“
”Markets in Focus
Timely analysis of market moves and sectors of opportunity
After April’s rapid shifts in market sentiment, May should give investors a chance to consider strong corporate earnings and a solid economic backdrop.
Commentary this week from a full roster of Fed officials could have an important impact on the course of interest rate expectations.
This is a time to think broadly about the impact of artificial intelligence and to consider the generally improving picture for global stocks, but to tread carefully around retail stocks where selectivity is doubly important.
April felt like a marathon as a confused market narrative toggled between optimism and pessimism in response to virtually every economic data point and earnings release.
May should be different, but no less interesting or important, said Matt Orton, CFA, Chief Market Strategist at Raymond James Investment Management.
“Thankfully,” he said, “the barrage of economic data, most first-quarter earnings, and the May Fed meeting are behind us. This should give investors a chance to recover and properly consider what I would argue are strong corporate results amid a solid economic backdrop.”
U.S. Federal Reserve (Fed) Chair Jerome Powell’s dovish press conference confirmed the Fed’s easing bias and essentially took the prospect of interest rate hikes off the table. Coupled with a weaker than expected payrolls report that confirmed a labor market slowly coming back into balance, longer-term U.S. Treasury yields and the U.S. dollar fell sharply while risk assets rallied. Orton said he remains optimistic on risk assets and suspects that equities can grind higher in the more catalyst-light few weeks until the next Federal Open Market Committee (FOMC) meeting in June.
“This is an environment where I feel more comfortable deploying capital on market weakness, particularly into high quality, more cyclical parts of the market where we’re seeing a re-acceleration in earnings growth due to strong secular growth mega-trends,” Orton said. “This is not the time to ‘sell in May and go away.’ Rather, April showers seem to have brought some May flowers.”
The relief provided to equities from falling longer-dated yields was welcome, but Orton said there’s still more work to do before we can have confidence that the recent uptrend in yields has reversed. Perhaps this week’s public comments from Fed officials will provide the catalyst. If 10-year yields can stay under 4.5% and push back toward 4.4% where the recent acceleration higher really took off, then Orton believes this could set up a rally to new all-time highs for the S&P 500 Index. The front end of the yield curve saw some big moves after the FOMC meeting, but the Fed’s lack of urgency to get started with interest rate cuts, coupled with a high hurdle to any meaningful reinjection of right-tail risk, means volatility likely falls. Overall, Orton said it’s encouraging to see some of the drivers of increased macroeconomic volatility fall after last week’s data, providing tailwinds for risk assets to push higher.
The labor market is coming into better balance
Month over month (m/m) change in nonfarm payrolls
Source: Bloomberg, as of 5/3/2024
Ultimately, Orton said investors should consider focusing on corporate fundamentals, which continue to be a source of optimism for investors. All of the macroeconomic data points are important for setting the operating environment, but Orton has said for a while that earnings will be the ultimate arbiter of the bull market. And earnings have been strong. More than 80% of the S&P 500 Index has reported results, and earnings growth has come in nicely ahead of expectations across sectors and industries.1 Of companies that have reported so far, 81% beat earnings per share (EPS) expectations. Moreover, as Orton anticipated at the start of the year, analysts are raising their 2024 EPS expectations for sectors like energy, materials, industrials, and financials as global growth continues to surprise to the upside. Positive results and guidance have been rewarded while misses have been penalized, setting a strong backdrop for stock selection. Based on the results from the consumer staples companies that have reported so far, Orton said he expects dispersion to remain elevated across the retailers that will report earnings in coming weeks, and he expects management conference calls to provide useful data on changes in consumption habits.
Powell confirmed the Fed’s easing bias and essentially took rate hikes off the table. Orton said this, coupled with payrolls data that confirmed a labor market that is slowly coming back into balance, makes it harder to see another rate acceleration like the one in early April that was problematic for risk assets. EPS growth is broadening, investor sentiment has returned to neutral, and breadth is robust with 70% of global stocks, as represented by the MSCI All Country World (ACWI) ex-USA Index above their 200-day moving average, as of May 3, 2024. Orton said he would push back against some of the bearish narratives that point to structural shifts in inflation, heightened risks due to investor concentration, and a lack of historical precedence of holding rates steady at the end of a hiking cycle for so long.
