March 22, 2023
In addition to the Fed decision, markets will pay close attention to Powell’s press conference for: 1) near-term direction on efforts to contain financial contagion; 2) associated impact on financial conditions from expected tightening of bank lending standards.
The S&P 500 trades into near-term technical resistance in the 3950-4000 range. The index looks vulnerable to accelerated downside momentum below this level. Clearing 4000 would open the door for a retracement into the 4100s, which would likely contain the rally. The pricing of rate cut expectations has been the primary driver of the recent rally, but the catalyst seems exhausted with the 2-year forward curve already priced for neutral policy rates. We maintain a tactically bearish outlook with an SPX target in the 3500s.
Growth sectors become more attractive than value sectors when inflation and bond yields have peaked. Official government inflation data has peaked and forward-looking indicators signal a pickup in disinflation. Bond yields also looked like they’ve peaked with 10-year yields topping out near 4%. The fundamental case to rotate from value to growth sectors is building. A confirmed top in 10-year real yields at levels below ~109bp will be a signal to add growth and Tech sector exposure. A confirmed bottom in real yields back in September 2021 was our signal to overweight value sectors and underweight Tech. The S&P 500 Value Index has gained +11% since real yields bottomed in September ’21, while the Nasdaq 100 (NDX) has lost -15%.