Today’s Bond Blunder? Parking Too Much Money Short Term

Weekly Market Guide

  • 09.13.19
  • Markets & Investing
  • Commentary

Review the latest portfolio strategy commentary from Mike Gibbs, managing director of Equity Portfolio & Technical Strategy.

Short-Term Summary

Following its break out last week, the S&P 500 has been able to hold above the 50 day moving average (DMA) and push to within 0.5% of new highs, as trade talks continued to de-escalate this week. China exempted some goods from tariffs (for the first time since trade talks began) and is reportedly close to agreeing to US agricultural purchases. Additionally, President Trump delayed the October 1 increase in tariffs (to 30% from 25% on $250B worth of imports) by two weeks to October 15, ahead of the Chinese delegation coming to DC for talks in early October.

The previous S&P 500 high of 3027 is now the next level of technical resistance. With short term indicators reaching overbought levels, we would not be surprised to see some consolidation before pushing higher. However, the short term technical improvement lowers the odds for a move to (or below) the 200 DMA (2817) for now. Nearby support on the downside is the 50 DMA at 2950. Over the intermediate-term, we are still guarded but with a positive bias. Our reasons for caution include a low probability of meaningful trade progress, a sluggish earnings trend, and weak seasonality. However our positive bias results from the dovish Fed (25 bp cut expected next Wednesday), belief that a worst-case will be avoided on trade tensions, and the services side of the economy remains strong.

The US 10 year yield backed up 32 bp over the past week, and is now up against its 50 day moving average of 1.80%. This back up obviously comes following a total collapse in interest rates since last November (when the US 10 year yield was 3.25%), which stretched the US 10 year yield to 40% below its 200 DMA. This was the most stretched below its 200 DMA that bond yields had reached in at least the past 5 years, so the slight mean-reversion should not come as too big of a surprise. Nonetheless, the tick up in interest rates (which was actually a 15% move) was the catalyst for sharp rotation between Growth vs. Value, as well as from year to date leaders to laggards, within the equity markets this week. For example, since Friday, Large Cap Growth is flat while Small Cap Value is up 6.3%. Additionally, leading year-to-date areas like Real Estate, Commercial Services, Restaurants, Software, and Health Care Equipment all underperformed; while laggards like the Banks, Energy, Transports, and Technology Hardware all outperformed.

Given Value’s underperformance for the vast majority of this bull market (and inexpensive relative P/E), it is leading many investors to wonder if the tide is turning for Value. Looking at similar relative strength spikes in the past, prior to 2017 spikes in Value outperformance led to at least short term relative strength. However, over the past couple of years, similar spikes have not led to sustainable relative gains for Value. Thus, the trend needs to be monitored in the near term for signs that it is sustainable, but for now it is far too soon to make a major portfolio shift.

Similarly, there was a noticeable shift into small cap from large cap this week. Small caps have outperformed by over 1% for the past three days in a row. This led to sharp relative strength gains for the small caps, although the intermediate term trend is still downward. The underperformance before this week was so extreme that the move could be nothing more than regression to the mean. The sharp momentum needs to prove sustainable, and we await price and relative strength to break out.

View full PDF


This material is being provided for informational purposes only. Expressions of opinion are provided as of the date above and subject to change. Any information should not be deemed a recommendation to buy, hold or sell any security. Certain information has been obtained from third-party sources we consider reliable, but we do not guarantee that such information is accurate or complete. This report is not a complete description of the securities, markets, or developments referred to in this material and does not include all available data necessary for making an investment decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct.

Links to third-party websites are being provided for informational purposes only. Raymond James is not affiliated with and does not endorse, authorize, or sponsor any of the listed websites or their respective sponsors. Raymond James is not responsible for the content of any third-party website or the collection or use of information regarding any websites users and/or members.

This report is provided to clients of Raymond James only for your personal, noncommercial use. Except as expressly authorized by Raymond James, you may not copy, reproduce, transmit, sell, display, distribute, publish, broadcast, circulate, modify, disseminate, or commercially exploit the information contained in this report, in printed, electronic, or any other form, in any manner, without the prior express written consent of Raymond James. You also agree not to use the information provided in this report for any unlawful purpose. This report and its contents are the property of Raymond James and are protected by applicable copyright, trade secret, or other intellectual property laws (of the United States and other countries). United States law, 17 U.S.C. Sec. 501 et seq, provides for civil and criminal penalties for copyright infringement. No copyright claimed in incorporated U.S. government works.

Index Definitions

The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market.

The Dow Jones Industrial Average (DJIA) is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange (NYSE) and the NASDAQ.

The NASDAQ Composite is a stock market index of the common stocks and similar securities listed on the NASDAQ stock market.

The MSCI World All Cap Index captures large, mid, small and micro-cap representation across 23 Developed Markets (DM) countries. With 11,732 constituents, the index is comprehensive, covering approximately 99% of the free float-adjusted market capitalization in each country.

MSCI EAFE (Europe, Australasia, and Far East) is a free float-adjusted market capitalization index that is designed to measure developed market equity performance, excluding the United States & Canada. The EAFE consists of the country indices of 21 developed nations.

MSCI Emerging Markets Index is designed to measure equity market performance in 23 emerging market countries. The index's three largest industries are materials, energy, and banks.

Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor's results will vary. Past performance does not guarantee future results. Future investment performance cannot be guaranteed, investment yields will fluctuate with market conditions.

International Disclosures

For clients in the United Kingdom:

For clients of Raymond James Financial International Limited (RJFI): This document and any investment to which this document relates is intended for the sole use of the persons to whom it is addressed, being persons who are Eligible Counterparties or Professional Clients as described in the FCA rules or persons described in Articles 19(5) (Investment professionals) or 49(2) (high net worth companies, unincorporated associations, etc.) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (as amended)or any other person to whom this promotion may lawfully be directed. It is not intended to be distributed or passed on, directly or indirectly, to any other class of persons and may not be relied upon by such persons and is, therefore, not  intended for private individuals or those who would be classified as Retail Clients.

For clients of Raymond James Investment Services, Ltd.: This document is for the use of professional investment advisers and managers and is not intended for use by clients.

For clients in France:

This document and any investment to which this document relates is intended for the sole use of the persons to whom it is addressed, being persons who are Eligible Counterparties or Professional Clients as described in "Code Monetaire et Financier" and Reglement General de l'Autorite des marches Financiers. It is not intended to be distributed or passed on, directly or indirectly, to any other class of persons and may not be relied upon by such persons and is, therefore, not intended for private individuals or those who would be classified as Retail Clients.

For clients of Raymond James Euro Equities: Raymond James Euro Equities is authorised and regulated by the Autorite de Controle Prudentiel et de Resolution and the Autorite des Marches Financiers.

For institutional clients in the European Economic rea (EE ) outside of the United Kingdom:

This document (and any attachments or exhibits hereto) is intended only for EEA institutional clients or others to whom it may lawfully be submitted.

For Canadian clients:

This document is not prepared subject to Canadian disclosure requirements, unless a Canadian has contributed to the content of the document. In the case where there is Canadian contribution, the document meets all applicable IIROC disclosure requirements.

Broker Dealer Disclosures

Securities are: NOT Deposits • NOT Insured by FDIC or any other government agency • NOT GUARANTEED by the bank • Subject to risk and may lose value

Raymond James & Associates, Inc., member New York Stock Exchange/SIPC. Raymond James Financial Services, Inc., member FINRA/SIPC. Raymond James® is a registered trademark of Raymond James Financial, Inc.