Price Action & Performance
Price action offers a longer-term bullish outlook, but near-term uncertainty for the S&P 500 Index. There is likely more near-term downside as market internals are short of washed-out levels that would mark an ideal entry point for new money. The S&P 500 Index is in the midst of its first pull-back of significance in 2024, off nearly -6% since it printed an all-time high of 5254 on March 28th. The index is near-term oversold and attempting to establish near-term price support near the 5000 level, but tactically over the next month upside and downside potential look about even for the index.
Economic and Policy Drivers
May’s CPI report will likely be a key driver of index and sector returns this month. Inflation has proven stubborn relative to the Fed’s preferred 2% inflation target with the April CPI printing a +3.5% yoy change after readings of +3.1% and +3.2% in February and March respectively. While these numbers are far below what was seen in 2022/23, they complicate policy decisions from the central bank which has begun to back off guidance for lower rates in the second half of the year. That expectation has been a part of the bull case for equities YTD and had been a catalyst for Growth over Value.
How Can Sector Investing Help?
Since the start of 2023 the Information Technology Sector (XLK) and the Communication Services Sector (XLC) have been clear leadership driven by investor preference for Mega Cap. Growth exposures to “MAG7” stocks, six of which (AAPL, MSFT, NVDA, GOOG/L, META) are found in these sectors. These stocks have been bid due to the emergence of AI as a dominant theme. The result has been a bifurcation of performance as investors speculated on AI plays confident that lower interest rates would be a helpful tailwind to the Growth companies that comprise the majority of the AI stock universe.
Now with inflation spoiling the narrative there is opportunity for sectors that have lagged to make up some ground. A “stagflation” scenario would increase the probability of recession and likely favor lower volatility sectors like Utilities (XLU) , Staples (XLP).
We could also see a continuation of an inflationary bull market if underlying economic demand remains strong. This would likely promote Value stocks over Growth as investors would be forced to re-enter exposures to commodity linked areas of the market like the Energy Sector (XLE) and Materials Sector (XLB). The Financial Sector (XLF) would also likely do well if Value becomes leadership as many areas of the sector have lagged over the longer-term and screen very well on Value factor metrics like Price-to-Book.
In Conclusion
A big spread in the performance of Growth over Value since the start of 2023 and increasing likelihood of a Fed pivot away from easing monetary policy in the second half of the year is likely a continued near-term headwind to previous leadership. Sector SPDR’s can help by offering a cost-effective way to switch portfolio exposures on a tactical basis at a time when the prevailing narratives are showing potential to change.
Chart | S&P Technicals
-
- Current price and near-term momentum set-up suggest potential for a max draw-down of -10% with structural support at the July 2023 price high
- Longer-term this is a strong trend rolling over from the top of a bullish channel. We should look for a tactical entry point closer to the 200-day m.a.
