After a positive start to the year, equity markets sold off aggressively in March. The S&P 500 Index ended the quarter with a 4.3% decline and briefly slipped into “correction” territory (defined as a 10% decline from the previous peak). The consumer discretionary and technology sectors were hit the hardest, with the Nasdaq Index down over 10%. Growth fears that followed uncertainty around tariffs and the broader Trump 2.0 policy agenda were the most significant weight on risk sentiment. These concerns translated into a decline in earnings growth expectations for the year. And cracks in the “AI” (Artificial Intelligence) secular growth narrative didn’t help broad market outcomes as investors have started to question the size of AI-related capital expenditures across the major hyperscalers and cloud companies as AI models become cheaper and more efficient.

Bonds were the beneficiary of the equity market volatility and economic growth concerns. Bond yields declined as the “flight to safety” trade sent investors into bonds, bringing interest rates down. Short and intermediate-duration bond indices posted low-single-digit gains for the quarter.

This is supposed to be a commentary on the events of the first quarter of 2025, but the most impactful economic event in 2025 happened to occur in the first two weeks of April. This commentary would be pretty useless if we did not discuss it, so please forgive us for exchanging the first quarter for the first seven twenty-fourths of 2025.

April 2^nd Announcement

The event to which we refer is, of course, President Trump’s Rose Garden press conference announcing substantial tariffs to be levied against U.S. trading partners around the globe. While the President had made no secret of his desire to impose tariffs on imported goods and had already done so on China, Mexico, and Canada, the tariff rates to be paid by U.S. importers announced on April 2nd were much higher than expected. The announcement outlined a plan for tariffs of a minimum of 10% on all countries, 20% on the European Union, 24% on Japan, an additional 34% on China, and, especially surprising, rates ranging from 25% to 49% on Asian countries previously not thought of as rivals, such as South Korea, India, Taiwan, and Vietnam.

In reaction to the magnitude and breadth of the tariffs, U.S. stocks^[1] immediately sold off 3%-4% in after-hours trading. The selling pressure was sustained when markets opened the following day, and the resulting 10.5% sell-off in the two days following the tariff announcement ended up being the fourth largest two-day drawdown in U.S. stocks since World War II. Only sell-offs during the 2008 Global Financial Crisis, the 2020 COVID era, and the freakish, technical-driven Black Monday in 1987 saw worse back-to-back days in the stock market.

With the following week marred by relentless selling of global stock markets, rising interest rates, and a Federal Reserve seemingly unable to provide monetary policy support due to the anticipation of tariff-induced upward pressure on inflation, the President pivoted on April 9th by offering a 90-day delay in implementation of his tariff policy to “any country that isn’t retaliating.” In one of the largest intraday relief rallies of all time, U.S. stocks recovered much, but not all, of their lost ground, rallying nearly 9% in minutes. Yet, shortly thereafter, tariffs on Chinese imports were substantially increased. Combined with the digestion of the fact that the minimum 10% tariffs on all imports were still in place, concerns of a protracted trade war were reignited. At the time of this writing, U.S. stocks remain 14% below their February peak.

Understanding Objectives

A significant challenge for investors is understanding the goals behind recent tariff announcements. One potential objective could be to strengthen the U.S. trade negotiating position. Given that the U.S. runs trade deficits with many countries, higher tariffs might be more impactful on trading partners than on the U.S. Notably, hedge fund manager Bill Ackman tweeted on April 5th, suggesting that the negotiating style involves asking for significant concessions and then settling for a compromise. Early signs indicate that trading partners are open to reducing their tariff rates. If the goal is to use negotiating leverage to secure trade deals, tariff hikes could be temporary, potentially limiting their long-term economic impact. However, convincing other countries to commit to reducing their trade deficits with the U.S. would complicate and slow negotiations. This may be an extremely difficult proposition for poorer countries that lack the resources to purchase higher-value U.S. exports. And persuading countries to line up against China and enact their own tariffs may be a bridge too far. National Economic Council Director Kevin Hassett recently stated that the Trump administration was negotiating trade policy with 130 countries. Perhaps we will gain some clues on the end game as these negotiations progress.

Another potential objective could be to encourage the return of manufacturing jobs to the U.S. For this to happen, corporations would need to believe that tariffs will remain high for an extended period before deciding to relocate production and investing in building manufacturing facilities domestically. We certainly do need to be able to produce and secure our access to key resources such as semiconductors and pharmaceuticals. And believe there is plenty of room to expand manufacturing capabilities in this country, focusing on high-value products. But reshoring takes years, not months. And we’re not of the view that our labor force is well suited to build iPhones or low-value consumer electronics at economical price points. Maybe over time, with the use of robotics, automation, and Artificial Intelligence. But we’re not there yet.

Going Forward

During the sell-off following the tariff announcement, we saw a flurry of communications issued by folks with impressive-sounding titles from impressive-sounding financial institutions. While generally informative about the facts of the matter at hand, they also contained a long list of recommendations of how to reallocate capital in the face of this new trade paradigm. We understand the comfort such pronouncements can give investors. When markets are in freefall and emotions are high, the urge to DO SOMETHING is unavoidable. Unfortunately, it is also the absolute worst possible time to give into that urge and make sweeping financial decisions. At a time when fiscal policy is undergoing major shifts on a daily basis and the definition of success for these policies is just as fluid as the changing policies themselves, how could one have any confidence – to the upside or downside – when moving capital between asset classes or sectors?