“We knew the last mile of disinflation was going to be the most difficult, and recent macro data provides hope that more progress can be made,” he said. “Let’s also not forget that sticky inflation tends to correspond to stronger-for-longer pricing power for corporations, and better corporate profitability tends to lead to higher capital expenditure. Just four mega-cap companies have plans to invest nearly $200 billion in the next year alone.”
The mega caps also have largely delivered on extremely elevated expectations, providing tailwinds for the broader market. While Orton remains optimistic, he believes selectivity remains critical, and he continues to favor considering moves that would add cyclical exposure to complement technology and to build better balance in portfolios.
Against this backdrop, Orton said his investment playbook would include giving close consideration to several key areas:
Artificial intelligence 2.0. Orton has advocated thinking about leaning into cyclicality, and after this earnings season he said he remains confident in that call, especially for companies with exposure to key secular growth tailwinds. And right now he said that means artificial intelligence (AI). In fact, he said one of the main takeaways from earnings is the dominance that AI will play over the next few years in driving growth. The cloud titans are spending massive sums to build out AI data centers. These vast capital expenditures play directly to the thriving makers of chips, servers and networking equipment. But Orton said he believes it’s also smart to focus on plays in the electrical equipment companies, materials, and industrial firms involved in this buildout.
“This is AI 2.0, and we’re already seeing incredibly strong growth in companies associated with the increased capital expenditure that we’ll see over the next year plus,” he said. In the materials space, he sees copper prices near $10,000 a ton highlighting the immense need for the metal across the AI buildout as well as the push for electrification while industrials broadly provide what he sees as a quality play on increased capital spending. “I believe there are still many good opportunities to consider getting into high-quality companies with accelerating earnings growth,” he said.
Be careful around retail. Consumption might be on solid footing in the aggregate data, but Orton noted that companies are starting to see spending habits shift as inflation pressures linger. One of the largest fast-food chains saw continued weakness, and a leading chain of coffee houses had “terrible results,” Orton said, partially due to “occasional customers” seeking more value and visiting less frequently. Meanwhile, other staples companies reported softness in discretionary spending. It’s clear that higher food and shelter inflation has weighed on discretionary spending across general merchandise categories, he said, which is why he has a generally unfavorable outlook on consumer staples outside of a few key players that are more exposed to the value trade. Once again, he said, selectivity will be very important going forward, especially in the consumer discretionary space as 50% of the companies in that sector have yet to report earnings.
International selectivity. International equities as represented by the MCSI ACWI (All Country World Index) ex USA Index are making a comeback relative to U.S. stocks as represented by the S&P 500 Index, and there has been strong performance across a broad range of sectors as earnings surprise to the upside globally. China has posted some decent economic data for the first time in a while, helping emerging markets to outperform, while European banks have been a standout trade over the past two months as growth surprises to the upside. Based on recent results, Orton said he believes that this momentum can continue (the EURO STOXX® Banks Index is up 22.8% year to date) and that any additional rate hikes in Japan will benefit Japanese banks that also have performed well. The recent pullback in Japan still looks buyable to Orton even after the move higher last week. Across the MSCI EAFE® (Net) Index, a number of sectors are seeing an increasing percentage of stocks make new highs versus lows — a positive signal in the durability of the rally — with strength in financials, materials, utilities, industrials, and healthcare. The divergence between the Fed and other central banks remains in focus and has set up an environment that Orton says should support growth internationally. Energy companies in Europe also have an opportunity to surprise to the upside as they report earnings, and Orton said he would consider adding exposure if EPS growth inflects.
With holidays in Japan and the U.K., plus a lighter data calendar, the focus shifts to a full roster of Fed speakers:
Monday: Federal Reserve Bank of Richmond President Tom Barkin and Federal Reserve Bank of New York President John Williams.
Tuesday: Federal Reserve Bank of Minneapolis President Neel Kashkari.
Wednesday: Fed Board of Governors Vice Chair Philip Jefferson, Federal Reserve Bank of Boston President Susan Collins, and Fed Governor Lisa Cook.
Thursday: Federal Reserve Bank of San Francisco Mary Daly.
