Investors can’t wait for the Federal Reserve to start pivoting. This past week’s action—illuminated by a pink full moon—shows that they might have to wait a bit longer.
The
S&P 500 index
slid 0.1% in the shortened trading week, while the
Dow Jones Industrial Average
advanced 0.6% and the
Nasdaq Composite
fell 1.1%. But while equity markets were little changed, bond yields declined in the early part of the week as weakening economic data stoked fears of a recession among fixed-income traders.
The stock market is known to be a forward-looking mechanism, but with the S&P 500 trading at 18 times forward earnings, stock traders’ crystal balls appear to be looking through a possible recession to a time when the Fed will be cutting—rather than raising—interest rates.
That could be a dangerous mind-set, at least in the near term. Department of Labor data showed that the economy added 236,000 jobs in March, with gains seen across several industries. While the tally marked the slowest pace of job additions in more than two years, it still showed a healthy labor market, despite the Fed’s yearlong effort to slow the economy. On the heels of the report, the yield on the 10-year Treasury ticked up slightly, to 3.39%, on expectations that the Fed still has more work ahead of it.
Indeed, earlier this week—before Friday’s print—Loretta Mester, president of the Federal Reserve Bank of Cleveland, warned that rates have to go a “little bit higher.”
Recent market behavior suggests that traders are going against the age-old mantra and are fighting the Fed.
“The market doesn’t believe the Fed and is pointing in a completely different direction,” Philip Orlando, chief equity market strategist at Federated Hermes, tells Barron’s. While he has an optimistic longer-term view on markets, he advises “keeping defense on the field” until there is more clarity on the economy. For him, that means cash, bonds, and value stocks whose businesses will still see stable demand even if economic activity slips.
That caution makes sense as we head into what is expected to be a confusing—and volatile—earnings season. Already, there have been 81 negative preannouncements for first-quarter earnings among companies in the S&P 500, compared with 26 positive ones, exceeding the average ratio of negative to positive announcements of 2.5, according to Refinitiv data going back to 1997. Earnings are expected to fall 5.2%, year over year.
Banks will be the first sector to kick things off, with
JPMorgan Chase
(ticker: JPM) and others posting results on April 14. Given the recent blowups of Silicon Valley Bank and Signature Bank, expectations for the sector are low. Tech takes center stage next, and after a slew of layoff announcements over the past few months, talk will probably center around cost-cutting and lowered expectations, Orlando says.
That’s not a lot for investors to get excited about.
“This is going to be a lackluster earnings season, There’s no reason to stick your neck out,” Chris Senyek, chief investment strategist at Wolfe Research, tells Barron’s. Senyek has been skeptical of the market’s gains this year—the S&P 500 is up 6.9% and the Nasdaq, 14.6%—noting that breadth has been weak. Regional bank stocks are down 27% this year and haven’t gotten much of a bounce despite efforts by the Fed and the Treasury Department to restore faith in the system.
“If markets are going to march higher, then banks are going to have to show leadership,” Senyek says. He, too, suggests playing defense, opting for opportunities in healthcare, consumer staples, and utilities.
Others on Wall Street are being even more selective, favoring strong companies, rather than a sector-oriented approach. Dave Donabedian, chief investment officer at CIBC Private Wealth Management, has been focusing on companies that have been able to raise their dividends amid the recent market turmoil, finding it a better sign of strength than merely maintaining a high payout.
Corporations that have lifted their dividends over the past few weeks include
FedEx
(FDX),
Constellation Brands
(STZ), chip maker
Applied Materials
(AMAT), and TJMaxx parent
TJX
(TJX).
“Dividend growth is better than dividend yield as a measure of quality,” he says.
It isn’t all bad news on the horizon. Donabedian and Orlando both feel cautious now, but expect that the lagging effects of monetary policy—coupled with banks conserving capital and tightening their lending standards—will lead to a more positive risk-reward payoff in the back half of the year as the economy decelerates, leading the Fed to actually pivot.
At least that doesn’t entail fighting the Fed.
Write to Carleton English at carleton.english@dowjones.com
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