The Importance of Planning

Planning for periods of market distress begins with having an asset allocation where the mix of risk-based and more stable assets contemplates the inevitable possibility of significant market declines and accurately reflects each client’s ability and willingness to weather these periods of market distress while still meeting their financial goals.

The most important step in weathering volatility and stressful market conditions is to stick to the plan. That plan was created for a reason, and that reason was not to discard it as soon as stocks fall 10%.

Whether the President backing away from the April 2nd tariff policy proves to be temporary or permanent, it’s clear that consumer and corporate confidence and visibility have taken a hit. This will likely weigh on consumer spending patterns and corporate capital expenditures in the near term. Economic and market outcomes are highly dependent on the duration of this shock. We remain confident in the companies in which we have invested and approach those investment decisions through the lens of long-term business owners, with a focus on their long-term earnings potential, not their results over the next couple of quarters.

We have every confidence that we and our clients, in partnership, will safely navigate this inherently uncertain future.

[1] All references to U.S. stocks and their returns are represented by the S&P 500 Index and the total return of that index.

Fort Pitt Capital Group is a d/b/a of, and investment advisory services are offered through, Kovitz Investment Group Partners, LLC, (“Kovitz”), an investment adviser registered with the United States Securities and Exchange Commission (SEC).  Registration with the SEC or any state securities authority does not imply a certain level of skill or training.  Please visit www.orchid-ibex-388317.hostingersite.com for additional important disclosures.  Click the following for more information about Kovitz:  www.kovitz.com. ©2024 Fort Pitt Capital Group. All rights reserved.

Fort Pitt Capital Group merged with Kovitz Investment Group Partners, LLC as of November 1, 2024. Any opinions expressed are opinions held at the time of publishing and are subject to change. It does not constitute an offer, solicitation, or recommendation to purchase any security. The information herein was obtained from various sources; we do not guarantee its accuracy or completeness. Past performance does not guarantee future results. The performance shown is for illustrative purposes only and the intent is to show the performance of certain segments of the markets. This information is not reflective of the performance of any FPCG client, or the impact of security selection on actual client portfolios. Actual results and developments may be substantially different from the expectations described in the forward-looking statements included herein.

The S&P 500 is a broad-based index of 500 stocks, which is widely recognized as representative of the equity market in general. The Nasdaq Index includes all stocks listed on the Nasdaq stock exchange.  It is one of the three most followed stock market indexes in the U.S. These indices are unmanaged and may represent a more diversified list of securities than those recommended by FPCG. In addition, FPCG may invest in securities outside of those represented in the indices. The performance of an index assumes no taxes, transaction costs, management fees or other expenses. Additional information on any index is available upon request.

The post Investment Newsletter First Quarter 2025 appeared first on Fort Pitt Capital Group.

This was another uneven quarter, with the S&P 500 Index higher by 2.4% while most other asset classes – large cap value, small and mid-cap, international equities, and bonds all posted flattish or negative returns. Consistent with full-year 2024 results, mega-cap technology stocks outperformed in the final quarter, propelling the tech-heavy Nasdaq and S&P indices.

The S&P logged its second consecutive year of +20% returns, a feat that hasn’t been accomplished since 1998. Similar to outcomes in 2023, U.S. stocks dramatically outperformed international equities. Large caps dominated small caps. And growth-oriented sectors, such as communication services and technology, were the top performers. The chart below provides a good visual of the skewed results across asset classes in 2024.

Source: Orion

Stock market performance in 2024 was well ahead of our expectations for the year. Economic growth remained strong, hovering around the 3% mark for most of the year, according to data published by Apollo/Atlanta Federal Reserve. Consumers showed no signs of putting the brakes on their willingness to spend. And corporate profits reached an all-time high. We’d attribute these positive outcomes to some of the same factors at play in 2023. Consumers and corporations are simply less interest rate sensitive than in years past. Elevated interest rates are less of a concern for homeowners that have already locked in 30-year fixed-rate mortgages at 3%-4%. And corporations that borrowed massive amounts of capital at rock-bottom interest rates during the pandemic have also been unphased by higher interest rates. Amazingly, nonfinancial corporate net interest payments are near record lows even after the most aggressive Federal Reserve hiking cycle in 40 years. In addition, government deficit spending has been stimulative to the economy and has served as a measurable counterbalance to tighter monetary policy. Or, more succinctly, things held up well again in 2024.

Turning to 2025, we expect the focus to be centered around how well the new administration’s policies and the bond market play together in the sandbox. So far, equity markets have embraced logical expectations for lower regulations and a continuation of a low tax regime. And those could be big positives. We feel it’s a fair (and unbiased) conclusion that the regulatory surge that took place under the Biden administration resulted in lower capital spending from businesses, restrained M&A (mergers and acquisitions), and distracted corporate management teams bogged down by Department of Justice and Federal Trade Commission inquiries/accusations. And corporate tax cuts could provide a mid-single-digit boost to already very healthy earnings growth expectations for 2025.