Friday: Fed Governor Michelle Bowman, Federal Reserve Bank of Dallas President Lorie Logan, Federal Reserve Bank of Chicago President Austan Goolsbee, and Fed Board of Governors Vice Chair for Supervision Michael Barr.
On the data front, Friday’s University of Michigan Index of Consumer Sentiment will be the highlight. On the other side of the Atlantic, watch for Germany’s March industrial production data on Wednesday, the Bank of England’s interest rate decision on Thursday, and the U.K.’s first-quarter gross domestic product (GDP) report on Friday. China reports inflation data for April on Friday night while Chinese President Xi Jinping visits Europe this week, his first trip there in five years.
1 Unless otherwise indicated, all data cited is sourced from Bloomberg as of May 3, 2024.
Risk Information:
Investing involves risk, including risk of loss.
Diversification does not ensure a profit or guarantee against loss.
Disclosures:
Index or benchmark performance presented in this document does not reflect the deduction of advisory fees, transaction charges, or other expenses, which would reduce performance. Indexes are unmanaged. It is not possible to invest directly in an index. Any investor who attempts to mimic the performance of an index would incur fees and expenses that would reduce return.
This document is a general communication being provided for informational purposes only. It is educational in nature and not designed to be taken as advice or a recommendation for any specific investment product, strategy, plan feature, or other purpose in any jurisdiction, nor is it a commitment from Raymond James Investment Management or any of its affiliates to participate in any of the transactions mentioned herein. Any examples used are generic, hypothetical, and for illustration purposes only. This material does not contain sufficient information to support an investment decision, and you should not rely on it in evaluating the merits of investing in any securities or products. In addition, users should make an independent assessment of the legal, regulatory, tax, credit, and accounting implications and make their own determinations together with their own professionals in those fields. Any forecasts, figures, opinions, or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions, and are subject to change without prior notice. All information presented herein is considered to be accurate at the time of production, but no warranty of accuracy is given and no liability in respect of any error or omission is accepted. It should be noted that investment involves risks, the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements, and investors may not get back the full amount invested. Both past performance and yields are not reliable indicators of current and future results.
The views and opinions expressed are not necessarily those of the broker/dealer or any affiliates. Nothing discussed or suggested should be construed as permission to supersede or circumvent any broker/dealer policies, procedures, rules, and guidelines.
Sector investments are companies engaged in business related to a specific sector. They are subject to fierce competition and their products and services may be subject to rapid obsolescence. There are additional risks associated with investing in an individual sector, including limited diversification.
Investing in small cap stocks generally involves greater risks, and therefore, may not be appropriate for every investor. The prices of small company stocks may be subject to more volatility than those of large company stocks.
International investing presents specific risks, such as currency fluctuations, differences in financial accounting standards, and potential political and economic instability. These risks are further accentuated in emerging market countries where risks can also include possible economic dependency on revenues from particular commodities or on international aid or development assistance, currency transfer restrictions, and liquidity risks related to lower trading volumes.
Definitions
Breadth describes the relationship between the median and the mean of a market index. When a few data outliers result in a mean that is substantially larger (or smaller) than the median of the full data set, then the performance of the entire index is being driven by a “narrow” selection of companies. An index supported by “broad” market movements is one where the median is closer to the mean.
Concentration is a term used to describe the extent to which investments in a portfolio, group of portfolios, industry, sector, index, or particular geography or clustered in groups that share specific factors or other characteristics.
Cyclical stocks have prices influenced by macroeconomic changes in the economy and are known for following the economy as it cycles through expansion, peak, recession, and recovery.
Disinflation refers to the temporary slowing of the pace of price inflation and describes what happens when the inflation rate is marginally lower over the short term. Disinflation refers only to the rate of change in the rate of inflation. In this, it is distinct from inflation and deflation, which describe the direction of prices.
Dispersion refers to the range of outcomes in different areas of a financial market or to the potential outcomes of investments based on historical volatility or returns.
Dovish, hawkish, and centrist are terms used to describe the monetary policy preferences or expectations of central bankers or market participants. Doves tend to support maintaining lower interest rates, often in support of stimulating job growth and the economy more generally. Hawks prioritize controlling inflation and may favor raising interest rates to reduce it or keep it in check. Centrists tend to occupy the middle of the continuum between tight (hawkish) and loose (dovish) monetary policy.
