What did you make of the week of the markets?
So I was happy to see a continued broadening in markets.
So we didn't see tech do well. But that's okay because there was more
participation from a variety of sectors. So I think in general this is a fairly
healthy environment, but we should expect that it's not surprising if we
get some kind of pullback. We've had a strong rally this year.
There should be or there should likely be a digestion period over the coming
months. So a broadening of the markets, you see
that as well, Sarah. We actually at Bloomberg have a chart
indicating the relationship between small caps and the S&P 500 suggesting is
a bigger divergence in there in 20 years.
Are you seeing a broadening of the markets or not?
There's three reasons why the Bulls beat the Bears again this week.
One is broader participation in the index is second is inflation, which is
continuing to moderate. And third, of course, is earnings
season. So participation rate for everything
outside of those top ten technology stocks has been very strong since June
1st. That's a healthy sign for the markets.
Moderating inflation with CPI, PPE coming in under expectations is another
positive, but we are still concerned about wage inflation and core inflation,
which remains above the Fed's target. And let's move to earnings.
We came into this earnings season with a low bar moderate estimate cuts coming in
and expectations for negative year over year earnings growth that set the bar
low and is allowing these banks and other cyclicals to beat earnings.
Now, the story is not the same with tech, where we came with with high
expectation for earnings. And a lot of those companies have shown
that they couldn't quite meet that high hurdle.
That's why we're seeing tech underperform and other areas of the
market outperform. So we're still early on in the earnings
season so far. So we'll have to find out what actually
happens. But where are you on the S&P 500 by the
end of the year? We still think there's upside as long as
employment markets remain strong and the consumers keep spending.
And you tend to see that when people are comfortable with their jobs, that will
keep spending money. I think the market still has upside if
that's the case. Now, I do acknowledge six months of
monetary tightening, including what we think is one more rate hike next week
until and then we're done with rate hikes for a while.
But all of that putting together, as long as we don't see a recession this
year, which we doubt that we will. I think the markets keeps climbing
higher technology. I wouldn't count that out either.
It has a lot of tailwinds like lower inflation yields that are moderating and
artificial intelligence. I think tech stocks also will continue
to move higher once they consolidate. David, I don't disagree with Sarah.
I think after that digestion period that I talked about and the potential for a
modest pullback, what we're likely to see is some improvement in the S&P 500
by year end. And I would argue that that is being
fueled by what I will call a bumpy landing.
I don't think it's a soft landing, but I don't think we go into any kind of
significant, broad based recession. We're also going to see history help us.
What we know is that when the Fed stops hiking rates, typically in the one year
period, the two years after the end of rate hikes, that is when we tend to see
good performance, strong returns, usually from the S&P 500.
I don't think this is going to be different this year, especially since
this time around. This kind of downturn is a job, full
downturn. And so we see the consumer continuing to
spend, as Sarah mentioned, because they have jobs and they can spend.
And with inflation coming down, that also helps helps with discretionary
spending. So next week, obviously, Christine, we
have the Fed decision. We all expect 25 basis points.
But what about after that? What is the Fed looking at at this
point? What data is it looking at?
Where is it pointing as of now? Well, if we think about the way Jay
Powell tends to look at things, he breaks down inflation into three
categories. He's got goods, inflation, he's got
corn, he's got up services, inflation, and he's got housing services.
Ex housing is what he's focused on. And in particular wage growth, which is
a very significant part of services inflation.
And so that is certainly higher. It's not where we want to be wage
growth, but clearly it's coming down. And I think he recognizes and hopefully
most of the Fed recognizes that there is a significant lag to monetary policy.
So what has been done thus far hasn't shown up yet in the inflation data.
It hasn't largely shown up in the inflation data, nor has it shown up in
the economic data either, which is why we do have to worry about the risk,
however small, that there is a significant recession.
Well, it may not have Shaun of the day yet, Sarah, but I wonder if it's showing
up in the strength of the dollar right now.
That is to say anticipation of the Fed may be getting close to being done
because we do see some weakening of the dollar, do we not?
We do. And our view is that the dollar is
likely flat to down. It has downside from here, which is one
of the reasons we like non-U.S. markets, particularly emerging markets.
So if inflation continues to weaken and the Fed is one and done next week, I
think the dollar has downside. We like emerging markets for a couple of
reasons. Number one, they're further along in
their front in their fight against inflation.
And we want to be in the later in. Is it this battle?
Secondarily, we think that China, which has struggled from here, will continue
to add stimulus to their economy and China could start to recover.
These are both reasons why we think emerging markets could outperform.
And of course, valuations are in their favor.
And that brings me to where can we find value in markets that are up so
significantly year to date, not only emerging markets, but back to the U.S.,
where we still feel technology has upside.
But look at other segments like small caps, where they're one of the largest
gaps at a discount to large caps and also dividend growers.
These provide income and portfolio protection.
Usually during downside, they've underperformed significantly year to
date because a lot of tech and technology companies don't pay or grow
dividends because they would love to have people like you and Sara on because
you're experts in your own right, but you also talk to clients all the time.
What are you hearing from clients about those opportunities Sara is talking
about to really participate right now in the marketplace?
Well, I think clients certainly have some feelings of FOMO if they've been
sitting on the sidelines. And I think that is that that is very
much the case for a significant portion of clients.
They got out, they got spooked. Certainly the October lows created some
fallout and and they haven't known when is a good time to get back in.
There's some who are worried that we may retest, Carlos, which I don't believe
will be the case. So certainly they're starting to dip
their toe in, be interested and they're starting with some fixed income
opportunities. Let's face it, all the pain we went
through last year has created very abundant yields in a variety of areas of
fixed income. They're a little more skeptical about
areas like emerging markets and just developed international equities, like
European equities. But I do believe that the more we talk
about the cases for them and there really is a compelling case for Asia M
as well as a good case for European equities.
I think they become more comfortable with that idea and start to dollar cost
averaging.