At the top of the list of uncertainties are tariff and immigration policies. There is a wide range of potential outcomes on the tariff front. And by design, no one knows if President Trump intends to unleash a drastic step up in tariffs in the early days of his presidency or use the threat as a negotiating tactic. We’ll have to wait and see, but if restrictive tariffs are the outcome, we would expect a negative impact on aggregate corporate earnings. There’s also the risk that immigration policy results in reduced labor supply, higher wages, and reignites inflation.

In the bond market, Treasury yields have surged since the Federal Reserve began cutting interest rates in mid-September. That upward ascent continued after the election results in early November. The bond market is sending a clear message of concern that the Fed may have turned too accommodative before the inflation problem is fully resolved and that tax cuts, tariffs, and a shallower labor pool could reverse the disinflationary trend. Investors have ratcheted down their expectations for the number of Fed interest rate cuts in 2025 to only one or two. We expect the bond market to play a key role in outcomes in 2025 and to represent a headwind to equity market advances if interest rates spike higher.

The bond market and inflation may also serve as a governor on the new administration’s agenda. The election results clearly showed Americans’ frustration and anger after four years of elevated prices. The Republican sweep of the White House and Congress may give the party a clear mandate to start the year. However, if tariff increases, mass deportations, and pro-growth policies like tax cuts result in even higher prices and borrowing costs for consumers, sentiment could shift rapidly.

Looking back at history, forward equity market returns have been significantly lower than long-term averages when valuations are as high as they are today. We’re starting the year with the S&P 500 Index trading at valuations in the 90^th percentile vs. history (100% = most expensive, 0% = least expensive). History tells us to expect low-single-digit inflation-adjusted returns from this elevated starting point. Tack on 2-3% for inflation, and we expect mid-single-digit returns from broad equity markets in 2025. We expect fixed income markets to remain volatile and reactionary to developments with inflation and trade policy but also to produce positive returns for the year, driven mainly by higher coupon payments rather than substantial bond price appreciation.

Fort Pitt Capital Group is a d/b/a of, and investment advisory services are offered through, Kovitz Investment Group Partners, LLC, (“Kovitz”), an investment adviser registered with the United States Securities and Exchange Commission (SEC).  Registration with the SEC or any state securities authority does not imply a certain level of skill or training.  Please visit www.orchid-ibex-388317.hostingersite.com for additional important disclosures.  Click the following for more information about Kovitz:  www.kovitz.com. ©2024 Fort Pitt Capital Group. All rights reserved.

Fort Pitt Capital Group merged with Kovitz Investment Group Partners, LLC as of November 1, 2024. All Insights are opinions of the author as of the date reflected within. Any graphs, data, or information in this publication are considered reliably sourced, but no representation is made that it is accurate or complete, and should not be relied upon as such. This information is subject to change without notice at any time, based on market and other conditions. Past performance is not indicative of future results, which may vary. Actual results and developments may be substantially different from the expectations described in the forward-looking statements included herein.

The S&P 500 is a broad-based index of 500 stocks, which is widely recognized as representative of the equity market in general. The information for all other indexes shown is mean to reflect certain segments of the market. These indexes are unmanaged and may represent a more diversified list of securities than those recommended by Fort Pitt Capital Group. In addition, Fort Pitt Capital Group may invest in securities outside of those represented in the indexes. The performance of an index assumes no taxes, transaction costs, management fees or other expenses. Additional information on any index is available upon request.

The post Investment Newsletter Fourth Quarter 2024 appeared first on Fort Pitt Capital Group.

Equity markets quickly recovered from an ~8% decline in early August to finish the quarter at a new all-time high. In sharp contrast to the previous quarter, Q3 performance results were well distributed across market sectors and capitalization ranges. The market capitalization weighted S&P 500 Index, which is heavily influenced by the concentration to technology and tech-related sectors, climbed by 5.9%. However, the equal-weighted S&P 500 Index, which weighs each of the index components in equal proportions, posted even stronger results, advancing by 9.6%. The Magnificent Seven/mega-cap technology stocks took a breather, with most constituents ending the quarter with negative returns. Value-oriented sectors outperformed with utilities, real estate, industrials, and financials leading the charge in the third quarter.

Equity markets were well supported by a substantial decline in interest rates, firming expectations for an economic soft landing and further progress on inflation. The Federal Reserve’s long-awaited interest rate cut also played a role in solid returns and broader participation across market sectors.

Fixed income markets also responded well to these developments. Short and intermediate maturity bond indices posted mid-single-digit positive returns, while longer dated bonds and more credit sensitive segments of the fixed income universe delivered even more impressive results. Credit spreads (the difference between Treasury yields and yields offered by credit instruments with similar maturities) tightened to the lowest levels of the year as investor appetite for higher yields remained elevated.

At their September meeting, the Fed moved forward with the first interest rate cut in more than four years. While the decision to cut rates was anticipated, the call to cut by 50 basis points instead of a more conservative 25 basis points surprised many investors, us included. In addition, the Fed’s forward projections and comments from Chair Jerome Powell indicated that more rate cuts are likely in the coming months.

