- Despite a sharp gap lower at the open last Monday morning and a historic spike in volatility, the S&P 500 managed to finish last week flat.
- On a short-term basis, as we discussed at the time, Monday felt a little panicky and overdone relative to the news of a softer employment report. The move down on Monday was likely exacerbated by investor repositioning and the unwinding of a popular trade, known as the yen carry trade.
- And later in the week, with investor expectations reset lower, a little bit of good news went a long way in the form of economic reports that were not recessionary. Indeed, with so much attention now on employment, a better-than-anticipated weekly initial jobless claims report proved to be a spark for the market along with a monthly ISM Services report coming in better than expected.
- That said, it’s unlikely that we are up and off to the races on the upside; following past volatility shocks, we tend to see wide swings in both directions, and the repair process typically takes time. It’s not unusual for markets to give back some of the initial rebound.
- Indeed, after such a sharp move down, there tends to be a battle between fear and greed. There is fear of more downside, which causes some investors to continue to sell on any bounce, and then greed on the other side, where those investors who were waiting for a pullback wade in.
- For the S&P 500, the low of 5119 is an important short-term level to watch on the downside (followed by 4900 to 5000). On the upside, the 5400 to 5500 range has multiple points of resistance, which we anticipate will take some time to break through.
- Notably, to gain further confidence, investors will be waiting for some of the higher profile reports/events at the end of the month and early September, which in market years may feel like forever.
- These include the Federal Reserve Chairman’s speech in Jackson Hole on August 25, where markets are hoping to get confirmation of a rate cut at the September FOMC 17-18 meeting. At the same time, the next employment report isn’t released until September 6.
- And from a market perspective, with earnings largely behind us, all eyes will be on NVIDIA’s earnings report currently scheduled for August 28.
- In the interim, each economic report, even those typically lower tiered, will likely be overly scrutinized—just like last week’s jobless claims, which tend not to be a market mover. This week, we get retail sales, inflation, and a read on the state of the consumer with reports from bellwethers Home Depot and Walmart.
- Our base case has not changed. We still believe what we have seen is most likely a correction within a bull trend. So far, the 8.5% pullback is close to the average pullback of 9% historically seen at some point in the second half following strong first halves (though below the average 14% maximum intra-year drawdown seen in all years since 1980). Forward earnings estimates are still rising, and our team’s base case is for a cooling of the economy but not a recession.
- From a tactical standpoint, for those investors that are underweight equities, we view an average-in approach as making the most sense in this choppier environment and potentially becoming more aggressive on deeper pullbacks.
- We maintain our bias for U.S. equities relative to international, an emphasis on large caps, and high quality within fixed income. Bonds are acting like bonds again and providing important portfolio diversification.
- At a more granular level, after downgrading the Technology sector prior to the July swoon, we moved the sector back to overweight last week as we see a better risk/reward relative to other areas of the market.
- In the fixed income space, after having a more favorable view of longer-term bonds, our team is now more neutral in our maturity (duration) outlook as a result of the 10-year U.S. Treasury yield’s sharp move lower recently to near 4%.
- With elevated geopolitical risks, we also still see holding modest positions in commodities and gold as a way to add portfolio diversification.
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