Today in the podcast, three big things you need to know:
• First, the stock market tends to experience turbulence heading into extended government shutdowns, but the S&P 500 has already done more than half the damage typically seen in those episodes and rebounds that follow tend to be powerful.
• Second, we view last week’s Fed meeting as a mixed bag for Growth stocks – negative short term but positive long term.
• Third, things that jump out from our high frequency indicators include continued erosion in investor bullishness, Trump pulling ahead of Biden in the polls, and strong outperformance by Utilities this month.
If you’d like to hear more, here’s another five minutes. While you’re waiting, a quick reminder that you can subscribe to this podcast on Apple and Spotify. Now, the details.
Takeaway #1: US Equities Tend To Be Turbulent Heading Into Extended Government Shutdowns, But Half the Typical Damage Has Already Been Done Since July
days or more, since the:
• Importantly, when we zoomed out, we also found that the US equity market has usually experienced a decent sized pullback heading into extended shutdowns which were, on an average and median basis, around 10%.
% from its late July:
• The other thing we’d encourage US equity investors to keep in mind as the politics around a potential shutdown evolve is that US equity markets have tended to rebound meaningfully after the pullbacks associated with extended shutdowns, with 12-month forward gains of 18-19% on an average and median basis.
Moving to Takeaway #2: We See Last Week’s Fed Meeting As A Mixed Bag For Growth Stocks
• We’ve talked a lot recently about how Large Cap Growth stocks have looked over owned, based on our interpretation of CFTC’s weekly data on asset manager positioning in Nasdaq 100 futures…
lued. More specifically, the R:
• We’ve also highlighted how Growth has been losing its dominance relative to Value on earnings revisions, which illustrates how an important tailwind for Growth stocks has diminished.
• Overall, we’ve thought that Growth stocks have been a plain old fashioned crowded trade in need of a tactical correction.
stly lowered expectations for:
EP, that the improved view on:
Wrapping up with Takeaway #3: Other things that jump out from our high frequency indicators
• First off, and perhaps most importantly ,individual investor sentiment has continued to retreat. Net bulls in the weekly AAII survey fell to 3.28% on the four-week average last week. While it’s not yet fair to say pessimism has gotten too extreme, this is an important development since this indicator had been flashing red in early August when net bullishness was 2 standard deviations above its long-term average. The unwind in sentiment that’s helped explain the weakness in the US equity market since late summer is in the process of playing out, but isn’t done yet.
ts will start focusing on the:
• And third, Utilities has been the top performing sector within the S&P 500 recently, but we’d stay on the sidelines.
- Flows to Utilities dedicated funds have also picked up.
- Valuations on the sector have improved but still don’t look cheap on our model.
- Earnings and sales revisions trends have also been a bit weaker than other sectors.
- We remain market weight and prefer Health Care as a defensive alternative.
That’s all for now. Thanks for listening. And be sure to reach out to your RBC representative with any questions.