Kicking off the interest rate policy easing cycle with a jumbo rate cut seems to indicate the Fed declaring mission accomplished in the battle with inflation. However, with core PCE – Personal Consumption Expenditures (the Fed’s preferred inflation gauge) still hovering well above their own 2% target, it seems premature to take a victory lap. Powell explained that the slowdown in job growth was the key factor behind the decision to start with a larger-than-normal rate cut. Job gains clearly slowed over the summer months. However, weekly unemployment claims never showed signs of labor market stress and unfilled job openings still stand at over eight million. We wonder if Fed members began to rethink their view of needing to support a weakening labor market after the September Non-Farm Payrolls report showed the economy added 254,000 jobs, a result that dramatically exceeded expectations. We expect the Fed will move at a more measured pace going forward and believe markets may be overshooting a bit on expectations for the number of future rate cuts.

We’re at the point in the year where the focus begins to shift to next year’s corporate earnings estimates. A lot can and will change before we roll into 2025. But as of now, 2025 earnings estimates look very healthy. As the chart below shows, analysts are currently projecting almost 15% EPS (earnings per share) growth for the S&P 500 Index. Equally important, expectations point to impressive growth rates for a wide range of market sectors and not just narrow leadership from technology companies driving aggregate earnings growth for the broad market index. We think expectations for more balanced corporate earnings growth across sectors help explain the recent broadening of market participation.

Copyright 2024 by Fort Pitt Capital Group LLC.  All rights reserved.

Fort Pitt votes proxies for client accounts as requested by our clients. A copy of Fort Pitt’s proxy voting policies, as well as information regarding how a particular issue was voted, is available by contacting the firm at 412-921-1822.

Fort Pitt Capital Group (FPCG) is an investment advisor registered with the United States Securities and Exchange Commission (“SEC”). For a detailed discussion of FPCG and its services and fees, see the Form ADV Part 1 and 2A on file with the SEC at www.adviserinfo.sec.gov. Registration with the SEC does not imply any level of skill or training. You may also visit our website at www.orchid-ibex-388317.hostingersite.com.

Any opinions expressed are opinions held at the time of publishing and are subject to change. It does not constitute an offer, solicitation, or recommendation to purchase any security. The information herein was obtained from various sources; we do not guarantee its accuracy or completeness. Past performance does not guarantee future results. The performance shown is for illustrative purposes only and the intent is to show the performance of certain segments of the markets. This information is not reflective of the performance of any FPCG client, or the impact of security selection on actual client portfolios. Actual results and developments may be substantially different from the expectations described in the forward-looking statements included herein.

The S&P 500 is a broad-based index of 500 stocks, which is widely recognized as representative of the equity market in general. The Bloomberg U.S. Aggregate Bond Index is a broad-based index of intermediate term investment grade bonds traded in the U.S. These indices are unmanaged and may represent a more diversified list of securities than those recommended by FPCG. In addition, FPCG may invest in securities outside of those represented in the indices. The performance of an index assumes no taxes, transaction costs, management fees or other expenses. Additional information on any index is available upon request.

The post Investment Newsletter Third Quarter 2024 appeared first on Fort Pitt Capital Group.

The S&P 500 Index advanced by 4.3% in the second quarter. The market cap weighted S&P was well supported by the strong performance and high weightings of the mega-cap technology stocks as “AI” – Artificial Intelligence enthusiasm dominated the market narrative. However, in stark contrast to the previous two quarters, market breadth and participation among sectors, geographies, and market capitalization were extremely poor. As detailed below, quarterly returns for most equity market indices were in negative territory.

AI momentum stole the show in the second quarter and disproportionately benefited the S&P 500 Index. However, those results have also increased the concentration level of the S&P to a 50-year high, with the top 10 stocks representing 37% of the entire index.

Wall Street has fully embraced AI as the most transformative technological innovation in history. However, the conclusion also seems to be that all the economic benefits will accrue to only a handful of companies that produce high-powered semiconductors and run the data centers. Those two conclusions are starkly at odds with each other. Meaningful technological advances, such as the internet a quarter of a century ago, resulted in productivity gains, increased monetization opportunities, and new growth verticals across a broad swath of industries. If AI is to be worthy of the lofty expectations, AI customers will need to realize structural benefits in the form of higher growth rates and profit margins. At present, we see little evidence of any meaningful valuation premium assigned to companies adopting and investing in AI technology to increase their efficiency. We expect equity markets to reward a broader group of companies across a wider range of industries as they demonstrate successful integration and achievements with these new capabilities.

Fixed income returns were mixed in the quarter. Bond prices declined as interest rates rose modestly across the yield curve. However, higher coupon income was an offset to those bond price declines.

Recent economic reports aligned well with the soft economic landing expectation. The data reflected an economy that is softening but not falling off a cliff. While still healthy, the job market is slowing and becoming less tight. We ended the quarter with a three-month average job growth, falling to the lowest level since January 2021. Consumer spending is also cooling in an orderly fashion. Consumers show signs of inflation fatigue as they trade down to more value-oriented options and delay big-ticket purchases. Several prominent retailers continued to cut prices across a wide range of products, noting an increasingly stretched consumer. Estimates for the second quarter GDP growth rate have been volatile but currently stand at 1.5%, little changed compared to the growth rate for the first quarter.