Earnings per share (EPS) is calculated as a company’s profit divided by the outstanding shares of its common stock. The resulting number serves as an indicator of a company’s profitability.
The Federal Open Market Committee (FOMC) consists of 12 members: the seven members of the Board of Governors of the Federal Reserve System; the president of the Federal Reserve Bank of New York; and four of the remaining 11 Reserve Bank presidents, who serve one-year terms on a rotating basis. The FOMC holds eight regularly scheduled meetings per year at which it reviews economic and financial conditions, determines the appropriate stance of monetary policy, and assesses the risks to its long-run goals of price stability and sustainable economic growth.
Guidance refers statements from the managers of publicly traded companies that indicate whether they expect to realize near-term profits or losses and why.
Market capitalization, or market cap, refers to the total dollar market value of a company’s outstanding shares of stock.
The moving average (MA) is a technical analysis tool that smooths out stock price data by creating a constantly updated average price, often over a specified period of time, such as 15, 30, 50, 100, or 200 days.
The payroll report, officially known as the Employment Situation Summary, is a monthly U.S. Bureau of Labor Statistics (BLS) report tracking nonfarm payroll employment and the national unemployment rate, with data on changes in average hourly earnings, and job trends in public and private sectors of employment. The report is based on surveys of households and employers.
Pricing power, also known as market power, refers to a company’s ability to manipulate the price of a product or service in the marketplace by controlling the level of supply, demand, or both.
Relative performance is a measure of a security’s performance compared to a specified benchmark such as a stock index, sector or other group of similar securities.
Risk assets refer to investments such as equities, commodities, high-yield bonds, real estate, and currencies, where the value may rise or fall due to fluctuating interest rates, changes in credit quality, default risks, supply and demand disruption, and other factors.
Secular stocks are characterized by having consistent earnings over the long term constant regardless of other trends in the market. Secular companies often have a primary business related to consumer staples most households consistently use whether the larger economy is good or bad.
“Sell in May and go away” is a saying in finance based on a historic pattern of seasonal divergence of lower relative performance for stocks from May through October.
Sticky is a term used to describe measured data that is slow to change, in contrast to faster-changing or more variable data.
Tail risk describes a form of portfolio risk associated with the increased possibility that an investment will move more than three standard deviations from the mean in a normal distribution. Left tail risks refer to unusually large losses. Right tail risks refer to unusually large gains.
Tailwind is a term used to describe events or market forces that exert a positive influence on an investment’s performance. The opposite of a tailwind is a headwind, which contributes to an investment’s underperformance.
The University of Michigan Index of Consumer Sentiment is based on monthly telephone surveys in which at least 500 consumers in the continental United States are asked 50 questions about what they think now and what their expectations are for their personal finances, business conditions, and buying conditions. Their responses are used to calculate monthly measures of consumer sentiment that can be compared to a base value of 100 set in 1966.
A yield curve is a line that plots yields (interest rates) of bonds having equal credit quality but differing maturity dates. The slope of the yield curve gives an idea of future interest rate changes and economic activity.
Indices
The EURO STOXX® Banks Index tracks stocks in European super sector of companies that derive their primary source of revenue from banking.
The MSCI ACWI (All Country World Index) ex USA Index captures large- and mid-cap representation across 22 of 23 developed markets countries (excluding the United States) and 24 emerging markets countries. With 2,228 constituents, the index covers approximately 85% of the global equity opportunity set outside the United States. Developed markets countries include Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Hong Kong, Ireland, Israel, Italy, Japan, Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland and the U.K. Emerging markets countries include Brazil, Chile, China, Colombia, Czech Republic, Egypt, Greece, Hungary, India, Indonesia, Korea, Kuwait, Malaysia, Mexico, Peru, Philippines, Poland, Qatar, Saudi Arabia, South Africa, Taiwan, Thailand, Turkey and United Arab Emirates.
The MSCI EAFE® (Net) Index measures the performance of performance of large and mid-cap securities across 21 developed markets, including countries in Europe, Australasia and the Far East, excluding the United States and Canada.
The S&P 500 Index measures change in stock market conditions based on the average performance of 500 widely held common stocks. It is a market-weighted index calculated on a total return basis with dividend reinvested. The S&P 500 represents approximately 80% of the investable U.S. equity market.
