What happened last week
- Increasingly positive investor sentiment boosted the S&P 500 closer to all-time high levels
- Fed delivers “hawkish pause,” signaling a hike in July; CPI print was as expected, still reflects concerning core inflation stabilization at around 5%
- China stocks, year-to-date laggards, boosted from policymakers signaling additional support for an ailing economy
What we’re watching this week
- Heavy week of Fed speeches, punctuated by Chair Powell’s testimony before Congress on Wednesday and Thursday
- Potential reversionary stock price action as investors rebalance after a divergent quarter for risk assets
- Ten central bank policy meetings, including the Bank of England, and data on Japanese inflation
Horizon’s Investment Management Views
- Ebullient investors lifted the S&P 500 (“S&P”) Index above 4400 for the first time since early April of last year. Last week marked the third consecutive weekly gain for the S&P, now less than 9% from its all-time highs. We strongly believe that resilience in the U.S. consumer could continue to support the economy and, by extension, financial assets. However, we think that the recent equity rally has gone a little too far, a little too fast. We would not be surprised to see some rotation from stocks into bonds and selling of the year’s winners in favor of the laggards, including domestic value, dividend stocks, and smaller-cap stocks, over the next few weeks.
- Our near-term, mildly bearish view is based on two observations. For starters, institutional and retail investors are exhibiting overextended behavior in both cash markets and derivatives; this is best encapsulated by crowded positioning, particularly within the AI theme (a long-term bullish development). Secondly, prices are running far ahead of the macro data. At last week’s Fed meeting, the committee held interest rates unchanged but the messaging was very hawkish, all but guarenteeing a rate hike in July. Meanwhile, the CPI release showed some progress on the headline release but plenty of reasons to worry about trend inflation that appears comfortable in the 5% range, much higher than the Fed’s target.
- Outside the U.S., investors cheered as China cut interest rates and pledged to do more to support their lackluster recovery. Chinese stocks, year-to-date laggards, outperformed strongly last week; this momentum is likely to continue if we see the rebalancing into the end of the quarter referenced above. Meanwhile, the ECB delivered another hawkish rate hike, showing how divergent and abnormal this economic cycle is.
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. 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.