While the economic data has been disappointing, the good news is slower growth (and tighter Fed policy) is helping to bring inflation down. The Federal Reserve’s preferred inflation measure (core PCE – personal consumption expenditures) increased 2.6% on a year-over-year basis in May. This represented the lowest annual rate since March 2021. Slowing economic growth, normalization in the labor market, and inflation moving (perhaps grudgingly) lower should set the stage for the Federal Reserve to start cutting interest rates at some point in the back half of the year.

Fort Pitt Capital Group (FPCG) is an investment advisor registered with the United States Securities and Exchange Commission (“SEC”). For a detailed discussion of FPCG and its services and fees, see the Form ADV Part 1 and 2A on file with the SEC at www.adviserinfo.sec.gov. Registration with the SEC does not imply any level of skill or training. You may also visit our website at www.orchid-ibex-388317.hostingersite.com. Any opinions expressed are opinions held at the time of publishing and are subject to change. It does not constitute an offer, solicitation, or recommendation to purchase any security. The information herein was obtained from various sources; we do not guarantee its accuracy or completeness. Past performance does not guarantee future results. The performance shown is for illustrative purposes only and the intent is to show the performance of certain segments of the fixed income markets. This information is not reflective of the performance of any FPCG client, or the impact of security selection on actual client portfolios.

The S&P 500 Equal Weighted Index is an equal weighted version of the S&P 500 is a broad-based index of 500 stocks, which is widely recognized as representative of the equity market in general. The S&P MidCap 400 provides investors with a benchmark for mid-sized companies. The S&P SmallCap 600 provides investors with a benchmark for the small-cap segment of the U.S. equity market. MSCI EAFE Index is designed to measure the equity performance of developed markets outside of the U.S. and Canada The returns for the indexes are provided for informational purposes only and are meant to reflect the performance of certain segments of the market. You cannot invest directly in an index. These indexes are unmanaged and may represent a more diversified list of securities than those recommended by Fort Pitt.

The post Investment Market Commentary for Q2 2024 appeared first on Fort Pitt Capital Group.

U.S. equities rallied for a second straight quarter. The S&P Index advanced by 10.6%, posting the best performance to start a year since 2019. Similar to the fourth quarter of last year, returns were more evenly distributed with broader participation across market sectors. While the technology sector and “AI” stocks continued to perform well, we did see signs of a rotation into some of the laggards from 2023 – such as – the energy, financials, industrials, and healthcare sectors. From a fundamental standpoint, we see plenty of runway for this rotation into the previously unloved sectors to continue and would view that outcome as a healthy and favorable backdrop for well-diversified portfolios.

Source: J.P. Morgan Asset Management “Weekly Market Recap” April 8, 2024. Sectors are based on the GICS methodology. Return data are calculated by FactSet using constituents and weights as provided by Standard & Poor’s. Returns are cumulative total return for stated period, including reinvestments of dividends.

Fixed income returns were mixed in the quarter. Longer duration bonds were negatively impacted by the rise in interest rates/bond yields and posted modest declines. However, shorter duration and more credit-sensitive fixed income investments posted slightly positive returns as higher coupon income and credit spread tightening were enough to offset the bump in interest rates in the quarter.

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The economy continued to defy expectations and expand at a healthy pace. The Atlanta Fed is currently estimating a solid 2.5% annualized GDP growth rate for the first quarter. Employment growth averaged a strong 275,000 monthly additions to the payrolls over the year’s first three months. U.S. manufacturing activity expanded in March for the first time since September 2022. And consumer spending remained robust, especially within the services sector of the economy.

It’s difficult to find compelling evidence that our economy is buckling under the weight of overly restrictive interest rates. Back in January, markets were pricing in six or seven interest rate cuts in 2024. We felt those calls were wildly misguided and unrealistic unless something went horribly wrong in the financial system. The avoidance of financial catastrophes combined with better economic data, the string of robust job gains, and sticky inflation readings have led the market to dramatically reprice expectations for interest rate cuts from the Fed this year. Market pricing currently points to only a couple cuts in 2024, and we’ve recently heard several Federal Reserve Governors ponder the big question out loud – do they need to cut at all this year?

In aggregate, equity markets have taken the repricing of interest rate cut expectations in stride and have managed to shake off a string of hotter-than-expected inflation reports in short order. We’d primarily attribute that outcome to a shift in the narrative. Markets have at least temporarily moved away from the “bad news is good news” because it means faster and deeper rate cuts view. Investors are instead focusing on the view that “good news is good news” because stronger economic growth, a healthy labor market, and some residual inflation in the system are positives for corporate earnings growth. We’ll see how these dueling narratives unfold throughout the year. But we suspect the bond market will be the final arbiter. Interest rates breaking above their recent range and moving back to the highs seen last fall would present a meaningful challenge to the equity market rally.

