style market. Looking at the McClennan Oscillator, an indicator of market breadth, we see more evidence that the market is oversold near-term. A brief rally can occur, but we still don’t have signs that a bottom is in place. We are buyers of this dip.

Equity markets have entered a seasonal correction that typically lasts into the fall months with important market bottoms often reached in the month of October. Earnings estimate revisions, which are one of the best predictors of stock prices, are seeing estimates rise. This gives us confidence that this is a correction within a bull market. However, continued higher interest rates will be a challenge for the market. Long Treasury bond yields appear to be breaking to the upside, which could track rates to the 5% area. This will attract investors away from equities to bonds and even to cash. Potential strong buyers of bonds are retired investors who would welcome a guaranteed interest income of 5%. If rates do rise, it will keep pressure on both the bond market and the equity market.

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Inflation Data Bullish But Bond Yields Still Look to Firm | Last week, Consumer (CPI) and Producer (PPI) Price indexes were released for the month of July with CPI coming in better-than-expected year-to-year at 3.2% (vs. expected 3.3%) and PPI coming in stronger than expected year-to-year at 0.8% (vs. expected 0.7%). There has been more downward progress on producer prices than on consumer prices. Overall inflation data looks to have peaked. In examining the patterns of historical inflation, the pattern of CPI appears – in our view – to be similar to the 1950s and not the 1970s. If this is correct, prices should continue to go down over time – which would allow the Fed to eventually pause on raising interest rates. However, a strong employment market may pressure the Fed to still raise rates. The next rate decision won’t happen until September (Federal Open Market Committee, or FOMC, meeting will be held on September 19-20.) However, the market will be paying close attention to the comments coming from the annual Jackson Hole Fed meeting taking place on August 24-26.

The Investment Council Report (ICR) provides a brief overview of the Council's perspectives of the economy and the major asset classes: equities, fixed income, and alternatives.

In the July edition of the Chart Book, Managing Director and Head of Advisor Solutions Richard Williams breaks down the month’s economic data, which showed consumer confidence rose to its highest level since July 2021, the Consumer Price Index (CPI) figures increased 3 percent over the last year, and a decline in the unemployment rate back to 3.5 percent pointed to continued tightness in labor market conditions.

Jobs And Wages Point To A Strong Economy | Last Friday, we received July employment data which does not show a slowdown in the economy. Although non-farm payrolls and private payrolls came in slightly below expectations, wages came in at 4.4% year-over-year, stronger than the expected 4.2%. A surprise was a drop in the unemployment rate to 3.5% (3.6% was expected). Continued good employment data and especially strong wages mean the consumer still has buying power to keep the economy growing. The Federal Reserve and several Wall Street economists are now calling for a soft landing in the economy, removing their forecasts for a recession this year. (See note about Bank of America’s reversal later in this commentary.) Corporate earnings for 2Q23 are also not as weak as originally feared. So, overall, the backdrop for equities is positive, but a break from the strong gains looks to be going on vacation.

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The Bull Is Running But Expect Pullbacks | Equities are in a bull market, but stocks have become very overbought. Pullbacks of 5%-10% are normal and can be expected. Seasonal weakness begins in September-October, with November beginning a strong seasonal year-end rally. We still anticipate a strong year, especially as the breadth of the market is expanding. This month, Small Caps joined the rally.

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You Can Bank On The Banks – 2Q Earnings Season Starts On A Positive Note | A great start to Earnings Season with JP Morgan (JPM), Wells Fargo (WFC) and Citi (C) reporting 2Q earnings better than what the Street was expecting. Bank stocks rallied early in the trading day but sold off by the close – except for JPM. Bank stocks are in a trading range and still face major upside resistance. Technically the best positioned stock of the group is JPM. The bigger banks will fare better, but overall Banks as a sector still appears to be a Value Trap. The benefit to Banks is “clipping a dividend.” We would stay with the large banks. At this very early stage, the second quarter earnings season for the S&P 500 is off to a strong start, according to FactSet. Both the number of positive earnings surprises and the magnitude of these earnings surprises are above their 10-year averages. A stronger earnings season would support the recent rally in the equity markets. Something to keep in mind: July is typically a well-performing month, leading up to markets having a peak in August, which in turn sets up seasonal weakness in September and October. We continue to believe that the second half of the year will be choppy, but we expect to end the year on a strong positive note.

