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WEEK AHEAD
August 28 - September 1, 2023
S&P majors snapped the downward pressures of the last several weeks, posting a positive gain for the technical signals. Fundamentals were watchfully mixed and cautious as the economy slowed, but concern over the Fed’s overly assertiveness. Sowell’s tactical models watchfully remain in full position (100%).
Buoyed by the strength of technology stocks, notably NVIDIA (NVDA), the S&P 500 concluded the week on a positive note, propelled by optimism surrounding the much-anticipated Fed speech on the preceding Friday. The technology sector, along with the impressive performance of NVDA as the fifth largest stock in terms of market capitalization, exhibited notable gains of +2.48% and +6.28%, respectively. These robust advancements contributed significantly to the S&P 500's overall ascent of +0.84% over the week.
During this period, the yields on long-Treasuries, specifically the 20-year and 30-year benchmarks, experienced a tightening trend in anticipation of Fed Chair Powell's address. His speech echoed the prevailing projection of an additional 1/4% rate hike by year-end. Consequently, the Bloomberg US Aggregate index secured a modest increase of +0.28%.
While Powell's discourse seemingly adhered to the ongoing themes of price stability and a measured approach by the Federal Reserve, a closer analysis of his remarks from the Jackson Hole event unraveled a subtly more hawkish stance. This stance contrasted with earlier expectations of moderation, especially in light of the eleven rate hikes already implemented. Powell explicitly reinforced the Fed's commitment to achieving the 2% inflation target and expressed a proactive intent to employ monetary policy preemptively for this purpose. This stance dismisses the viewpoints of economists advocating for a more lenient inflation target adjustment by the Fed.
This notable shift in central policy and narrative holds the potential to usher in more frequent rate hikes than what the market has thus far incorporated. Consequently, the market's prior assumptions may necessitate revision to accommodate the likelihood of a more hardline path of rate adjustments.
After a notable revelation last week, which showcased UoM inflation expectations surpassing forecasts at 3.5% for the upcoming 12 months, the forthcoming week holds the task of interpreting the Federal Reserve's intended course of action in light of a series of pivotal economic indicators. The week's focus on deciphering the Fed's stance is underscored by the critical nature of the economy's status and the watchful measures undertaken by the Fed. These measures are primarily guided by significant factors such as Housing Prices, GDP, PCE, and, not least, the Unemployment rate.
"Turning then to the outlook. Although further unwinding of pandemic-related distortions should continue to put some downward pressure on inflation, restrictive monetary policy will likely play an increasingly important role…Two percent is and will remain our inflation target." — Fed Chair Jerome Powell, Jackson Hole Symposium, August 25, 2023.
S&P 500 Index – The "Debate" Continues
Aiming to encompass and monitor a diversified spectrum of the U.S.'s major stocks, the S&P 500 index serves as a comprehensive benchmark. It diligently achieves this by constructing its index through a market-capitalization framework, allocating greater weight to companies with larger market caps. Presently, this approach results in the top 10 holdings (AAPL, MSFT, AMZN, NVDA, GOOGL, TSLA, META, GOOG, BRK.B, and UNH) collectively constituting 30.6% of the index's weight. The Technology and Communications sectors contribute significantly to this weight, accounting for 28.48% and 8.69%, respectively, culminating in a cumulative 37.17% of the index's total weight. Beyond its function as a performance benchmark and measurement tool for investments, the S&P 500 index also attempts to offer diversification benefits, especially during periods of heightened volatility.
It is worth noting that the influence of the S&P 500's performance now greatly hinges on the fortunes of five out of its top 10 companies, each boasting a market capitalization exceeding $1 trillion: Apple, Microsoft, Google, Amazon, and NVIDIA. This renders the index's trajectory intricately tied to its performance. In contrast, the S&P 500 Equal Weight (EW) index, composed of the same constituents as the S&P 500 index, is structured with equal weight distribution, assigning a fixed weight of 0.20% to each holding. In this framework, the top 10 holdings collectively account for a mere 2% of the S&P 500 Equal Weight, while the Technology and Communications sectors command 15.10% and 3.90%, respectively.
In terms of performance evaluation, the year-to-date returns for the S&P 500 index and S&P 500 EW stand at +20.65% and +10.73%, respectively. However, contrasting results emerged in 2022, with the S&P 500 index experiencing a YTD return of -18.11% and the S&P 500 EW showing -11.45%.
Presently, the S&P 500 index exhibits characteristics closely resembling those of a technology and growth index, potentially diluting its historical diversification attributes, as shown in 2022. This underscores the reality that indices can manifest divergent behavior based on their construction methodology. It is essential for investors to recognize that not all indices share the same characteristics and objectives.
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.