M-542192 Exp. 9/6/2024
The Fed kept its policy rate unchanged at its latest Federal Open Market Committee meeting, while showcasing its easing bias.
With the possibility of a potential hike effectively off the table, investors should expect rates to remain high — not higher — for longer while the Fed closely monitors incoming inflation and jobs data.
As earnings and key macro data releases slow, equities can grind higher with a few “catalyst-light” months ahead.
Following three stronger than expected Consumer Price Index (CPI) prints and elevated Employment Cost Index (ECI) data on the last day of April, markets went into the Federal Open Market Committee (FOMC) meeting worried about a hawkish pivot.
That’s not what happened.
“The May FOMC meeting leaned dovish, and we should breathe a sigh of relief that rates will simply remain high, not higher, for a while longer,” said Matt Orton, CFA, Chief Market Strategist at Raymond James Investment Management.
The FOMC kept rates unchanged for a sixth straight meeting and, despite persistently high inflation readings to start the year, Fed Chair Jerome Powell’s comments confirmed an easing bias and essentially closed the door on a rate hike. While the Fed noted the lack of further progress on inflation, it maintained references to a future reduction of interest rates in its statement. This message was also emphasized during the press conference with mention that reducing policy restraint too late or too little could unduly weaken the economy and jobs market, and suggested that the bias to ease rates remains.
The Fed also announced that tapered balance sheet runoff will begin on June 1, with a slightly larger cut than expected to the runoff caps in the United States Treasury System Open Market Account (SOMA). Those caps will go from $60 billion/month to $25 billion/month.
Orton stressed that with hikes essentially off the table for now, it reaffirms his view that rate cuts should be viewed as when they will happen, not if. When Powell was asked whether the committee would be satisfied with inflation remaining around a 3% pace for the rest of the year, he again guided to the notion that the committee believes that the existing level of rates will be enough to get inflation down. “Of course we’re not satisfied with 3% inflation,” Powell said. “We think our policy stance is appropriate to achieve (2% inflation). The policy focus has really been on holding the current level of restriction. That’s where the discussion was focused.”
Fed holds policy rate steady for 6th consecutive meeting
U.S. 10-year Treasury yield since July 2023
Source: Bloomberg, as of 5/1/2024
Orton believes the bar to cut has gotten higher since the March meeting, and he doesn’t think even a significant surprise would put June or July back on the table for rate cuts. “December is my base case for one cut in 2024,” Orton said.
Economic alarmists also received a dose of humor and realism when Powell answered a question about the potential for stagflation by responding, “I don’t see the ‘stag’ or the ‘flation.’”
The market reaction through the early part of FOMC post-meeting communications was dovish, with implied rates and the U.S. dollar pulling back.1 Equities jumped while U. S. Treasuries gained on the statement’s lack of a more hawkish twist to forward guidance, as well as a surprisingly large cutback in quantitative tightening.
Orton didn’t like the sharp reversal in equities to close May 1 with the S&P 500 Index reversing a +1.4% move with no clear catalyst, but he said it was encouraging to see green the following morning.
“We still have the payrolls report the morning of May 3 but, hopefully, the context of the FOMC meeting will allow markets to take a strong print in stride. We should want a strong economy to support earnings growth,” Orton said. He suspects that once we get past this week, with earnings and key macro data releases slowing a bit, that equities can grind higher with a few “catalyst-light” months, and shared that election years also typically see a summer lull in volatility.
“At this point, I feel more comfortable deploying capital on market weakness, particularly to cyclical parts of the market and taking advantage of generationally attractive yields,” Orton said. He also wants to ensure it’s top of mind that sticky inflation tends to correspond to stronger-for-longer pricing power for corporations, and that better corporate profitability tends to lead to higher capital expenditures — noting that between just four of the largest mega-caps there’s nearly $200 billion being invested in the next year alone. And, he cautioned not to forget about structural tailwinds for capital expenditures such as supply chain reshoring, providing the electric needs for data center buildouts, and more.