In the June edition of the Chart Book, Managing Director and Head of Advisor Solutions Richard Williams breaks down the month’s economic reports which saw U.S. gross domestic product revised up to a 2% annualized increase in the first quarter, according to the U.S. Commerce Department. The government’s third estimate of GDP for the period reflected upward revisions to exports and consumer spending, while household spending, the engine of the U.S. economy, rose at a 4.2% pace — the strongest in nearly two years — as services outlays were adjusted higher. Meanwhile, key inflation gauges watched closely by the Federal Reserve were revised down slightly.

The first half of 2023 had spectacular returns that were not expected as we came into the year. The consensus view was that the first half of the year would not be good for markets – but the second half would be better. So having the S&P 500 up nearly 16% and Nasdaq over 30% through the end of June is almost shocking – especially given the record speed with which the Fed hiked interest rates from 0% to 5%. The manufacturing area of the economy has been negatively impacted by higher interest rates and has been for a while. However, the consumer has remained a spender, keeping the services part of the economy strong. Looking at the Conference Board Consumer Confidence Index shows the consumer is still optimistic. An optimistic consumer spends money – a good sign for the services side of the economy. Why are consumers still spending? Because the unemployment rate remains historically low at 3.6%. But recently there’s been some weakening in the jobs data with initial jobless claims rising, payrolls coming in below expectations, and JOLTS falling (that’s the Job Openings and Labor Turnover Survey). For now there is enough of a runway for consumers to still be spending, but they are becoming more selective in what they purchase.

Last Friday’s job report came in softer than expected as cracks continue to show in the labor market. Reminder: this is what the Federal Reserve is looking for to slow down the economy, which would slow down inflation. Non-farm and private payrolls came in below expectations and revisions to the previous month came down. The employment rate remains low, coming in at 3.6%, down from 3.7%. Average hourly wages remain sticky at 4.4% growth year-on-year, BUT wages have been falling. As we have been highlighting recently, initial jobless claims are also showing cracks with higher claims being reported. And yes, it’s true that the Fed wants and needs more weakening in the job market, but overall, these reports are positive for interest rates and the stock market.

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Core Price Consumption Expenditure (PCE) Year-over-Year Ticks Down Slightly | Last Friday, the year-over-year Core PCE data came in slightly below expectations at 4.6% (vs. 4.7%). This inflation gauge – the Federal Reserve’s favorite – remains elevated and above the Fed’s goal of 2%, but it is slowly falling. This data should support the Fed continuing its rate hikes in July; we believe you can expect a 25-basis point bump. Meanwhile, the equity market is rallying on the data because they’re focused on the end of the rate cycle coming. Given the recent stronger economic data and still elevated inflation, bonds are holding rates high. We still believe rates are in a peaking process.

The Big Short in Housing: Last week, housing data came out surprisingly strong with both housing starts and permits coming in above expectations – an indication that housing remains strong. This is evident within the market when you see S&P 500 Homebuilding stocks breaking out to record all-time highs. This industry group is very sensitive to both the economy and interest rates. So, why is this industry so strong? It’s Economics 101: short supply and strong demand equals higher prices. The supply of housing remains low relative to the demand. The current housing shortage in the U.S. has been impacted by several issues, including the pandemic, inflation and increased interest rates. Furthermore, new home construction dropped precipitously after the Great Recession (late 2007-2009) and has yet to fully recover. But essentially, this is a problem of supply and demand as many millennials are now looking to move from renting to buying, and the insufficient housing supply is driving up prices and overall robust health for the industry.

Peak Inflation, Peak Rates, Earnings Improving, Bearish Positioning = Markets Higher | Last week, both the Consumer Price Index (CPI) and the Producer Price Index (PPI) came in softer than expected. After 10 consecutive rate hikes, the Federal Reserve decided to pause this month and not raise rates again BUT with the caveat that they are likely not done raising rates. The Fed did say they remain “data dependent” month to month. While the market is already pricing in an additional 25-basis point rate hike in July, it is really looking beyond these actions, believing that we are coming to the end of the higher rate cycle. What’s fueling this belief? In part: all the positive earnings estimates we’re seeing. Global markets have also gotten excited and rallied because China is stimulating its economy by cutting rates. Why? Its economy is not recovering as expected and remains weak.

