Clark Capital 2023 Quarterly Economic and Capital Market User Guide
- September 5, 2024
- Clark Capital
Table of Contents
Clark Capital 2023 Quarterly Economic and Capital Market
Specifications:
- Product Name: Guide to the Gauges
- Manufacturer : Clark Capital Management Group, Inc.
- Release Year: 2023
Product Information:
The Guide to the Gauges provides insights into key economic indicators and
market assessments. It offers analysis on GDP, labor market, inflation, ISM
indices, and monetary policy to help users understand the current economic
landscape.
Product Usage Instructions
Economy Gauge:
This quarter’s Economy gauge is held in Neutral. It reflects stable GDP growth
near trend with potential risks of a recession in 2024. The job market remains
strong, indicating any recession would likely be short and shallow.
Key Takeaways:
- GDP: Monitor quarterly GDP changes for economic trends.
- Labor Market: Track the unemployment rate and job openings ratio.
- Inflation: Stay informed about CPI, PPI, and Core PCE figures.
- ISM Indices: Follow ISM Manufacturing and Services PMI for industry insights.
Monetary Policy Gauge:
This quarter’s Monetary Policy gauge is set to Neutral. It suggests the Federal Reserve may pause rate hikes and potentially ease rates in 2024 if needed. However, the Fed remains prepared to tighten policy if inflation rises.
Key Takeaways:
- Rate Hikes: Note any changes in interest rates set by the Federal Reserve.
- Fed Fund Futures: Keep an eye on market expectations for rate cuts.
- Balance Sheet: Monitor the Fed’s quantitative tightening activities.
FAQ:
Q: How often should I review the Gauges?
A: It is recommended to review the Gauges quarterly or whenever
significant market events occur to stay informed about economic developments.
Q: Can the Gauges predict market changes accurately?
A: The Gauges provide projections based on economic conditions; however,
they are subject to change as market conditions evolve.
Guide to the GaugesGuide to the Gauges
Our Latest Assessment of Key Economic Indicators
We believe that over the long term, stock prices are driven by two things:
earnings, and what people are willing to pay for those earnings. These five
gauges reflect our outlook for the factors that we believe drive stock prices.
Each gauge is comprised of a number of individual indicators, which the
Investment Team evaluates on an ongoing basis to determine if the gauge is
neutral, positive, or negative.
Fourth Quarter Summary
The economy has defied the naysayers and remained very strong in the face of
recession calls. We expect the economy to continue to grow, but at a slower
pace in 2024. Given the strength of the job market, we believe that any
potential recession in the year ahead would be short and shallow.
As inflation continues to trend downward, we believe that the Federal Reserve
is done hiking rates. Fed Fund Futures are currently pricing in six rate cuts
beginning in March of this year, while the Fed’s “Dot Plot” is signaling only
three.
We held the Valuations gauge in a Neutral position this quarter and we
continue to view stocks as “fairly valued” at the index level. Investor
sentiment, which is a contrarian indicator, flipped from bearish to bullish
in December. As a result, we moved the Investor Sentiment gauge two notches
backwards to the Slow Reverse position.
The gauges represent the firm’s expectations for the market, and how changes in the market will affect the strategy, but are only projections which assume certain economic conditions and industry developments and are subject to change without notice.
Economy
This quarter, we held the Economy gauge in Neutral to reflect that GDP growth remains near trend, but there are some storm clouds on the horizon. December marked the 14th consecutive month of declining manufacturing activity in the U.S. The Federal Reserve appears to be achieving the elusive soft landing, although we can not rule out a recession in 2024. However, given the strength of the job market, any potential recession, in our opinion, would be short and shallow.
Key Takeaways
GDP
GDP for the first and second quarter of 2023 came in slightly above 2%. Third
quarter GDP saw an acceleration to 4.9%. The Atlanta Fed’s GDPNow is
forecasting a slowdown to 2.5% for fourth quarter GDP.
Labor Market
The unemployment rate held steady at 3.7% in December and job openings
declined to 8.8 million. The ratio of job openings to unemployed people is
roughly 1:4.
