Investors are wondering how to position themselves for the week ahead, as they face a barrage of economic data, earnings reports, and central bank decisions. Here are some key factors to watch and some tips on how to adjust your portfolio accordingly.
The Fed: Will it pause or press on?
The Federal Reserve is holding its two-day policy meeting on Tuesday and Wednesday, and markets are eagerly awaiting its statement and press conference. The Fed has been raising interest rates steadily since late 2022, in an attempt to cool down the overheating economy and contain inflation.
However, the recent collapse of two regional banks, Silicon Valley Bank (SVB) and Signature Bank, has raised concerns about the health of the financial system and the potential spillover effects on the broader economy. The Fed has intervened to provide liquidity and support to the banking sector, but some analysts wonder if it will also signal a pause in its rate-hiking cycle.
The bond market seems to think so. The yield on the two-year Treasury note, which reflects expectations of future Fed policy, has fallen below the federal funds rate, indicating that investors expect the Fed to stop raising rates soon. In fact, some traders are even pricing in a rate cut later this year. The bond market has often been a reliable predictor of Fed moves in the past, but it could also be overreacting to temporary shocks. The Fed may not want to appear too dovish or too hawkish in this uncertain environment, and may opt for a wait-and-see approach instead.
The Economy: Slowing down or holding up?
The week ahead will also bring a slew of economic data that will shed light on how the economy is coping with the headwinds of higher interest rates, tighter credit conditions, trade tensions, and geopolitical risks. Some of the key reports to watch include:
Consumer confidence index (Tuesday): A measure of how optimistic or pessimistic consumers are about their current and future economic prospects. Consumer spending accounts for about 70% of U.S. GDP, so consumer confidence is a crucial indicator of economic activity and demand.
GDP growth (Thursday): The first estimate of how much the economy expanded in the first quarter of 2023. Economists expect a slowdown from the robust 4.1% annualized growth rate recorded in the fourth quarter of 2022, as higher interest rates and supply chain disruptions weigh on consumer spending and business investment.
Personal income and spending (Friday): A report on how much income households earned and how much they spent in March. This report also includes the Fed’s preferred measure of inflation, the core personal consumption expenditures (PCE) index, which excludes food and energy prices.
The Fed targets a 2% annual increase in this index, but it has been running above that level for several months, fueling concerns about inflationary pressures.The data will provide clues on whether the economy is experiencing a soft landing or a hard landing, and whether inflation is transitory or persistent. Depending on how the data comes out, it could either reinforce or challenge the Fed’s policy stance and outlook.
The Winners and Losers:
Which sectors and stocks will outperform or underperform?The stock market has been undergoing a rotation in recent months, as investors shift their preferences from growth-oriented sectors like technology and consumer discretionary to more defensive sectors like utilities and health care.
This rotation reflects a changing macroeconomic environment, where higher interest rates make growth stocks less attractive relative to value stocks, and where slowing economic growth makes defensive stocks more appealing than cyclical stocks.However, this rotation may not be linear or permanent.
Some growth stocks may still offer attractive opportunities if they can deliver strong earnings growth despite higher interest rates and competitive pressures. Some cyclical stocks may also benefit from positive surprises in economic data or trade negotiations. Conversely, some defensive stocks may face headwinds from regulatory or political risks or rising input costs.
Therefore, investors should not blindly follow the market trends, but rather look for individual stocks that have strong fundamentals, competitive advantages, and reasonable valuations. Some examples of such stocks include:
Microsoft (MSFT): The tech giant reported stellar earnings last week, beating analysts’ expectations on both revenue and earnings per share. Microsoft’s cloud computing business Azure grew by 50% year-over-year, while its productivity software suite Office 365 added 10 million subscribers. Microsoft also announced a $60 billion share buyback program and raised its quarterly dividend.