This month, we had Consumer Prices (CPI) and Producer Prices (PPI) come in below expectations right before the Federal Reserve’s decision on interest rates. The Fed elected to go on pause after raising interest rates 10 times consecutively. The pause was mostly expected, but the surprise was the fact that half of the Federal Open Market Committee (FOMC) members expect that rates still need to go up further – possibly twice more with a target terminal rate of 5.6%. Their concern is founded in the ongoing strength of the labor market. But the Fed said they remain data-dependent, meeting to meeting. In addition, they are not forecasting a recession but more of a soft landing this year and next. As we know, 2024 is a Presidential election year and recessions typically don’t happen during this time frame. Our outlook still remains positive on markets and we’re looking for the equity market to rally into the summer but there could be brief corrections. We still anticipate a peaking in interest rates. Investors should maintain a balanced and quality portfolio given the concentration risk within the equity market.

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In the May edition of the Chart Book, Managing Director and Head of Advisor Solutions Richard Williams provides analysis of the month’s economic reporting. According to the Commerce Department, the U.S. economy grew at a lackluster 1.3% annual rate from January through March as businesses wary of an economic slowdown trimmed their inventories. Despite the first-quarter slowdown, consumer spending, which accounts for around 70% of America’s economic output, rose at a 3.8% annual pace, the most in nearly two years and an encouraging sign of household confidence.

The Phoenix Rises | Last week, the S&P 500 reached a 20% gain from the October low and it’s the first time the bull has arrived when a recession was forecast to be on the horizon, ending the longest bear market since 1948. According to Bank of America, after crossing the 20% mark from the bottom, the S&P 500 continued to rise over the next 12-months 92% of the time, returning 19% on average back to 1950. The message is that the markets are still in a secular bull market. This indicates the market can reach new record highs.

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Debt Ceiling Resolved and Jobs Report Mixed. The Bull is Ready to Run. The hand-wringing over the debt ceiling has been resolved (sigh of relief), so with that market distraction sidelined, let’s talk about J-O-B-S. Last Friday, the May Jobs report came out with a surge in both nonfarm and private payrolls, but the unemployment rate rose sharply and was the biggest monthly gain since April of 2020 (see chart and table below). The equity markets took the data as bullish, and we now have a confirmed breakout not only in the Nasdaq 100, but the S&P 500 and Russell 2000 (small caps) have also joined the breakout club. Meanwhile, market sentiment is mixed on what the Fed’s next move on interest rates will be: some are counting on a pause and some are anticipating further rate hikes. The lack of clarity on the Fed’s path may cause periods of volatility.

A Debt Ceiling Deal is on the Table | Early in the holiday weekend, Congress and President Biden came to an agreement on the Debt Ceiling while the X date was pushed out to June 5. In atypical fashion, equity markets rallied in May and into the Debt Ceiling negotiations with the S&P 500 rising 1.8% and the Nasdaq 100 surging 13% this month. Now the markets can focus on the fundamentals.

Impasse On The Debt Ceiling Appears To Be Cracking - A path to resolving the debt ceiling debate appears to be within sight. A quick review of how the market and various sectors behaved during debt ceiling crises shows poor performance during negotiations – but once a deal is struck, markets recover. Granted, in 2011, there was the debt downgrade after the resolution of the debt ceiling and markets did decline more – but a bottom and a recovery did occur. Today, it’s all a bit different. Frankly it’s atypical to have markets rallying in the hopes of a resolution. This is the unexpected but happy surprise we’re seeing with the Nasdaq, where the FANG+ Mega Cap tech-related stocks are leading the charge higher. But expect volatility until a deal is done.

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Positive Inflation Data: But the Debt Ceiling is the Wall of Worry for the Markets Last week two positive reports on inflation were released with both CPI (Consumer Price Index) and PPI (Producer Price Index) data coming in slightly lower than expected. We remain in the camp that inflation has peaked – however – the data can be choppy, meaning the numbers may zig up and zig down. But overall, we believe the result is a downtrend. So how did the markets react to the positive reports?

In the April edition of the Chart Book, Managing Director and Head of Advisor Solutions Richard Williams analyzes the month’s economic data as the Federal Reserve continues to seek to reduce inflation without unnecessarily deepening the economic slowdown.

There is an old adage on Wall Street: Sell in May and Go Away – meaning the returns for the rest of the year will be muted. Why would they say this? Because most of the returns that are generated in the market tend to happen toward the end of the year. But no model has shown that this is a long-term strategy that beats the market. What it does say is volatility will be present. The theme we have had this year is that the markets would have volatility and we see no reason to change this view. The equity market is very divided in what is working and what is not working; meanwhile the bond market is challenged with pricing in an a debt ceiling debate, strong employment, economic slow down and a banking crisis.