Inflation
Headline Consumer Price Index (CPI) and Producer Price Index (PPI) for
November came in at 3.1% and 0.9%, respectively. The Fed’s preferred measure
of inflation, Core Personal Consumption Expenditures (PCE) declined to 3.2%,
but remains above their target of 2%.
ISM Manufacturing and Services PMI
The ISM Manufacturing Purchasing Manager’s Index (PMI) increased slightly to
47.4 in December but remains below 50, marking the 14th straight month below
50. The ISM Services PMI unexpectedly fell to 50.6 in December, but remains in
expansion territory.
ISM Manufacturing vs. Non-Manufacturing
1/31/2019 to 12/31/2023
Monetary Policy
This quarter, we improved the Monetary Policy gauge to Neutral to reflect that the Federal Reserve is likely done raising rates. During the December FOMC presser, Fed Chair Powell acknowledged the risks of overtightening and made a case for potentially easing rates in 2024. However, he balanced those statements by emphasizing that the Committee is prepared to tighten further should inflation return.
Key Takeaways
Rate Hikes
December marked the third consecutive meeting where the Federal Reserve held
rates steady in a range of 5.25%-5.5%.
Fed Fund Futures
Fed Fund Futures are currently pricing in six rate cuts beginning in March of
this year, while the Fed’s “Dot Plot” is signal-ing only three.
Balance Sheet
Quantitative Tightening (QT) has continued as previously outlined by the Fed
with the balance sheet well below $8T.
The Fed’s Balance Sheet
Nearly all of the emergency lending accessed by banks through the Fed’s
discount window in March of 2023 has been reversed.
Total Borrowings of Depository Institutions from the Federal Reserve
6/1/2007 to 12/31/2023
Valuations
This quarter, we held the Valuations gauge in Neutral to reflect that P/E multiples remain in “fair value” range for S&P 500 companies.
Key Takeaways
P/E Multiples
The S&P 500 staged an impressive rally in 2023 but remains in the “fair value”
range as earnings growth has kept valuations near average levels over the last
few decades.
Earnings
Analysts are currently forecasting ~9% operating earnings growth in 2023 and
~13% growth in 2024. Both would represent record S&P operating earnings.
S &P 500 Calendar Year Operating EPS Actuals & Estimates
The S&P 500 ended 2023 with an Operating P/E ratio of just over 21. Since
2000, the S&P 500 has had an average Operating P/E ratio of 19.55.
1/1/2019 to 12/31/2023
Investor Sentiment
This quarter, we moved the Investor Sentiment gauge from Slow Forward to Slow Reverse to reflect that investor sentiment flipped from bearish in October to bullish in December. We also observed that stock volatility, as measured by the VIX Index, decreased as the quarter ended. This is a contrarian indicator. The more fear and pessimism among investors, the more positive for stocks, and vice versa. This is a sensitive gauge and can change quickly.
Key Takeaways
AAII Survey
After reaching 50% bearish readings at the end of October, the AAII Survey
retreated to 25% bearish by the end of December as stocks staged a year-end
rally. Bullish sentiment ended December at 46% after being above 50% in the
prior two weeks.
VIX Index
The VIX moved above 20 in October, its highest evel since March, as stocks
sold off. The VIX ended December at 12.45, a sign of complacency among
investors.
What Does the AAll Survey Indicate About Bullish and Bearish Sentiment?
Since its inception in 1987, the AAll Survey has been a useful contrarian
indicator. In the past when the survey reaches extreme levels of bullishness
or bearishness, a change in direction for the market often follows.
Interest Rates
This quarter, we improved the Interest Rates gauge to the Neutral position to reflect the likely end to the Fed’s current interest rate hiking cycle and the dramatic drop in long-term interest rates since October.
Key Takeaways
Change in Yields
The curve reached new highs in Oct, but fell by the end of Dec. The planned
bond issuance was not as large as feared and the idea that the Fed is done
raising rates rates seemed to be validated.