Copyright 2024 by Fort Pitt Capital Group LLC.  All rights reserved.

Fort Pitt votes proxies for client accounts as requested by our clients. A copy of Fort Pitt’s proxy voting policies, as well as information regarding how a particular issue was voted, is available by contacting the firm at 412-921-1822.

Fort Pitt Capital Group (FPCG) is an investment advisor registered with the United States Securities and Exchange Commission (“SEC”). For a detailed discussion of FPCG and its services and fees, see the Form ADV Part 1 and 2A on file with the SEC at www.adviserinfo.sec.gov. Registration with the SEC does not imply any level of skill or training. You may also visit our website at www.orchid-ibex-388317.hostingersite.com.

Any opinions expressed are opinions held at the time of publishing and are subject to change. It does not constitute an offer, solicitation, or recommendation to purchase any security. The information herein was obtained from various sources; we do not guarantee its accuracy or completeness. Past performance does not guarantee future results. The performance shown is for illustrative purposes only and the intent is to show the performance of certain segments of the markets. This information is not reflective of the performance of any FPCG client, or the impact of security selection on actual client portfolios. Actual results and developments may be substantially different from the expectations described in the forward-looking statements included herein.

The S&P 500 is a broad-based index of 500 stocks, which is widely recognized as representative of the equity market in general. The Bloomberg U.S. Aggregate Bond Index is a broad-based index of intermediate term investment grade bonds traded in the U.S. These indices are unmanaged and may represent a more diversified list of securities than those recommended by FPCG. In addition, FPCG may invest in securities outside of those represented in the indices. The performance of an index assumes no taxes, transaction costs, management fees or other expenses. Additional information on any index is available upon request.

The post Investment Newsletter First Quarter 2024 appeared first on Fort Pitt Capital Group.

 Stocks ended 2023 on a high note, with the S&P 500 Index advancing by 11.7% in the fourth quarter, closing the year with a 26.3% return and within striking distance of all-time highs. The powerful rally could be attributed to continued disinflation traction, increased credibility of the soft economic landing narrative, and a surprisingly dovish pivot from the Federal Reserve, which sent bond yields plummeting. In stark contrast to the prior three quarters, returns were much more evenly distributed across equity market sectors and capitalization. Or, more succinctly, it wasn’t just the mega-cap tech stocks that performed well this quarter.

 Bond markets were rattled in the third quarter as excessive government borrowing left investors wondering how high bond yields would have to go in order to absorb the additional supply. The drubbing left most fixed income indices in negative territory for the year as of the end of September. However, that changed dramatically in the final months of 2023 as economic readings gave investors confidence that the Federal Reserve has inflation on the run, and the Fed’s December Summary of Economic Projections suggested three interest rate cuts in 2024. These developments helped to bring interest rates/bond yields down dramatically and propelled fixed income returns firmly into positive territory for the year.

Looking back to the beginning of the year, the consensus among economists and market pundits was that the Federal Reserve’s aggressive tightening cycle would push the economy into a recession. So far, those recession calls have been wrong. Not only have we not experienced a recession, but GDP growth was slightly above long-term trend levels in 2023. The best explanation for the economic and financial market resiliency is how well-prepared consumers and larger corporations were for a higher interest rate environment. Smart borrowers used the historically low-interest rate environment in the first half of 2020 to restructure and refinance their balance sheets. According to real estate brokerage firm Redfin, roughly 80% of homeowners have a fixed-rate mortgage and almost two-thirds of those mortgages have interest rates below 4%. Unless homeowners have been forced to move or relocate, they have been well-insulated from the pain of 7%-8% mortgage rates. Large corporations raised massive amounts of capital in 2020 by issuing long-term bonds at rock-bottom interest rates. In fact, among S&P 500 nonfinancial firms, 92% of debt is fixed rate with a weighted average interest rate of only 3.2% and an average maturity of almost nine years. Obviously, the longer interest rates remain at elevated levels, the more consumers and companies will be impacted. But smart borrowing and refinancing activity in 2020 set the stage for better-than-expected outcomes in 2023.

Turning to 2024, the starting point feels much different than at this time last year. We enter the year with much more optimistic economic predictions and bullish investor sentiment. It’s now difficult to find an economist willing to predict a recession with the consensus view shifting to a soft economic landing and inflation returning to long-term trend levels. Bond markets are pricing in five or six interest rate cuts throughout the year. And equity analysts are penciling in double digits corporate earnings growth for 2024. While each consensus outcome is plausible in and of itself, we’re a bit more skeptical and don’t expect a perfect alignment of outcomes with optimistic expectations. And we’re reminded of the contrarian nature of equity markets – above-average returns often come after investor sentiment, positioning, and outlooks have been severely depressed. We don’t have this tailwind at our backs to kick off the year.

Our outlook for 2024 is for flattish returns for market cap-weighted indices such as the S&P 500 Index and better outcomes from more diversified strategies and portfolios. Concentrated leadership was a painfully evident trend in 2023. The “Magnificent Seven” (Apple, Microsoft, Google, Meta Platforms, Amazon, Nvidia, and Tesla) rebounded from a dismal showing in 2022 and accounted for roughly 85% of the return for the market cap weighted S&P 500 in 2023. However, the massive outperformance from these mega-cap technology stocks has pushed the S&P into concentrated territory, with the top 10 weighted stocks now accounting for one-third of the entire index. This concentrated positioning also represents a headwind from a valuation standpoint, with those top 10 stocks trading at a 45% premium to 25-year historical averages.

