I did a deep dive into my sector (GICS L-1) work last week. After making several small changes last month, including an upgrade of Technology, my work has not suggested any changes. Interestingly, despite the rumblings in the market caused by the recent banking chaos and the market’s dramatically changing Fed expectations, the key 8-panel indicators and metrics in my sector dashboard remained quite stable.
With that being said, my recommendations are as follows: 1) Tilt Above — Heath Care, Staples, Technology, and Utilities; 2) Neutral C Comm Services, Energy, and Real Estate; and 3) Tilt Below — Industrials, Materials, CD, and Financials, which have been below benchmark since last summer.
Cyclicality remains the most at risk, and at some point, the bad news and the challenging macro backdrop will finally be OVERLY discounted, I believe, which will ultimately precede THE equity market bottom. Until then, I continue to advise caution, patience, and to remain fully alert for opportunities as 2023 is likely to remain quite volatile.
Macro / Bigger Picture Conclusions
- I am likely to put my uber bear scenario of 3200-3000 back on the table; until then I am targeting a retest of the October low.
- I have been in the Fed is higher for longer camp and the terminal rate reaches 5.50-6.5%. However, the recent bank chaos may change the immediate path here, but not a definitive shift to easing.
- NO EASING — Fed keeps the ultimate terminal rate unchanged for an extended period, …
- The economy looks headed towards a shallow recession.
- Corporate profit expectations remain too high and need to be lowered as there are strong headwinds.
- Cyclicals are holding up, but my work says this is where the risk is growing the most.
- Single stock opportunities are sparse, but they are expected to increase.
- Tilt Above — Heath Care, Staples, Technology, and Utilities
- Tilt Below — Industrials, Materials, CD, and Financials
Please see pdf for complete report.