Core Segments Point to Contracting Economy

Core segments of the market are pointing to a contracting economy. Last week’s economic report on Retail Sales and Industrial Production was weaker than consensus forecasts. Capacity utilization, the gauge for production capacity in the U.S., was lower than expected. In addition, regional markets for Philly and NY Empire State are all reflecting worse-than-expected declines. The one bright spot is Housing Starts and the Mortgage Market Index, showing improving fundamentals with moderating mortgage rates.

After last week’s core banks earnings, this week will spotlight prominent earnings across a broad spectrum of industrials, including core Dow companies highlighting the strength of the overall economy alongside U.S. GDP ranging from AT&T, Boeing, Chevron, J&J, Microsoft, Verizon, and Visa. Further, Thursday’s report on GDP, Inventories, and Durable Goods will shed light on the heartland of manufacturing.

Is Style Still in Fashion?

From 2007 to 2021, ever since the 2008 Financial Crisis, Growth stocks have trounced Value stocks 11 out of the last 15 calendar years – AKA batting average of 73%. Post-Covid, Value stocks not since the Dotcom bubble hammered Growth stocks in 2022 (-29.41%), outperforming by 2,418 bps. Over the next few series of weekly commentaries, we will dive into understanding the reasoning, fundamental changes occurring to the S&P 500 index, and whether this is a blip in the Growth saga or are Value stocks becoming a trend leader. But let’s not forget, since the 2008 Financial Crisis, growth stocks have benefited from an environment of Fed policies of cheap money (Quantitative Easing, Pandemic Stimulus), federal bailouts, low inflation, low-interest rates, and last but not least, low-cost manufacturing in China all coming to a sudden halt in 2022. At Sowell, we fundamentally believe in style rotation between growth-and-value stocks in part due to its fundamental correlation to changing market environments and history repeating. But that fundamental investment philosophy also hinges on the make-up of an index, the dominant sectors leading the respective styles, and its correlation to the economy, interest rates, inflation, and market-capitalization of stocks. It is premature to state Value stocks will be the next trend leader after one data point, but all the right stars are in place.