Employment and Wages Still Strong: Last Friday, the April jobs report was released and the report came in stronger than expectations – both non-farm and private payrolls were up sharply versus expectations, but for the previous month, both of those data points were revised down. The unemployment rate fell to 3.4% from 3.6% and wages rose year-on-year 4.4% from an expected 4.2%. Net net, the jobs report was bullish for the economy and bearish for the Fed. This is not the kind of report the Fed wants to see while fighting inflation. The stock market reacted favorably while interest rates rose – two actions that we believe were justified.

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Last week, the Federal Reserve’s favorite inflation data, the Price Consumption Expenditures Deflator (PCE Deflator) came in slightly higher than expected year over year (4.2% versus expected 4.1%) and so did the Employment Cost Index (1.2% versus 1.1%). These reports show that inflation remains sticky and therefore support an interest rate hike this week; we expect another 25-bps bump by the Fed on May 3. On the flip side, the stock market did like the softer 1Q 2023 GDP annualized number coming in much softer than expected at 1.1% versus expected 1.9% -- which favors lower interest rates later in the year. So, the economic data had something for the bulls and something for the bears.

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Cracks Now Showing in Employment Data - Initial jobless claims is a weekly economic data series released on Thursday mornings that serve as a leading indicator of the direction of employment and one that we have been following very closely. This data is finally showing cracks as claims have been rising and staying elevated. The Federal Reserve is expected to raise interest rates for the tenth time by 25 basis points when it meets on May 2-3. The Fed may then pause its parade of rate hikes – which began just over a year ago – to look for the impact of its actions, as revealed by incoming data on inflation and employment.

Something for the Bulls, Something for the Bears. Let’s do a review of recent important data releases. The Federal Reserve Open Market Committee minutes acknowledged for the first time that there is risk of a recession later this year based on the expected credit contraction resulting from the recent bank failures. There were also two important data releases on inflation. Both the Consumer Price Index (CPI) and the Producer Price Index (PPI) were released with each posting better than expected inflation data. Then the official start of earnings season kicked off with three major banks reporting earnings much better than expected.

The Federal Reserve has raised interest rates nine consecutive times which triggered a banking crisis and two US banks were taken over by regulators. Meanwhile, there was a forced bank merger in Europe with Credit Suisse being consumed by UBS Group. One would think stocks would be down sharply given this backdrop, but in fact they have since rallied. Confidence was restored for U.S. deposit holders in part by the Fed’s infusion of capital through a loan facility for the banks, which served to increase liquidity on the Fed’s balance sheet. This liquidity supported risk assets, allowing stocks to rally. Also fueling the rally is the drop in interest rates at the short and long ends of the yield curve.

In the March edition of the Chart Book, Managing Director and Head of Advisor Solutions Richard Williams reviews the month’s economic data released against the backdrop of the regional banking crisis.

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First quarter 2023 is in the books with the S&P 500 up 7% and the Nasdaq Composite up nearly 17%. Nasdaq had its best quarter since 2020. To be up in this environment is simply amazing when you consider that the Federal Reserve has raised interest rates nine times in a row – and will continue to do so as the terminal rate is now targeted at 5.125%. Plus, the higher rates have finally shown the cracks in the system with a run on regional banks and two of them needing to be taken over by regulators. But here we are. So, this week we look at how or why this situation became possible.

The Investment Council Report (ICR) provides a brief overview of the Council's perspectives of the economy and the major asset classes: equities, fixed income, and alternatives.

Last week, the Fed raised interest rates by 25 basis points, as expected, which is the ninth rate hike in its ongoing fight against inflation. The Fed is maintaining its terminal rate projection of 5.125%, leaving the window open for another rate hike of 25 bps. (Next Fed meeting is set for May 2-3). In announcing the hike, the Fed did acknowledge the recent disruptions in the U.S. banking system – which it expects to cause tightened credit conditions for households and businesses, something that could weigh on economic growth. Fed Chair Powell said: “Such a tightening in financial conditions would work in the same direction as rate tightening. You can think of it as being the equivalent of a rate hike or perhaps more than that.” When he began his press conference, Powell addressed what was happening in the banking system and he clearly stated that the U.S. banking system is sound and resilient with strong capital and liquidity. U.S. Treasury Secretary Janet Yellen said last week that regulators are prepared to take additional steps to guard bank deposits if warranted. Monday morning, it was announced that First Citizens Bancshares Inc. (FCNCA) would buy Silicon Valley Bank’s (SVB) deposits and loans from the FDIC, with $90 billion to remain in receivership. While this is a positive for the regional banking crisis, a solution for First Republic (FRC) bank is still needed. We may see banks rally on the back of this news, but the risk is that they remain under pressure until the banking disruption is fully resolved.

