Weekly Wisdom – May 11, 2023

By Hightower Great Lakes on May 11, 2023

Market Dislocation

There are a few unique relationships occurring in today’s market environment due to the considerable number of macro crosscurrents. While Q1 earnings have been much better than expected, price reaction has been relatively muted. We are paying close attention to the macro and company comments.

Below are examples of potential leading indicators within the current market environment. Overall, there is a defensive tone in the marketplace. Companies capturing secular trends are keeping pace, while weak companies are showing their cards.

Chart 1: Homebuilders vs. Home Depot¹

The Homebuilders ETF has performed in line with Home Depot (HD) over the past year. Yet HD has fallen year-to-date, relative to the S&P 500, while the Homebuilders ETF continues to rise. Homebuilders are benefitting from secular housing trends, while HD is reacting poorly to soft retail sales.

Traditionally cyclical sectors, like consumer retail, autos, banks and transports have all recently underperformed. Homebuilders, along with industrials and perhaps energy, buck the trend due to secular themes.

Chart 2: Industrials vs. Health Care²

It is rare that you see health care and utilities, traditionally defensive sectors, correlate strongly with industrials, a traditionally cyclical sector. Industrials are outperforming, not on cyclical factors, but due to inelastic demand trends. Secular momentum includes the bipartisan infrastructure bill and semiconductor industry CHIPS Act; supply chain bottlenecks also delayed new fleets and innovative tech-embedded equipment, which is now available.

Chart 3: Copper/Gold Flashes Signs of Economic Weakness, Defensiveness³

The gold/copper relationship breaking down indicates that investors have decidedly begun to protect assets by buying gold, rather than bet on continued cyclical momentum by buying copper. Copper is a representative commodity for the overall economy because of its broad use in building, utility and communication infrastructure. Gold/copper divergence is viewed as an economic warning sign, similar to yield curve inversion in the bond market.

Chart 4: BLK vs. Financials Sector⁴

BlackRock (BLK) tends to lead on the way up, when financials begin to rally, and also lead on the way down, when financials begin to fall. Most recently, BLK has fallen -9.9% over the past month, while the financial sector is +0.1%.

BLK may be viewed as a leading indicator for broader financials, particularly amid the volatility and challenged industry across brokerage, capital markets, money management and trading, alike. JP Morgan (JPM) is the only quality financial we find that has acted well over the past month and represents a safe-haven for investors who want to maintain industry exposure, but take on less risk.

Chart 5: Broad Price Weakness, Limited Momentum in S&P 500⁵

Less than half of the S&P 500 is priced above its 200-day moving average. This indicates a lack of momentum, especially as 78% companies were above their 200-day moving average just three months ago. This is especially surprising, given the strong earnings beats for Q1. At the end of last week, 85.5% of the S&P 500 had reported earnings and 74% of companies beat estimates. Earnings are beating estimates by 7.1%, but price reaction has been muted.

Selective Investing

Investing is not about timing the markets but, rather, about being purposeful in selection and allocation. Today’s environment perfectly emphasizes how there are opportunities to outperform by selecting companies capturing real demand, which are executing on quality, pricing and end-market strategy.

Active positioning across sectors (e.g., defensives and secular tailwinds) and actively selecting names within sectors (e.g., high quality, pricing power, healthy end-markets) can support long-term relative outperformance, despite overall market weakness.

Click here to read last week’s Weekly Wisdom (5/4).

Disclosures

Investment Solutions is a group comprised of investment professionals registered with Hightower Advisors, LLC, an SEC registered investment adviser. Some investment professionals may also be registered with Hightower Securities, LLC, member FINRA and SIPC. Advisory services are offered through Hightower Advisors, LLC. Securities are offered through Hightower Securities, LLC.

This is not an offer to buy or sell securities. No investment process is free of risk, and there is no guarantee that the investment process or the investment opportunities referenced herein will be profitable. Past performance is neither indicative nor a guarantee of future results. The investment opportunities referenced herein may not be suitable for all investors.

All data or other information referenced herein is from sources believed to be reliable. Any opinions, news, research, analyses, prices, or other data or information contained in this presentation is provided as general market commentary and does not constitute investment advice. Investment Solutions and Hightower Advisors, LLC or any of its affiliates make no representations or warranties express or implied as to the accuracy or completeness of the information or for statements or errors or omissions, or results obtained from the use of this information. Investment Solutions and Hightower Advisors, LLC assume no liability for any action made or taken in reliance on or relating in any way to this information. The information is provided as of the date referenced in the document. Such data and other information are subject to change without notice.

This document was created for informational purposes only; the opinions expressed herein are solely those of the author(s) and do not represent those of Hightower Advisors, LLC, or any of its affiliates.

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¹ Source: FactSet (chart). As of May 10, 2023.

² Source: FactSet (chart). As of May 10, 2022.

³ Source: FactSet (chart). As of May 10, 2023.

⁴ Source: FactSet (chart). As of May 10, 2023.

⁵ Source: FactSet (chart). As of May 10, 2023.