Looking forward, we see plenty of opportunities within areas and sectors investors have passed over as they continue to pile in and chase the mega-cap tech rally. Given the extremes in positioning, index weightings, and valuations of the “Magnificent Seven” versus everything else, we feel the rational expectation points to a shift in focus to some of the unloved sectors. And given our diversified exposure, we are much better positioned for a market environment with broader participation.

Fort Pitt Capital Group (FPCG) is an investment advisor registered with the United States Securities and Exchange Commission (“SEC”). For a detailed discussion of FPCG and its services and fees, see the Form ADV Part 1 and 2A on file with the SEC at www.adviserinfo.sec.gov. Registration with the SEC does not imply any level of skill or training. You may also visit our website at www.orchid-ibex-388317.hostingersite.com.

Any opinions expressed are opinions held at the time of publishing and are subject to change. It does not constitute an offer, solicitation, or recommendation to purchase any security. The information herein was obtained from various sources; we do not guarantee its accuracy or completeness. Past performance does not guarantee future results. The performance shown is for illustrative purposes only and the intent is to show the performance of certain segments of the markets. This information is not reflective of the performance of any FPCG client, or the impact of security selection on actual client portfolios. Actual results and developments may be substantially different from the expectations described in the forward-looking statements included herein.

The S&P 500 is a broad-based index of 500 stocks, which is widely recognized as representative of the equity market in general. The Bloomberg U.S. Aggregate Bond Index is a broad-based index of intermediate term investment grade bonds traded in the U.S. These indices are unmanaged and may represent a more diversified list of securities than those recommended by FPCG. In addition, FPCG may invest in securities outside of those represented in the indices. The performance of an index assumes no taxes, transaction costs, management fees or other expenses. Additional information on any index is available upon request.

Copyright 2024 by Fort Pitt Capital Group LLC.  All rights reserved.

The post 4th 2023 Quarter Market Commentary appeared first on Fort Pitt Capital Group.

After three consecutive quarters of positive returns, stocks pulled back in the third quarter with the S&P 500 Index declining 3.3%. Other asset classes, such as small/mid-cap stocks and international equities posted slightly larger declines. Attributing the quarterly pullback to poor economic data or disappointing corporate earnings results would be difficult. Recent economic data points and earnings releases have generally been strong and better than expected. The weakness in risk assets was a result of the sharp and rapid spike in interest rates that occurred in the quarter.

Increase in 10-Year U.S. Treasury Bond Yields in the Third Quarter

With bond yields rising to the highest levels in more than 15 years, fixed income allocations provided no ballast to portfolio returns. Intermediate and long-maturity bond indices posted declines similar to equity markets, erasing positive year-to-date returns. However, on the positive side, the significantly higher bond yields currently being locked in when new bonds are purchased in portfolios should help buffer bond price volatility going forward.

We can attribute the spike in interest rates/bond yields to a wide range of issues and developments that warrant monitoring. An abbreviated list includes the following:

• Economic growth has remained solid. In fact, the Federal Reserve Bank of Atlanta estimates a third-quarter GDP growth rate of close to 5%.
• Oil prices increased by almost 30% in the quarter, which had an observable impact on headline inflation.
• While the Federal Reserve decided to leave interest rates unchanged at their September meeting, they stressed their “higher for longer” mantra, increased their economic growth forecast, and are now projecting fewer interest rate cuts in 2024 compared to their view in June.
• In early August, Fitch Ratings downgraded U.S. Treasuries from AAA to AA+ due to a growing debt burden and political dysfunction in Washington.
• The Treasury Department released borrowing estimates for the second half of the year, which were significantly higher than expectations. The Treasury plans to borrow a staggering $1 trillion in the third quarter and another $852 billion in the fourth quarter. Unsurprisingly, the massive increase in supply has translated into lower bond prices and higher bond yields.

In the near term, we expect the path of interest rates to dictate the direction of financial markets. It will be challenging for equity markets to advance without stabilization in the bond market. We do see several developments that have the potential to lower interest rates. Economic momentum is likely to slow after a surprisingly strong third quarter as tighter monetary and credit conditions weigh on economic growth. Consumers have nearly depleted excess savings that have supported elevated spending levels. The timing of this development corresponds with a tick-up in delinquencies on auto loans and credit card debt. Outside of the spike in oil prices, there have been some positive developments on the inflation front. Wage growth has cooled and the most recent core inflation reading came in at 2.2% using a three-month annualized rate. While these data points may not align with expectations for a rip-roaring economy, that’s not the outcome investors want to see. We’re in a “bad news is good news” environment where investors want to see evidence of a cooling economy that brings down inflation and interest rates.

