Today in the podcast, we run through some of the most interesting questions we got from US equity investors last week as 2023 got underway.
’s decline in:
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• Takeaway #1: We had some inbound on the new provisions in the Inflation Reduction Act…
o There hasn’t been a lot of discussion of these in recent company transcripts, and we don’t view these as a major issue for the equity market.
o But across the Russell:
o We’ll be keeping a close eye on this issue in the upcoming reporting period.
in:
o We ran a contribution to return analysis of the S&P 500, which looks at the impact in terms of both weight and performance, and found that the three major growth/TIMT centric sectors (Comm, CD, Tech) account for 95% of the S&P 500’s decline in 2022, but the Tech sector is still a positive contributor to the index on a 3 year basis.
o Interestingly, the top 10 stocks accounted for almost 2/3’s of the index’s decline last year.
• Next, Takeaway #3: We had another even more interesting inbound asking us about the ISM manufacturing cycle and how to play it through sectors.
o Within the S&P 500, Tech has been most positively correlated with ISM manufacturing trends, while Staples and Health Care performance has been most inversely correlated.
o What this means to us from a positioning perspective is that until market participants become convinced that a bottom in ISM manufacturing is close, defensives may continue to lead and Tech may continue to suffer. But we see that as short-lived. Once market participants do sense a bottom in ISM is close, we expect Tech to work again and defensives to lag, particularly for Staples where hedge fund positioning has been close to peak.
o It’s worth noting that takeaways are similar in Small Cap.
o Within the R:
• Wrapping up with Takeaway #4: we’ve gotten a number of questions on our Small Cap overweight call recently…
o Small Caps are off to a solid start to the year and are showing some modest leadership YTD.
o We think that will continue.
o Small Cap performance – relative to Large Cap – does tend to move in sync with the ISM manufacturing cycle.
ical troughs in the summer of:
o Small Caps have also been baking in the uptick in jobless claims that’s starting to materialize for quite some time.
o When we layer in the fact that Small Caps are still deeply undervalued vs. Large Caps, it appears to us that Small Caps simply baked in a recession well ahead of time.
That’s all for now. Thanks for listening. And be sure to reach out to your RBC representative with any questions.