Small-cap stocks outperformed May 1 after posting their worst monthly performance since September, with the Russell 2000® Index down 7.04%. If investors take the rate hike scenario off the table, small-cap stocks could benefit, and Orton said the entry point is interesting if you believe we’re nearing the trough in earnings. The Russell 2000® Index has lagged the S&P 500 Index by nearly 8% year to date and sits nearly 20% below its 2021 all-time high. Quality has worked well down the market capitalization spectrum and, so far, Orton said it’s been a strong year for active small-cap stock managers across styles.
“Again, this highlights the importance of being active down market capitalization,” he said, “and I believe investors who don’t have exposure to — or are underweight — small-cap stocks should consider adding some to their investment mix following this FOMC meeting.”
1 Unless otherwise indicated, all data cited is sourced from Bloomberg as of May 1, 2024.
Risk Information:
Investing involves risk, including risk of loss.
Diversification does not ensure a profit or guarantee against loss.
Disclosures:
Index or benchmark performance presented in this document does not reflect the deduction of advisory fees, transaction charges, or other expenses, which would reduce performance. Indexes are unmanaged. It is not possible to invest directly in an index. Any investor who attempts to mimic the performance of an index would incur fees and expenses that would reduce return.
This document is a general communication being provided for informational purposes only. It is educational in nature and not designed to be taken as advice or a recommendation for any specific investment product, strategy, plan feature, or other purpose in any jurisdiction, nor is it a commitment from Raymond James Investment Management or any of its affiliates to participate in any of the transactions mentioned herein. Any examples used are generic, hypothetical, and for illustration purposes only. This material does not contain sufficient information to support an investment decision, and you should not rely on it in evaluating the merits of investing in any securities or products. In addition, users should make an independent assessment of the legal, regulatory, tax, credit, and accounting implications and make their own determinations together with their own professionals in those fields. Any forecasts, figures, opinions, or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions, and are subject to change without prior notice. All information presented herein is considered to be accurate at the time of production, but no warranty of accuracy is given and no liability in respect of any error or omission is accepted. It should be noted that investment involves risks, the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements, and investors may not get back the full amount invested. Both past performance and yields are not reliable indicators of current and future results.
The views and opinions expressed are not necessarily those of the broker/dealer or any affiliates. Nothing discussed or suggested should be construed as permission to supersede or circumvent any broker/dealer policies, procedures, rules, and guidelines.
Sector investments are companies engaged in business related to a specific sector. They are subject to fierce competition and their products and services may be subject to rapid obsolescence. There are additional risks associated with investing in an individual sector, including limited diversification.
Investing in small cap stocks generally involves greater risks, and therefore, may not be appropriate for every investor. The prices of small company stocks may be subject to more volatility than those of large company stocks.
International investing presents specific risks, such as currency fluctuations, differences in financial accounting standards, and potential political and economic instability. These risks are further accentuated in emerging market countries where risks can also include possible economic dependency on revenues from particular commodities or on international aid or development assistance, currency transfer restrictions, and liquidity risks related to lower trading volumes.
Definitions
Capital expenditures, or capex, are monies used by a company to buy, improve, or maintain physical assets such as real estate, facilities, technology, or equipment, and may include new projects or investments.
The U.S. Consumer Price Index (CPI) measures the change in prices paid by consumers for goods and services. The U.S. Bureau of Labor Statistics bases the index on prices of food, clothing, shelter, fuels, transportation, doctors’ and dentists’ services, drugs, and other goods and services that people buy for day-to-day living. Prices are collected each month in 75 urban areas across the country from about 6,000 households and 22,000 retailers.
Cyclical stocks have prices influenced by macroeconomic changes in the economy and are known for following the economy as it cycles through expansion, peak, recession, and recovery.
The federal funds rate, known as the fed funds rate, is the target interest rate set by the Federal Open Market Committee of the U.S. Federal Reserve. The target is the Fed’s suggested rate for commercial banks to borrow and lend their excess reserves to each other overnight.
The Employment Cost Index measures the change in the cost of labor, free from the influence of employment shifts among occupations and industries, for three- and 12-month periods. The U.S. Bureau of Labor Statistics collects data for the index from thousands of private and government employers nationwide.
