What’s New

They say that March comes in like a lion and out like a lamb, and while the brief drawdown we saw in equity markets to start the month was hardly ferocious, investors were surely comforted by equities continuing to drift higher through month-end.

Yet under the surface, things appear to be shifting. As bond yields continued to grind higher on the back of a still-resilient economy and upside risks to inflation, equity markets have seen a rotation in leadership. Year-to-date, US equities have been led by momentum, quality, and growth.

From a sector perspective, Communication Services and Information Technology had been the clear leaders coming into March. March saw a strong surge in the performance of Energy and Materials – sectors more traditionally associated with higher yields and stronger economic growth. Rather than momentum or growth, value was the strongest performing sector of the month. The almighty Information Technology sector has started to show cracks, with Apple continuing to move lower and non-semiconductor industries amongst the worst performing of the month.

What accounts for the shifting dynamics in equity market performance? In our view, the market is continuing to price in the much-discussed soft landing scenario. Concentration in equity market performance was driven largely by a belief in the ability in a small number of companies to deliver strong and visible earnings growth in an uncertain environment.

Thus, the increased belief in the ability of the Fed to engineer a benign outcome is likely behind the broadening out of equity market performance into more economically sensitive areas.

This is perhaps no more apparent than in the leadership we saw in March from the Russell 2000, which delivered a total return of 3.4% versus the S&P 500 at 3.1% and the Nasdaq at 1.8%.

Our Perspective

While we acknowledge the resilience we have seen in the US economy and the progress we have seen in bringing inflation back toward the Fed’s target, we continue to see and monitor risks. Rising rates may yet again begin to pressure borrowers, especially small- and medium-sized businesses. Inflation is no longer falling at the pace it was, and core service inflation (excluding shelter) has stalled out at a level well above pre-COVID levels.

Meanwhile, valuations are far from attractive at a broad level, and it leaves us wondering what many market participants are paying for. Nevertheless, we have continued to find opportunities in the market, with risk management at center stage. Overall, as growth continues to slow, we remain defensively positioned in our core portfolios.

Although the market is pricing in a soft landing scenario, we believe that one is unlikely as we progress through the economic cycle as historical evidence suggests that the Fed has never brought inflation down from the levels we’ve seen without causing significant economic hardship. With three cuts planned for the year, we’re closely monitoring for signs of weakness and what it all can mean for the start of a rate-cutting cycle.

Negative Rates No More

After embarking on a path of ultra-loose monetary policy to help stimulate the economy, Japan’s grand experiment is finally coming to an end as the Bank of Japan voted to end their yield curve control program and raise borrowing costs for the first time since 2007.

With this also comes the end of negative interest rates as Sweden, Denmark, the European Central Bank, Switzerland, and Japan (the final holdout), are all once again in positive territory. Read our analysis here: Negative Rates No More

Our View

Economic Cycle		The economy is in a late cycle, though it continues to prove incredibly resilient. The Fed hiked aggressively and we saw significant pain in industries including transport and manufacturing. However, the US consumer has remained strong. We believe that the lagged effect of monetary policy may start to be felt in other parts of the economy in the coming quarters.
Stock Market		The US stock market has rebounded strongly off its October 2022 lows. Sentiment now appears stretched and valuations are not compelling. To date, market returns have been driven by multiple expansions. EBIT margins climbed to historical highs in the years following pandemic lockdowns; elevated input costs and weakening demand and pricing power are posing a risk to the ability of corporations to maintain earnings at their projected level. Returns will be harder to come by and stock selection will be increasingly important.
Bond Market		Interest rates remain well off their lows, as the economy has remained resilient, and the market is weighing the dynamics of still-elevated core inflation and the potential for interest rates to remain higher for longer. Corporate spreads remain well contained, particularly considering the risks we see to the economy.
Important Issues on the Radar		Inflation: Factors including a resilient demand environment and wage increases threaten to keep core services inflation elevated. Should this be the case, the Fed may remain tighter for longer.
		China’s Economy: China has pivoted on the two key economic issues that acted as severe headwinds to growth over the last two years; however, economic growth appears to be stagnating and it will be critical to monitor the policy response in the coming months.

Indicates change Indicates no change

Source: Bloomberg

All investments contain risk and may lose value. This material contains the opinions of Manning & Napier, which are subject to change based on evolving market and economic conditions. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

This newsletter may contain factual business information concerning Manning & Napier, Inc. and is not intended for the use of investors or potential investors in Manning & Napier, Inc. It is not an offer to sell securities and it is not soliciting an offer to buy any securities of Manning & Napier, Inc.

The S&P 500 Index is an unmanaged, capitalization-weighted measure comprised of 500 leading U.S. companies to gauge U.S. large cap equities. The Index returns do not reflect any fees or expenses. Dividends are accounted for on a monthly basis. Index returns provided by Bloomberg. The Dow Jones Industrial Average is a price-weighted average of 30 blue-chip U.S. stocks that are generally the leaders in their industry. Dividends are reinvested to reflect the actual performance of the underlying securities. The Index returns do not reflect any fees or expenses. Index returns provided by Bloomberg. The NASDAQ Composite Index is a broad-based capitalization-weighted index of domestic and international based common type stocks listed in all three NASDAQ tiers: Global Select, Global Market and Capital Market. The NASDAQ Composite includes over 3,000 companies. The Index returns do not reflect any fees or expenses. Index returns provided by Bloomberg. The Russell 2000® Index is an unmanaged index that consists of 2,000 U.S. small-capitalization stocks. The Index returns are based on a market capitalization-weighted average of relative price changes of the component stocks plus dividends whose reinvestments are compounded daily. The Index returns do not reflect any fees or expenses. Index returns provided by Bloomberg. Index data referenced herein is the property of each index sponsor (London Stock Exchange Group plc and its group undertakings (Russell) and S&P Dow Jones Indices LLC, a division of S&P Global Inc., its affiliates (S&P), their affiliates ("Index Sponsors") and/or their third party suppliers and has been licensed for use by Manning & Napier. The Index Sponsors and their third party suppliers accept no liability in connection with its use. Data provided is not a representation or warranty, express or implied, as to the ability of any index to accurately represent the asset class or market sector that it purports to represent and none of these parties shall have any liability for any errors, omissions, or interruptions of any index or the data included therein. For additional disclosure information, please see: https://go.manning-napier.com/benchmark-provisions.