What happened last week
- Equities sold off in volatile trading to start the third quarter
- Continued economic resilience drove Treasury yields higher and weighed on equity valuations
- Labor market at a historically tight level – employment remains a powerful pillar of support for the U.S. economy
What we’re watching this week
- June CPI print Wednesday, which outside of a meaningful deviation from estimates, is unlikely to move the needle on a July rate hike
- Additional U.S. economic data to include updates to sentiment surveys and jobless claims
- Earnings season to kick off with mega banks, possibly shifting the existing top-down focus towards bottom-up
Horizon’s Investment Management Views
• Global stocks1 started the new quarter with a mild sell-off in a whippy but holiday-shortened week. Robust U.S. economic data forcing a recalibration higher in yields was the main event. Equity markets took their cue from rates, partially reversing some of the multiples expansion that propelled stocks higher in the second quarter. While we have been waving the short-term bearish flag for a few weeks now, we think that the downside bias in equities could persist as investors digest that the entire yield curve is above 4% and the 2-year yield is near pre-Silicon Valley Bank collapse highs.
• But let’s not get carried away – higher yields due to a better economy is no disaster for the economy and equity markets. The labor market, a key to the overall economic picture in our framework, remains incredibly strong. Last week’s employment figures likely sealed a hike by the Fed in their meeting later this month. Now the markets will focus on what comes next for monetary policy in the fall. Outside the U.S., however, the data paints a different picture; waning momentum in the economies of Europe and China is weighing on asset prices within those regions.
• U.S. Consumer Price Index (CPI) for June on Wednesday is the highlight of this week; we will focus on the core and core services gauges, which are arguably more reliable gauges of trend inflation than the popular headline figure. This release is unlikely to impact the upcoming Fed meeting: other data, including sentiment surveys and jobless claims figures, won’t either. However, they will add color to the overall economic mosaic. Second quarter earnings season, which officially kicks off with the big banks on Friday, could shift the markets’ focus away from the macro towards the micro.
1 Global stocks are represented by the MSCI ACWI Index , which is a stock index designed to track broad global equity-market performance. 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.