Morning Notes — Outlook

Outlook: The S&P 500 (SPX) continues to work through a seasonably bearish month.  Visible risks, including a China slowdown, Washington issues and negative earnings preannouncements (bottleneck pressures), have lined up with technical sell signals at the end of August.  SPX technical support in the 4365-4435 range has held, but there’s stronger support at the 4240-4260 level. The structural and cross market dynamics that typically signal a top are not currently evident.  Fundamental cyclical forces remain strong and the value equity factor is still the most compelling opportunity.  A much flatter yield curve would change our mind.  We expect investors will look through the risk factors listed above and expect value to outperform growth as bond yields rise.  Value sectors haven’t been materially sold, but the performance divergence vs. growth is now ~2 standard deviations from the mean.  Value sectors need to outperform growth by 6-7% just to catch up with bond yields.  We see 10-year yields approaching ~1.75%-1.92% in Q4.  The key risk is higher real yields that could eventually cause multiple compression in Tech.   

Fed: Today’s updated dot plot could have near-term implications for markets.  It only takes two more Fed officials to move the median dot on the first rate hike into ’22. Consensus still expects the dots to signal rate hike liftoff in ‘23, but bond yields seem to be priced for liftoff in ’22.  There’s also some debate about whether the median dot for 2023 will show 2 or 3 rate hikes, and today’s update also includes a first look at the 2024 dots.