What happened last week
- Strong end to a strong quarter with the S&P 500 closing at its highest level since last April
- Global yields rose amidst resilient economic data and hawkish central bank messaging
- U.S. banks passed the Fed’s annual stress test; reactions in bank stock were muted as questions over profitability remain
What we’re watching this week
- Friday’s non-farm payrolls release is the week’s economic highlight; job openings and weekly claims data will add context to the state of the labor market
- Price action and the potential for large moves in relatively illiquid trading
- OPEC+ meeting and events in Russia will add to the geopolitical landscape but are unlikely to have immediate market implications
Horizon’s Investment Management Views
- Most major stock indices continued to march higher last week, capping off a strong quarter in a historically strong start to the year (S&P 500 up ~17% and NASDAQ 100 up ~40% YTD). Last week’s gains were led by cyclicals, in stark contrast with the year-to-date domination of mega caps. This cyclical outperformance was primarily fueled by stronger-than-expected economic data (consumer confidence, GDP revisions, and income). Our view is that a pause in the outperformance of tech and mega caps is encouraging and healthy; we will continue to look for opportunities to increase exposure to the AI theme, which we believe to be in the very early stages.
- However, we can not overlook the impact of better economic data on the Fed and the bond market. The 2-year yield, up almost 90 bps in the second quarter, is approaching 5%, and Friday closed one strong jobs report away from the pre-SVB highs. Higher yields have yet to disrupt the strength in equities, but our sense is that this relationship is near an inflection point; from here, interest rates are likely to be a headwind for valuations, given the multiple expansion we have already seen this year. Unless trend core inflation falls quickly to around the Fed’s 2% target, we expect the upside in equities to be capped as market volatility comes off an unusually low floor in coming months.
- The upcoming holiday-shortened trading week is likely to be light, despite important labor market data releases – watch out for large moves on low volume and counterintuitive price action. Overseas, the main focus is on the OPEC+ meeting in Vienna; the market has already moved on from the events in Russia that gripped the headlines just over a week ago.
Disclosure
The commentary in this report is not a complete analysis of every material fact in respect to any company, industry or security. The opinions expressed here are not investment recommendations, but rather opinions that reflect the judgment of Horizon as of the date of the report and are subject to change without notice. Forward looking statements cannot be guaranteed. We do not intend and will not endeavor to provide notice if and when our opinions or actions change. This document does not constitute an offer to sell or a solicitation of an offer to buy any security or product and may not be relied upon in connection with the purchase or sale of any security or device. Before investing, an investor should consider his or her investment goals and risk comfort levels and consult with his or her investment adviser and tax professional. References to indices, or other measures of relative market performance over a specified period of time are provided for informational purposes only. The S&P 500 Index represents the largest US companies. The NASDAQ-100 is an index which includes 100 of the world’s largest non-financial companies listed on the NASDAQ stock exchange, based on their market capitalization. Reference to an index does not imply that any account will achieve returns, volatility or other results similar to that index. The composition of an index may not reflect the manner in which a portfolio is constructed in relation to expected or achieved returns, portfolio guidelines, restrictions, sectors, correlations, concentrations, volatility or tracking error targets, all of which are subject to change. It is not possible to invest directly in an index. This commentary is based on public information that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied on as such. Horizon Investments and the Horizon H are registered trademarks of Horizon Investments, LLC.