Yield Curve
The spread between 3-month and 10-year Treasuries remains inverted. This
signal has preceded prior recessions, although it does not indicate the depth
or duration of a potential recession.
Interest Rate Volatility
Interest rate volatility, as measured by the BofA MOVE Index, dropped below
100 in the middle of September, but ended December at 114.62.
U.S. Treasuries Yield Curve
Since hitting a high water mark on October 19th, the long end of the
Treasury yield curve ended 2023 dramatically lower.
Date Range: October 19, 2023 to December 29, 2023
The opinions referenced are as of the date of publication and are subject to change due to changes in the market or economic conditions and may not necessarily come to pass. There is no guarantee of the future performance of any Clark Capital investments portfolio. Material presented has been derived from sources considered to be reliable, but the accuracy and completeness cannot be guaranteed. Nothing herein should be construed as a solicitation, recommendation or an offer to buy, sell or hold any securities, other investments or to adopt any investment strategy or strategies. For educational use only. This information is not intended to serve as investment advice. This material is not intended to be relied upon as a forecast or research. Investors must make their own decisions based on their specific investment objectives and financial circumstances. Past performance does not guarantee future results.
The “Economic Gauges” represent the firm’s expectations for the market, and
how changes in the market will affect the strategy, but are only projections
that assume certain economic conditions and industry developments and are
subject to change without notice.
The Standard and Poor’s 500, or simply the S&P 500, is a stock market index
tracking the stock performance of 500 large companies listed on stock
exchanges in the United States.
The 3 Month Treasury Bill Rate is the yield received for investing in a
government-issued treasury security that has a maturity of 3 months.
The 10 Month Treasury Bill Rate is the yield received for investing in a
government-issued treasury security that has a maturity of 10 months.
The ISM manufacturing index, also known as the purchasing managers’ index
(PMI), is a monthly indicator of U.S. economic activity based on a survey of
purchasing managers at more than 300 manufacturing firms.
The ISM Services PMI provides significant information about factors affecting total output, growth, and inflation.
Earnings per share (EPS) is calculated as a company’s profit divided by the
outstanding shares of its common stock. The resulting number serves as an
indicator of a company’s profitability.
The price-to-earnings (P/E) ratio relates a company’s share price to its
earnings per share.
VIX of VIX (or VVIX) is a measure of the volatility of the Chicago Board Options Exchange (CBOE) Volatility Index (VIX). The CBOE’s VIX measures the short-term volatility of the S&P 500 indexes, and the VVIX measures the volatility of the price of the VIX. In other words, VVIX is a measure of the volatility of the S&P 500 index and alludes to how quickly market sentiment changes.
Gross domestic product (GDP) is a monetary measure of the market value of all the final goods and services produced and sold in a specific time period by countries.
References to market or composite indices, benchmarks or other measures of relative market performance over a specified period of time (each, an “index”) are provided for your information only. Reference to an index does not imply that the portfolio will achieve returns, volatility or other results similar to that index.
The composition of the index may not reflect the manner in which a portfolio is constructed in relation to expected or achieved returns, portfolio guidelines, restrictions, sectors, correlations, concentrations, volatility or tracking error targets, all of which are subject to change. Investors cannot invest directly in an indexThis document may contain certain information that constitutes forward-looking statements which can be identified by the use of forward-looking terminology such as “may,” “expect,” “will,” “hope,” “forecast,” “intend,” “target,” “believe,” and/or comparable terminology (or the negative thereof). Forward looking statements cannot be guaranteed. No assurance, representation, or warranty is made by any person that any of Clark Capital’s assumptions, expectations, objectives, and/or goals will be achieved. Nothing contained in this document may be relied upon as a guarantee, promise, assurance, or representation as to the future. Clark Capital Management Group, Inc. is an investment adviser registered with the U.S. Securities and Exchange Commission. Registration does not imply a certain level of skill or training. More information about Clark Capital’s advisory services and fees can be found in its Form ADV which is available upon request. CCM-1179
References
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