April 22-26, 2024

Tactical Signal 9

After another week of volatility, our short-term moving averages have softened, but its long-term moving average remains above the support level to maintain a fully invested position (100%).

Last week's market turbulence witnessed a notable sell-off in both the S&P 500 and Nasdaq Composite, with declines of -3.04% and -5.52%, respectively. However, the breadth of this downturn was nuanced, primarily driven by earnings guidance from select bellwether industries. While the market-cap-weighted indices saw significant declines, the S&P 500 equal-weighted index only retreated by -1.37%, suggesting a more targeted sell-off.

Despite this overall decline, the financial sector displayed resilience, buoyed by strong earnings performance. Financial stocks managed to eke out a gain of +0.67%, with notable contributions from industry stalwarts such as Goldman Sachs (+3.73%), Bank of America (+3.30%), Morgan Stanley (+5.19%), and Charles Schwab (+4.84%).

Among the sectors, Technology (-7.03%), Communication Services (-3.26%), and Consumer stocks (-3.96%) bore the brunt of the sell-off. The catalyst for this downturn stemmed from Taiwan Semiconductor, a key player in the chip manufacturing industry, signaling weakness in forward earnings guidance. Consequently, semiconductor stocks experienced a significant decline of 9%, with high-flying names trading at lofty valuations at over 60x P/E, including TSMC (-10.40%), NVIDIA (-13.59%), SMCI (-20.57%), and ARM (-30.98%). Despite this negative momentum, it's noteworthy that only two of the Magnificent-Seven stocks have year-to-date losses: Apple (-14.17%) and Tesla (-40.82%).

Simultaneously, as market expectations for interest rates shifted, bond markets experienced repricing, leading to a further increase in long-term bond yields by 11 basis points. This resulted in declines for both the Bloomberg US Aggregate and Long-Term Treasuries, falling by 0.61% and 1.17%, respectively. Year-to-date, bonds have faced cumulative losses of -3.11%, primarily attributed to duration and yield curve risks - Sowell has been maintaining a cautious stance on duration risk where applicable.

As earnings season unfolds, investors should brace for heightened volatility, particularly in high-flying stocks like Tesla, Meta, Microsoft, and Google. This volatility may stem from lofty earnings expectations and geopolitical and budgetary uncertainties emanating from Congress and the Middle East conflicts.

Market sentiment is expected to stabilize as earnings reports from Industrials and Consumer-related sectors provide clarity, alongside key inflation indicators such as Durable Goods, PCE Prices, and Personal Spending. Investors should remain patient and focus on long-term opportunities through these dynamic market conditions.

"From this weekend's attack to the Houthi attacks in the Red Sea, Iran's actions threaten the region's stability and could cause economic spillovers."

— Remarks by Secretary of the Treasury Janet L. Yellen at Press Conference Ahead of the 2024 Spring Meetings of the International Monetary Fund and World Bank, April 16, 2024

Out with the New, In with the Old - Gold

While gold is no longer a standard used by any government, it remains relevant, and its appeal is back in vogue. There are various ways to invest in gold, including exchange-traded funds (ETFs) and gold futures. Owning physical gold provides individuals with a sense of security and ownership that appeals to certain investors. Even Costco started selling gold bars in 2024 to provide its members with a convenient and trusted platform to acquire physical gold.

Gold's performance relative to the S&P 500 is an intriguing topic now, particularly in the context of investment strategies and market dynamics. The S&P 500 represents a broad index of stocks, reflecting the performance of the overall economy and largest companies traded on U.S. stock exchanges. On the other hand, gold historically has been seen as a safe haven asset, prized for its stability and ability to retain value during economic uncertainty. 

Over various periods, gold has indeed outperformed the S&P 500. During economic downturns, geopolitical instability, or high inflation, investors often flock to gold as a store of value, which can drive up its price—does that echo the present environment? This was notably observed during the global financial crisis 2008 and, more recently, during the COVID-19 pandemic.

For instance, in 2020, amidst the economic turmoil caused by the pandemic, gold saw a significant surge in value, reaching all-time highs. During the same period, the S&P 500 experienced sharp declines followed by a strong recovery, albeit not as spectacular as gold's performance during that time frame.

At a record closing price of $2,406 per ounce last Friday, Gold has actually performed competitively with the S&P 500 in the previous five years. 

However, it's important to note that gold's performance compared to the S&P 500 is inconsistent. Over more extended periods, such as decades, the S&P 500 has historically delivered higher average returns than gold. As represented by the S&P 500, stocks offer the potential for capital appreciation through dividends and growth, which gold does not provide.

Looking forward, the attractiveness of gold as an investment depends on various factors. Economic conditions, inflation expectations, interest rates, and geopolitical tensions significantly determine gold's performance.

Here are some points to consider:

  1. Economic Outlook: If economic stability is questioned or if central banks continue to implement loose monetary policies, gold may remain attractive as a hedge against inflation and currency devaluation.
  2. Interest Rates: Gold tends to perform better in environments of low or negative real interest rates, as the opportunity cost of holding gold diminishes compared to interest-bearing assets like bonds.
  3. Inflation Expectations: If inflationary pressures rise significantly, investors may turn to gold to preserve purchasing power, potentially driving up its price.
  4. Market Sentiment: Investor sentiment plays a crucial role in gold's performance. Fear and uncertainty can increase demand for gold, while optimism and risk appetite may have the opposite effect.

Ultimately, whether gold remains attractive in the future depends on individual investment objectives, risk tolerance, and portfolio diversification strategies. While gold can serve as a valuable hedge against certain risks, it's essential for investors to carefully assess their circumstances before making investment decisions.


Select Indices as of 4/19/24

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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