The mega-cap technology companies have powered the broad market higher this year. In fact, the 8.1% gain in the S&P 500 year to date has been driven entirely by six mega-cap stocks: Apple (AAPL), Microsoft (MSFT), NVIDIA (NVDA), Meta (META), Amazon (AMZN), and Alphabet (GOOG/L). Is this narrow leadership a problem for stocks looking forward? We try to answer that question below.
Economists like to remind us there is no such thing as a free lunch. In investment parlance, that just means all investments carry risk—even cash. And the big risk with cash is reinvestment risk. That is, while short-term rates are currently elevated, the risk is these rates won’t last and upon maturity, investors will have to reinvest proceeds at lower rates. And if this current cycle follows history, we could see lower core bond yields over the next year, which would mean cash-only investors may miss out on these higher yields. LPL’s Strategic and Tactical Asset Allocation Committee (STAAC) recommends investors maintain a neutral duration relative to benchmarks with the expectation that Treasury yields are likely headed lower (or at least not much higher) over the next few quarters.
First quarter earnings season is nearly complete, and it has caused us to regret titling our earnings preview commentary on April 10, “Malaise Continues.” While the “better than feared” label fit the past couple of earnings seasons quite well, based on the magnitude of upside surprises in the first quarter, and encouraging guidance from corporate America, that’s probably underselling it. There’s plenty to worry about the rest of the year (debt limit, recession, tightening financial conditions, a Federal Reserve (Fed) policy mistake, among them), but the risk of an additional sharp contraction in profit margins has come way down.
Much has been written lately about the threats facing the reserve currency status enjoyed by the U.S. dollar. “De-dollarization” headlines appear on a near-daily basis, suggesting the dollar’s reign is in looming jeopardy, while counter arguments point out there isn’t another currency with the depth, transparency, and reliability associated with the dollar. Still, critics accuse the U.S. of having “weaponized” the dollar, that is, punishing other countries with sanctions and freezing assets. These accusations have been particularly prevalent as the Ukraine/Russia conflict continues, with Russia and its long-standing allies asserting that the U.S. has illegally frozen billions of dollars of Russian financial assets.
“Sell in May and go away” is probably the most widely cited stock market cliché in history. Every year a barrage of Wall Street commentaries and stories in the financial press floods in about this popular, but overused, stock market adage. Here we take our annual look at this historical seasonal pattern which, as you will see below, has started to lose some of its street cred recently.
Investors use various analogies to describe the importance of small businesses in the domestic economy. Some refer to the small business sector as the backbone or the lifeblood of the economy. At this current stage of the cycle, we could say there are rising risks of an acute backache or a draining of that lifeblood. In this edition of the Weekly Market Commentary, we discuss the weakness in small businesses and what that foreshadows in the markets and the economy.
The commercial real estate (CRE) market has recently captured the spotlight after being flagged as the next potential shoe to drop following last month’s banking turmoil. While rising rates have weighed on financing costs and the recent bank failures will make lending more restrictive, the post-pandemic world has produced structural changes that will likely weigh on the sector, especially within the retail and office segments. Banks, especially smaller cap regionals, are most exposed to CRE if credit cracks continue to widen.
First quarter earnings season kicks off this week with some big banks reporting toward the end of the week. In some ways this quarter’s earnings season will probably be déjà vu all over again—earnings declines and cautious guidance, reductions in estimates, but better than feared. However, tightened financial conditions in the wake of last month’s banking turmoil and building evidence for a slowing economy has changed the economic backdrop this quarter. It will be interesting to see how management teams react to these latest developments.
A lot has changed in the past few weeks, both in terms of expectations for interest rates and lost confidence in the health of the banking system as a result of the sharp rise in interest rates that has led to some things “breaking,” as we wrote about here last week. Here we share some thoughts on who’s to blame for the ongoing banking crisis and reiterate how we are telling investors to adjust, or not adjust, their asset allocations in light of ongoing market volatility.
The Federal Reserve (Fed) has a history of raising short-term interest rates until something “breaks.” Considering the Fed has raised rates from a near-zero level to 4.75% (upper bound) over the course of only one year, it was almost a near certainty this time would be no different. Recent bank failures suggest things are indeed starting to break. However, we don’t think we’re on the brink of a full-blown crisis, as market indicators we follow suggest contagion risks are still currently low. And while we don’t think a full-blown crisis is imminent, financial stability risks have clearly increased, which makes a prudent asset allocation plan a must.
Last week did not play out how we anticipated. Coming into the week, it was all about Federal Reserve (Fed) Chair Jerome Powell’s congressional testimony and the February jobs report. Instead, we got a shockingly fast collapse of a financial institution with over $200 billion in assets, which turned the market’s focus toward the stability of the banking system and what systemic risks banks might be facing. This commentary is focused on our asset allocation views, but no doubt the Silicon Valley Bank saga will require more attention from investors in the days ahead.
Suggesting an economy makes “no landing” makes no sense. Analogies eventually break down, especially this one. Economic activity does not stop like an airplane eventually does, but rather the economy will settle into a steady state where growth is consistent with factors such as population and productivity. Here we take a look at some factors that illustrate how the economy is struggling to find a stable growth path.