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The U.S. economy expanded at a 2.7% annual rate from October through December, a solid showing despite rising interest rates and elevated inflation. The government had previously estimated that the economy grew at a 2.9% annual rate last quarter. The report revised down the government's estimate of consumer spending growth in the October-December quarter, from a 2.1% rate to 1.4%. That was the weakest such showing since the first quarter of last year. Business spending also slowed in the fourth quarter, suggesting that the economy lost momentum at the end of 2022.

One would not have expected the equity markets to actually rally amid a U.S. banking crisis – but because stocks are so oversold on a short-term basis and measures have been taken to help fix this crisis, a rally did indeed begin last week. As long as the banking crisis sparked by the SVB collapse continues and the Federal Reserve continues to raise interest rates, the markets will remain volatile. This Wednesday (3/22), all eyes will be on the rate decision by the Federal Open Market Committee (FOMC) as well as their comments on the future direction of interest rates. As of this writing, expectations in the market are split between a 25-basis point hike and a pause. Looking ahead, the market is pricing in rate cuts of up to 100 basis points. We have been here before, where the market expects future rate cuts only to have the Fed squash those expectations. This is a risk to the volatility of the markets. Read on.

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We are providing this information in light of recent market volatility sparked by news related to Silicon Valley Bank (SVB). We know that situations like this can be unsettling and raise questions about the safety and security of your investments. We want you to know that we take your trust in us very seriously and are dedicated to keeping your assets safe and secure. That being said, we'd like to take a moment to explain why you can trust us, and those we choose to partner with, to protect your assets and feel confident about your investments.

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As we near the Ides of March, there are widespread concerns that cracks are beginning to show in the U.S. financial system. But are we facing a historic turning point? We believe no. Last Thursday, concerns emerged on the credit risk of Silicon Valley Bank (SVB), and fear of a run on that bank spread like a contagion to other banks, particularly to the regional banks. This wave came on the heels of fears caused by the voluntary shutdown of Silvergate Bank, operated by Silvergate Capital Bank (SI), which was heavily leveraged to the crypto market. Higher interest rates now appear to be having an impact on a select area of the financial system. We must emphasize that the major commercial banks are heavily regulated and monitored and are required to have a solid capital base that satisfies Federal Reserve stress tests. These banks also have a more diversified business mix (unlike SVB and Silvergate). But these banks’ stocks were hit last Thursday and Friday in sympathy. The regional banks have broken down technically, indicating the likelihood these stocks are going to remain under pressure. The big banks are also under pressure – but not as bad as the regionals. The silver lining of last week’s action was a positive diversification created by a flight to safety as the Treasury market saw rates falling on both the short and long ends. This is a time for patience not panic as deposits are safe with the Fed backstopping this banking crisis. Historically, when policy makers begin to panic you are near the lows of the market. But do expect volatility to continue as the market digests what all this means. Read on.

Equity markets through the month of February have been consolidating the strong rally that emerged at the start of the year. Near term, there are oversold readings with the S&P 500 holding its 200-day moving average (3940, as of March 3) – at least so far. Turning to market breadth, the McClennan Oscillator, which measures momentum in market breadth similar to the MACD (moving average convergence/divergence), reached levels that historically have seen equity markets rally. Meanwhile, volatility measured by the VIX index is falling. This data points to a market that can rally or at least remain in a trading range. Many market participants are confused as to why the market has not fallen more, considering that interest rates are now expected to reach and possible exceed 5%. The likely reason is that, back in December, most sentiment surveys showed an extremely bearish bias with investment positions very defensive, including investors stockpiling mountains of cash. When most investors are positioned the same, the opposite generally happens. Note: sentiment indicators are contrarian by their nature.

