Stocks were higher last week (S&P 500 +1.6%), lead once again by the tech-heavy NASDAQ (+3.0%). YTD NASDAQ is +20.9%, S&P 500 +9.7% and DJIA +0.8%. The S&P 500 broke above 4200 for the first time since last August. The news backdrop featured seemingly positive progress on the debt ceiling negotiations. Best sectors were technology (+4.2%) and communication services (+3.1%); worst sectors were utilities (-4.4%) and real estate (-2.4%).
While we are reasonably certain that inflation has peaked for this cycle, we also believe that inflation is likely to remain stubbornly high for structural reasons. The most important implication of that for investors is the Fed will be unable to subsidize the cost of capital for Uncle Sam and Corporate America at large. Theoretically, this should be a boon to active managers who can feast on a greater dispersion between strong and weak companies. The “everyone gets a trophy” era of capital is over. In the short term, however, the increasingly narrow nature of market leadership is problematic for the active manager. Together, Apple and Microsoft are valued at almost double the combined market capitalizations of the entire Energy and Materials sectors. Apple itself is worth more than the Russell 2000 and J.P. Morgan is worth more than all publicly traded regional banks. The irony in this is that it renders the chief virtue of indexation and passive investing – risk diversification – moot. In truth, we do not know what the catalyst for a change in this dynamic will be. We do think it is important to remember, however, that in a recession, everything – from breakfast cereal to cloud computing - becomes cyclical. A company previously perceived to be unassailable can look vulnerable. The greatest differences in the performance between the market cap and equally weighted sectors can be found in Communications, Technology, and Consumer Discretionary.
The Market is dislocated now, and we are more concerned with what will happen in the next few months so we are staying conservative with our allocation at this time. Here is a good chart on where we are at as to the possibility of an upcoming recession if we are not already there now.
Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments. Data provided by Refinitiv.
Fed's Kashkari: "Close call" on June rate hike or pause - CNBC
Minneapolis Federal Reserve President Neel Kashkari on Monday said it was a "close call" on whether he would vote to raise interest rates at the central bank's meeting next month or take a pause and leave rates where they are.
Analysis: G7's nuanced pledge to 'de-risk' from China reflected concerns from Europe and Japan
TOKYO, May 22 (Reuters) - The leaders of the Group of Seven (G7) rich democracies this weekend pledged to "de-risk" without "decoupling" from China, an approach that reflected European and Japanese concerns about pushing Beijing too hard, officials and experts said. U.S.