Market Navigator – August 2023 edition

Market Navigator

August 3, 2023

This monthly publication provides regular and timely economic and investment strategy views.

Monthly letter


The Dow Jones Industrial Average had its longest winning streak since 1987, rising 13 straight days in July, and the S&P 500 added a fifth month to its winning streak.

The Volatility Index, also commonly referred to as the fear index, traded below 13, the lowest level since before the pandemic.

At the same time, the current earnings season is on track to show the highest percentage of companies exceeding analysts’ expectations since the second quarter of 2021, aided by economic data that is surprising to the upside by the greatest amount since March 2021.

Likewise, the most recent year-over-year inflation reading moved to the lowest level since March 2021.

Alongside what some investors would describe as a goldilocks scenario of a resilient economy, declining inflation, and, of course, higher stock prices, the percentage of investors holding a bullish market outlook broke above 50% for the first time since April 2021, according to the latest survey from the American Association of Individual Investors (AAII).

We often say markets are mostly about how data comes in relative to expectations. The story so far this year can be summed up as economic, earnings, and inflation data coming in better relative to depressed expectations, along with an investor frenzy over artificial intelligence leading to outsized gains in growth stocks.

The good news is persistent strength in markets historically tends to be a sign of underlying strength:

  • After the previous 28 occurrences when the S&P 500 rose five straight months, stocks were higher 26 times a year later, or 93% of the time.
  • The one wrinkle is the last signal in June 2021 was one of the two misfires. That’s why stats are helpful to know but should never be viewed in a vacuum.

Moreover, we see a market more vulnerable to bad news as stocks have become extended on a short-term basis:

  • Valuations have pushed to one of the richest levels of the past few decades.
  • Investor expectations have been reset sharply higher as we head into a more challenging seasonal period.
  • The year-over-year comparisons for inflation are set to become a bit more difficult.

We already have seen some of this vulnerability in the first few days of August on Fitch’s surprise downgrade of U.S. debt. Also, the move in the 10-year U.S. Treasury yield above the 4% level will likely act as a headwind to further expansion in already lofty equity valuations.

“Our expectation is that the market takes some time to digest the strong year-to-date gains and moves into a choppy period.”

Outlook and positioning

Our expectation is that the market takes some time to digest the strong year-to-date gains and moves into a choppy period.

  • From a technical perspective, there is price support for the S&P 500 in the 4300 to 4400 zone, with important structural support closer to 4200.
  • On the upside, 4600 appears to be a formidable near-term resistance, followed by the previous all-time highs closer to 4800.

We are maintaining a neutral posture across stocks, bonds, and cash, with an emphasis on higher quality across equity and fixed income given the many macro crosscurrents that remain.

Our long-standing U.S. equity bias remains in place. The U.S. economy still appears to be in better shape relative to most of the globe, even though we expect a slowdown in both, and companies are generally higher quality.

Within the U.S., we still prefer large caps. We advocate pairing traditional large cap exposure with some less market cap heavy areas, such as the S&P 500 Equal-Weighted-Index, given the relative performance of the average stock has improved and is trading at cheaper valuations.

Economic and price trends for international developed markets are weak on a relative basis and we remain underweight.

Likewise, we retain a negative view of emerging markets(EM). Earnings trends are lackluster and even as China, the largest component of the EM universe, looks to provide stimulus to support the economy, policymakers there more recently placed new mobile use restrictions on some of their biggest internet firms. Regulation remains a headwind to profitability.

On the fixed income side, despite the Fitch downgrade of U.S. debt, we still are focused on higher quality fixed income. In a statement following the downgrade, U.S. Treasury Secretary Janet Yellen wrote that U.S. government securities “remain the world’s preeminent safe and liquid asset.” We unequivocally agree.

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