The Federal Open Market Committee (FOMC) consists of 12 members: the seven members of the Board of Governors of the Federal Reserve System; the president of the Federal Reserve Bank of New York; and four of the remaining 11 Reserve Bank presidents, who serve one-year terms on a rotating basis. The FOMC holds eight regularly scheduled meetings per year at which it reviews economic and financial conditions, determines the appropriate stance of monetary policy, and assesses the risks to its long-run goals of price stability and sustainable economic growth.
The Federal Reserve’s balance sheet is a statement of the assets and liabilities of the U.S. central bank. It shows what the Fed owns, mainly U.S. Treasury securities and mortgage-backed securities, and what it owes, mainly U.S. currency and reserve deposits of other financial institutions. The Fed’s balance sheet reflects its monetary policy and its influence on the money supply and interest rates in the economy.
Guidance refers statements from the managers of publicly traded companies that indicate whether they expect to realize near-term profits or losses and why.
Hawkish, dovish, and centrist are terms used to describe the monetary policy preferences of central bankers and others. Hawks prioritize controlling inflation and may favor raising interest rates to reduce it or keep it in check. Doves tend to support maintaining lower interest rates, often in support of stimulating job growth and the economy more generally. Centrists tend to occupy the middle of the continuum between tight (hawkish) and loose (dovish) monetary policy.
Market capitalization, or market cap, refers to the total dollar market value of a company’s outstanding shares of stock.
A market-implied policy rate is an estimate of the policy rate that reflects the difference between the current policy rate and an estimated forward or futures rate.
Mega-cap stocks are the largest publicly traded companies as measured by market capitalization. Generally, this refers to companies with market capitalizations over $200 billion.
The payroll report, officially known as the Employment Situation Summary, is a monthly U.S. Bureau of Labor Statistics (BLS) report tracking nonfarm payroll employment and the national unemployment rate, with data on changes in average hourly earnings, and job trends in public and private sectors of employment. The report is based on surveys of households and employers.
A policy rate is an interest rate set by a central bank or other monetary authority to influence the evolution of an economy’s monetary variables such as consumer prices, exchange rates, or credit expansion.
Quantitative tightening, also known as quantitative tapering, refers to the attempt by central bankers to reverse the effects of quantitative easing (QE), which is a form of unconventional monetary policy in which a central bank purchases longer-term securities from the open market in order to increase the money supply and encourage lending and investment. In quantitative easing, buying securities adds new money to the economy, and also serves to lower interest rates by bidding up fixed-income securities. It also expands the central bank’s balance sheet. In quantitative tightening, reducing those purchases is a policy primarily aimed at interest rates and at influencing investor perceptions of the future direction of interest rates.
Stagflation, first described after the oil shocks of the 1970s, is an economic condition that includes slow economic growth (or even declines in gross domestic product), relatively high unemployment, and inflation.
Tailwind is a term used to describe events or market forces that exert a positive influence on an investment’s performance. The opposite of a tailwind is a headwind, which contributes to an investment’s underperformance.
The System Open Market Account (SOMA) is managed by the Federal Reserve Bank. It contains domestic securities and foreign currency portfolios of the Federal Reserve, which are acquired through operations in the open market and serve as a management tool, liquidity resource for emergency events, and as collateral for liabilities on the Federal Reserve’s balance sheet.
Indices
The S&P 500 Index measures change in stock market conditions based on the average performance of 500 widely held common stocks. It is a market-weighted index calculated on a total return basis with dividend reinvested. The S&P 500 represents approximately 80% of the investable U.S. equity market.
The Russell 2000® Index measures the performance of the 2,000 smallest companies in the Russell 3000® Index, which represents approximately 7% of the total market capitalization of the Russell 3000® Index.
London Stock Exchange Group plc and its group undertakings (collectively, the “LSE Group”). ©LSE Group 2024. FTSE Russell is a trading name of certain of the LSE Group companies. Russell® is a trademark of the relevant LSE Group companies and is used by any other LSE Group company under license. All rights in the FTSE Russell indexes or data vest in the relevant LSE Group company which owns the index or the data. Neither LSE Group nor its licensors accept any liability for any errors or omissions in the indexes or data and no party may rely on any indexes or data contained in this communication. No further distribution of data from the LSE Group is permitted without the relevant LSE Group company’s express written consent. The LSE Group does not promote, sponsor, or endorse the content of this communication.
M-541006 Exp. 9/5/2024
