Look up at the night sky in March and chances are you’ll see Jupiter and Venus “touching” despite being separated by 400 million miles. Contrast that with the stock market, which appears to be millions of miles away from the Federal Reserve — and in no rush to converge.
Just look at the past week’s price action. Fed Governor Christopher Waller said on Thursday that interest rates may need to rise to curb inflation, which briefly pushed the yield on the 10-year Treasury note above 4% for the first time since November.
However, the stock market was unaffected. For the week
S&P 500
increased by 1.9 per cent
Dow Jones Industrial Average
advanced 1.8%, and
Nasdaq Composite,
2.6%. The 10-year yield ended at 3.96%.
This kind of price action has made it difficult to navigate the markets this year. January started with a boom, February went wild and it’s too early to say what March will bring. At the end of February, Bank of America’s Sell Side Indicator, a measure of Wall Street sentiment, was still inclined to Sell, but the reading was only 1.5 percentage points away from where Sell would become Buy. When that happens, the S&P 500 has a 95% chance of being positive 12 months later, with an expected return of 16%, making this the most bullish of BofA’s market metrics.
BofA strategist Savita Subramanian isn’t ready to go there just yet. The S&P 500 is trading at 4046 – right in line with BofA’s year-end target – but that doesn’t mean she’s backing away from the market either. She just recommends being picky. For this market, Subramanian advises buying “old economy” sectors like energy, materials and housing, which are trading at a discount to the S&P 500.
Advertisement – Scroll to continue
Although the sectors have seen increased interest over the past two years, they have suffered from underinvestment over the past 10. This is particularly true for energy stocks, as measured by
Energy Select Sector SPDR
exchange-traded fund (ticker: XLE), which is up 19% over the past 12 months but is down 0.5% this year.
“Valuation remains compelling, and declining earnings volatility, limited supply and continued shareholder returns keep the sector attractive,” she wrote.
With rates dancing around with every utterance from Fed officials or hot-and-cold economic indicators, bond investors are probably better off sticking with safety. Six-month Treasury bills yield 5.1% with little risk to principal.
Advertisement – Scroll to continue
One thing that also seems certain: This is no longer a black-and-white, buy-or-sell stock market. The days of “There is no alternative” to growth-oriented tech stocks are in the rearview mirror, and both stocks and bonds offer compelling opportunities if you choose the right ones.
This means more than just buying the index and instead using some counterintuitive thinking – and hoping the planets will align.
Write to Carleton English at carleton.english@dowjones.com