April 15-19, 2024

Tactical Signal 9

Following another week of a market dip while the S&P still maintains a YTD gain of 7.86%, let us not lose sight of the fact that recession fears are nonexistent, the U.S. job market is above the rate of full employment, and the U.S. has among the highest GDP growth rates among the G20 nations. Our technical indicators remain in a bullish position (100%) as the underlying fundamentals continue to display strength.

Reality checks show that a possible monetary easing is no longer in sight as peripheral inflation references are poor. With headline inflation coming in not lower than expected, investors overreacted as the S&P 500 index declined by 1.52% while the Nasdaq Composite modestly declined by 0.45%. With CPI coming in hot at 3.5% yoy, above the previous month's 3.2% yoy, investors punished interest rate sensitive sectors, including Financials (-3.56%), Industrials (-2.50%), and Basic Materials (-2.99%). Concurrently, long-term bond yields continued to widen with the 10 yr, 20 yr, and 30 yr, reaching 4.50%, 4.73%, and 4.61%, respectively, resulting in the Bloomberg US Aggregate YTD loss of -2.52%.

JP Morgan bore the brunt of market turbulence, experiencing a steep decline of 7.42% over the past week, despite reporting year-over-year increases in revenue and net earnings coupled with a reduction in credit losses. The stock faced investor scrutiny due to its revised guidance on net interest income, reflecting concerns over the impact of rising interest rates.

Amidst evolving headline expectations, the broader economic landscape continued to exhibit signs of resilience, evidenced by a robust 5.2% year-on-year increase in same-store retail sales, a 0.3% month-on-month rise in inflation-adjusted real earnings, and a 2.3% month-on-month expansion in Wholesale Trade. Volatility swings are expected to continue until investor sentiment normalizes their rate cut expectations and company earnings expectations.

As attention turns toward the forthcoming Federal Open Market Committee (FOMC) meeting scheduled for April 30, market participants await key consumer and manufacturing data releases, including Retail Sales, Business Inventories, and Industrial Production. Moreover, the momentum of first-quarter earnings is set to intensify, with Financials taking center stage, followed by anticipated reports from Taiwan Semiconductor, a bellwether in the semiconductor industry.

Since 1954, Tax Day was set as April 15 since Congress overhauled the tax system. The date is pushed back only when the deadline falls on a Saturday, Sunday, or any federal holiday. Happy Tax Day.

"While we are investing more money in our A.I. capabilities, many of these projects pay for themselves. Over time, we anticipate that our use of A.I. has the potential to augment virtually every job, as well as impact our workforce composition. It may reduce certain job categories or roles, but it may create others as well." 

—Jamie Dimon, Chairman and CEO Letter to Shareholders - Annual Report 2023, April 8, 2024

MBTI Myers Briggs Applied to Equity Market Factor Exposures


It's dawned on us at Sowell that market factor exposures might be explained much like how we look at personality types. Today, many people are familiar with the Myers-Briggs test that helps identify personality types across four categories: introversion or extraversion, sensing or intuition, thinking or feeling, and judging or perceiving. We all know our MBTIs and are equally interested in others. ESTP, ISTJ, and INTJ are just a few of the 16 designations, but what I find interesting is the self-awareness of our own personality traits and how we react or interact with others.

The MBTI indicators are quite disconcertingly accurate.
When we think about markets, long-term data and our own experiences show a similar "personality" type of "factors" that represent the makeup of company and stock types. Despite what we see on T.V. and other media, awareness of what drives stocks and the exposures each has, especially under the surface, is quite complex and multidimensional. S&P has created a good visual tool that shows these company factors, or what I now consider "personality traits." They are known as low volatility, momentum, value, high beta, dividend, quality, and size.

When we look at this MBTI-like factor data, we can see a visual for certain sectors that may explain the personality types in stocks that react to macro factors, industry inputs and costs, interest rate sensitivity, innovation, and investor sentiment. Much like how our individual personalities react to our stimuli. Where are we going with this? We find it helpful to understand these factors that influence performance and portfolio construction and ultimately wringing the best performance for the risk taken.

Now, if we view the market through these factor exposures, we can support what seems very reasonable in how the markets unfolded for the year 2023, especially as a tale of two halves. In the first half of last year, investors seemed enamored with growth, as evidenced by the strong positive correlation between market capitalization and performance, think large cap and growth on our visual. This period saw the ascendancy of high-flying, expensive stocks, with the market showing a clear preference for companies with significant growth potential. Intrinsic value and dividends, traditionally considered markers of stability and value, found themselves at odds with this fervent pursuit of growth, displaying a negative correlation with performance during this period, and of course, the sectors that show that "type" like utilities and small and midcaps. S&P's decoder key for company "factor" types shows us how and why certain sectors perform given the environment and how that environment changes.

The narrative took a slight turn in the third quarter of 2023, as underperformance in the overall market prompted a reevaluation of investment strategies. Cheaper alternatives emerged as resilient options, experiencing lesser losses and challenging the previous negative correlation between intrinsic value and returns. While this moderation in correlation persisted through the fourth quarter, the overarching narrative of 2023 remained one of growth dominance, owing to the enduring preference for high-growth stocks witnessed in the earlier quarters. Cap-weighted benchmarks were hard to beat in 2023, as their performance was heavily, even overly, driven by a few large names like the Mag 7.

As the calendar turned to Q1 of 2024, momentum emerged as a dominant theme, underscoring the market's ongoing appetite for dynamic performance. Although the overall Q1 indicators still suggest a moderate intrinsic value performance and a positive outperformance of large companies, March seemed to be a possible turning point. Data from the S&P factor dashboard revealed a noteworthy outperformance of value over growth indices in March, signaling a potential shift in investor preferences. Similarly, the dividend factor, long associated with a negative correlation to performance, exhibits signs of outperformance in March, further suggesting a reevaluation of investment strategies.

The latter part of 2023 and the beginning of 2024 appear marked by a growing realization among investors of the potential value offered by underappreciated names, hinting at a potential shift in market dynamics towards a more value-tilted or at least balanced approach to investment.

Lastly and most importantly, as we think about company factor exposures, there are always shades of gray. As the ability to learn and change our personality, companies too can change where they fall on this rather simple but effective description. Or not!


Economic Reports 4/15-4/19
Select Indices as of 4/12/24

Advisory services offered through Sowell Management, a Registered Investment Advisor. The views expressed represent the opinion of Sowell Management. The views are subject to change and are not intended as a forecast or guarantee of future results. This material is for informational purposes only. It does not constitute investment advice and is not intended as an endorsement of any specific investment. Stated information is derived from proprietary and non-proprietary sources that have not been independently verified for accuracy or completeness. While Sowell Management believes the information to be accurate and reliable, we do not claim or have responsibility for its completeness, accuracy, or reliability. Statements of future expectations, estimates, projections, and other forward-looking statements are based on available information and Sowell Management’s view as of the time of these statements. Accordingly, such statements are inherently speculative as they are based on assumptions that may involve known and unknown risks and uncertainties. Actual results, performance or events may differ materially from those expressed or implied in such statements. Investing in securities involves risks, including the potential loss of principal. While equities may offer the potential for greater long-term growth than most debt securities, they generally have higher volatility. International investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles, or from economic or political instability in other nations. Past performance is not indicative of future results.


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