March should prove to be an exciting month for the markets as it will be data-heavy with employment and inflation updates set to be released around the Ides of March. The next employment report will be on Friday, March 10, followed by CPI data on March 14 and PPI and Retail sales data on March 15 we get PPI and Retail sales. Each of these datasets will “betray” what’s happening with inflation – and we know that the Fed will be watching in the wings, anticipating its next move. Et tu, Mr. Powell?

Last Friday, one of the Fed’s favorite measures of inflation, the PCE Core Price Deflator, came in hotter (4.7%) than expected (4.3%) – and the data had already been revised the previous month higher to 4.6% from 4.4%. So, this report was in line with the trend we just saw with the overheated CPI and PPI numbers. Data does not trend in one straight line so occasional upticks in inflation should be expected. This data will keep the Fed on the same course of raising interest rates as expected. The Terminal Rate is now expected to be 5.3%-5.5%. But examining the chart of PCE (below), it still looks like the data is peaking. Importantly, as long as interest rates are going up, markets will remain volatile.

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Despite the long weekend, folks are still thinking about last week’s surprisingly strong data: the numbers for the Consumer Price Index (CPI), the Producer Price Index (PPI), and retail sales all came in higher than expected. But let’s take a step back for a minute. The first thing we need to keep in mind is that the equity markets were overbought after a very strong rally in January. We had said to expect a pullback. Well, the pullback is here. And it’s been a controlled pullback – the markets didn’t really sell off too much.

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So far, the Federal Reserve has been true to its word: as long as employment data is strong, the Fed’s actions will remain restrictive. Is the data strong? Right now there are 11 million job openings – near record highs! The concern is that there are not enough employees to fill the jobs that are open. The concern is that this could put upward pressure on wages, keeping inflation elevated. Fed Chair Powell did acknowledge that the Fed would now be data-dependent (just as we’ve previously said they were!). And what data will the Fed care about? This week’s CPI report for a start – which will also be important for the bond and stocks markets.

As markets remained in a tug of war with the Federal Reserve, Managing Director and Head of Advisor Solutions Richard Williams analyzes the month’s economic reporting in the January edition of the Chart Book, which highlights a slowdown in housing, retail and manufacturing amid a stubbornly tight labor market.

We retain our thesis that the Bull is already running – and we offer a slew of charts as evidence. But that doesn’t mean we’re ignoring the expectations for two additional rate hikes or the distraction that is the debt ceiling. Yet the market may already be pricing in these hurdles, as economists have begun to revise their forecasts, and a portrait of market resilience is now overshadowing the dread of a recession.

The Longo Group's annual presentation reviewing the market.

When the Fed hiked its interest rate 25 bps last week, it was completely in line with long-held expectations. But what got a reaction was the message – and tone – used in the announcement.

The Investment Council Report (ICR) provides a brief overview of the Council's perspectives of the economy and the major asset classes: equities, fixed income, and alternatives.

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Wall Street has an old adage: “As goes January, so goes the year” – which means that: if the January return in the equity market is positive, the full year will be positive, but if the month is negative, expect a negative return on the year. Need proof? Just look at 2022.

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As last week’s earnings and market data was mixed – delivering good news and bad news – the S&P 500 continues to test resistance at 4000 level despite the recent improvement in market breadth (i.e., the number of stocks advancing relative to those that are declining). What was that mixed bag of news?

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Last week’s CPI report came in as expected and the markets cheered. Although the level is still elevated at 6.5%, on a year-to-year basis, it does appear that CPI has peaked. As a result, markets will focus on the future direction of inflation, and we see that the bond market is already voting that inflation will be coming down.

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The Best Strategy for 2023 will be Dollar Cost Averaging.

In the December edition of the Chart Book, Managing Director and Head of Advisor Solutions Richard Williams breaks down the month’s economic data to close out 2022. Highlights included an increase in consumer spending which coincided with weakening in manufacturing and housing indicators.

Markets continue to struggle as employment data remains strong – a tenacious trend that gives the Fed agita.

Last year is now in the history books and will be remembered (not fondly) for its Bear market in both stocks and bonds and the Fed’s warpath approach to fighting inflation by taking the Fed Funds rate from the zero-bound to 4.50%. Markets responded – as they should – by going down, down, down.

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Sanctuary Founder and CEO Jim Dickson sits down with Chief Investment Strategist Mary Ann Bartels for a candid conversation about what we can anticipate in 2023.

The Year Ahead Outlook 2023 Report provides a deep dive into the economic forecast and is an easy to digest overview .