Summary:
US markets continue to be a choppy mess after 18 months of gains.
Lesser weighted sectors in US markets are showing relative strength as interest rates rise and demand for commodities increases.
Investor sentiment plunging as low as it has is a signal of opportunity.
US Market Outlook
We are currently experiencing one of the worst starts of the year in history for US stocks, particularly within growth sectors. When we zoom out, however, we can see that we are really just stuck in a large trading range as there has been no upward progress in the major US indices for 9 months. This type of consolidation is consistent with this being the second year after what we believe to be a new bull market which began following the Covid crash in 2020. The market needs time to digest the massive run up that occurred, with many of the largest growth stocks doubling or tripling in value from the Spring of 2020 until the end of 2021. It is perfectly normal for even the largest stocks in the world to see swift selloffs as investors lock in profits or begin to rotate into different sectors of the market which are showing relative strength.
Relative Strength
It is important to remember that the stock market is a discounting tool and therefore trends over time. Individual sectors within the market also trend, and when these trends begin to change, there is an increase in volatility. This is the main culprit in the stock market action we have been seeing since the start of the year. While technology, consumer discretionary, and communications stocks continue to make new lows each week, there are some areas of the market that continue to make new highs. Commodities, Financials, Industrials (mainly materials and agriculture), and Energy have shown impressive relative strength since the start of the year and are likely to continue to have success if interest rates continue to hold above their highs from 2021. The quick rise in interest rates, which hit their lows last summer, has caused a ripple effect through the market making previously underlooked sections of the market more attractive. With over 50% of the S&P 500 being allocated to the weakest sectors listed above, it is now an opportunistic time for investors to begin rotating into the sectors which continue to trend upwards.
Investor Sentiment
Individual investor sentiment is currently tracking at its lowest level since the middle of the Covid crash. At the same time, financial advisor sentiment is seeing a similar level of pessimism with the market. Since most US investors tend to be overweight in similar sectors to the S&P 500, this makes sense given the current trajectory the market has taken. Historically, when there is a high level of pessimism in the market, it is a signal that it may be time for a short-term bottom to begin forming. We will likely continue to see large swings in either direction over the coming weeks and it will be crucial to observe which areas of the market are holding up and which are continuing to sell off.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All investing involves risk including loss of principal. The economic forecasts set forth in this material may not develop as predicted.