Broker Check

We always respect the longer standing-trend as being stronger

April 24, 2023

Stocks pulled back from multi-month highs last week as a very short-term downtrend in the S&P 500 formed in the wake of Monday’s midday reversal. A longer-term uptrend dating back to the April 10th lows was tested on Friday but so far remains intact. We always respect the longer standing-trend as being stronger, so until we see the uptrend that began in mid-April violated, risks are skewed to the upside. Bottom line for the S&P 500, we have approached a tipping point in the market that should be resolved this week with last week’s downtrend being broken or stocks violating the longer-standing uptrend dating back several weeks. 

Looking at the major indexes, the tech-heavy Nasdaq has been the clear upside standout YTD but there are some signs that the rally is losing momentum. Small caps, meanwhile, remain a major market laggard with the Russell 2000 barely positive YTD. Between the two major investment styles, growth has massively outperformed value so far in 2023, but there has so far not been concrete evidence that the definitive and primary trend of value-over-growth that dominated markets in 2022 has reversed just yet, leaving the gains in growth stocks so far this year at risk of a reversal or steep pullback. This is the reason we have not moved back into growth. Among the major market sectors, we are currently bullish on Consumer Staples, Energy, Healthcare, Industrials, and Technology. Communication Services, Financials, Materials, and Utilities all appear to be market neutral while we are bearish on Consumer Discretionary and Real Estate at this time. 

I have talked about the inverted yield curve (when short term rates on Treasuries are higher than the long term rates). This indicates that interest rates are biased on the upside. When this begins to reverse, the bond traders are telling us that we are near an end to the Fed raising interest rates. In the past four or five weeks this yield curve began to flatten. This week the rates on the short side move up. This is more consistent with my belief that the Fed has about 3 more moves left before pausing. So we are looking at mid-summer for the Fed to stop their restrictive monetary policy. When that ends the yield curve will reverse and the markets should move up to the end of the year.

Bottom line, the conflicting signals from data, earnings, Fed speak, inflation, etc. only reinforce our concern the economy is “turning,” and as such we continue to want to be positioned for slower growth ahead, and that means defensive sectors (utilities/staples/healthcare). I also believe that the small stocks will outperform going forward since they have not performed well so far this year. If growth slows, these sectors will outperform and insulate our portfolios from volatility. And if the soft landing happens and we get “immaculate disinflation” (dropping inflation without any economic slow- down) then we’re still long equities, and while they might relatively lag, they’ll still rally with the market. 

*  What’s Outperforming: Growth factors, tech, consumer discretionary and communication services, the worst performers in 2022, have outperformed YTD. However, higher yields remain a headwind and as such we don’t think this outperformance will last over the longer term. 

*  What’s Underperforming: Defensive sectors and value have underperformed YTD, but are still massively outperforming since the bear market started in 2022, and since our primary concern in 2023 is economic growth, we think this underperformance will be temporary. 

Keep the faith and you will be rewarded for your patience. 

"This material is provided for general information and is subject to change without notice.  Every effort has been made to compile this material from reliable sources however no warranty can be made as to its accuracy or completeness. The information does not represent, warrant or imply that services, strategies or methods of analysis offered can or will predict future results, identify market tops or bottoms or insulate investors from losses. Past performance is not a guarantee of future results.  Investors should always consult their financial advisor before acting on any information contained in this newsletter.  The information provided is for illustrative purposes only.  The opinions expressed are those of the author(s) and not necessarily those of Geneos Wealth Management, Inc."