While several of the factors contributing to the recent spike in interest rates could reverse course, we acknowledge that the supply-demand picture for bonds is not encouraging at present. U.S. debt levels stand at $33 trillion, and Washington is running large budget deficits in a period of full employment. With no signs of fiscal restraint in D.C. and the Federal Reserve reversing course after a long stretch of supporting demand for government bonds through their Quantitative Easing programs, these supply-demand dynamics aren’t likely to improve any time soon. Policymakers need to come to terms with the fact that borrowing money is no longer free, and as such, the basic rules of economics apply to them as well. When supply overwhelms demand, the result is lower prices or, in this case, higher borrowing costs.

Fort Pitt Capital Group (FPCG) is an investment advisor registered with the United States Securities and Exchange Commission (“SEC”). For a detailed discussion of FPCG and its services and fees, see the Form ADV Part 1 and 2A on file with the SEC at www.adviserinfo.sec.gov. Registration with the SEC does not imply any level of skill or training. You may also visit our website at www.orchid-ibex-388317.hostingersite.com.

Any opinions expressed are opinions held at the time of publishing and are subject to change. It does not constitute an offer, solicitation, or recommendation to purchase any security. The information herein was obtained from various sources; we do not guarantee its accuracy or completeness. Past performance does not guarantee future results. The performance shown is for illustrative purposes only and the intent is to show the performance of certain segments of the markets. This information is not reflective of the performance of any FPCG client, or the impact of security selection on actual client portfolios. Actual results and developments may be substantially different from the expectations described in the forward-looking statements included herein.

The S&P 500 is a broad-based index of 500 stocks, which is widely recognized as representative of the equity market in general. The Bloomberg U.S. Aggregate Bond Index is a broad-based index of intermediate term investment grade bonds traded in the U.S. These indices are unmanaged and may represent a more diversified list of securities than those recommended by FPCG. In addition, FPCG may invest in securities outside of those represented in the indices. The performance of an index assumes no taxes, transaction costs, management fees or other expenses. Additional information on any index is available upon request.

Fort Pitt and its representatives may, from time to time, make forward-looking statements about developments, results, conditions or other events that the firm anticipates will occur in the future. Forward-looking statements are based on the firm’s views as of the date of this publication. Actual results may differ materially from those projected.

© Copyright 2023 by Fort Pitt Capital Group LLC.  All rights reserved.

Fort Pitt votes proxies for client accounts as requested by our clients. A copy of Fort Pitt’s proxy voting policies, as well as information regarding how a particular issue was voted, is available by contacting the firm at 412-921-1822.

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The post Quarterly Newsletter for 2023’s 3rd Quarter appeared first on Fort Pitt Capital Group.

The Rally Marches On

Equity markets posted impressive returns in the second quarter, with the S&P 500 Index advancing by 8.7%, marking the third consecutive quarter of positive returns. Similar to last quarter, the technology sector was the top performer and helped to propel broad equity indices higher. However, market breadth improved dramatically, with nine of the eleven S&P 500 sectors posting positive results. Positive developments included easing of banking sector stress, a resolution to the debt ceiling, continued moderation in inflationary pressures, and another quarter of better-than-expected corporate earnings results.

Bond yields were stable and rangebound for most of the second quarter. However, strong economic data and renewed hawkish commentary from the Federal Reserve in late June sent bond yields higher and translated into modest quarterly declines for most core fixed income indices.

We close the books on the first half of 2023 with broad domestic stock indices up roughly 16%. A better result (so far) than we expected at the beginning of the year when we predicted a 6%-8% return for equity markets in 2023. We’d primarily attribute the better-than-anticipated results to two main factors. First, investors have been forced to push back the timing of their recession forecasts. A recessionary outcome has been thwarted by the strong demand for workers, a resilient housing market, and consumers that are still supported by excess savings. Second, early-year calls for a 10%-15% decline in corporate earnings are looking too bearish at this point. Corporations have managed profit margins very well and are benefiting from operating leverage. Analysts are currently projecting full-year 2023 corporate earnings to be roughly flat compared to 2022. We view these expectations as credible, given the recent string of quarterly earnings results surpassing forecasts.

The continuation of the downward trend in inflation has also been a contributing factor to market performance. June’s headline inflation reading of 3% represents significant progress from the peak of 9.1% registered 12 months ago. Core inflation is still too high and will take some time to return to long-term trend levels. However, encouraging progress is being made and indicates the Federal Reserve’s tightening process is working to better balance supply and demand.

The massive outperformance from the mega-cap technology stocks warrants some additional comments. The six largest technology stocks (Apple, Microsoft, Amazon.com, Nvidia, Alphabet, and Meta Platforms) are up between 35%-189% through the first six months of 2023 and are responsible for two-thirds of the S&P 500 Index’s year-to-date return. Some of this outperformance can be attributable to a rebound from the dismal performance of 2022, when the tech sector declined by 28% as soaring interest rates and bloated cost structures weighed heavily on investors’ appetite for technology stocks. In our opinion, high-quality tech companies were unjustifiably punished last year by the undiscerning mass exit from unprofitable and speculative tech stocks.

The dynamics within the technology sector have changed drastically over the past six to eight months. Sector level valuation has moved from cheap and attractive territory to a 40% premium compared to longer-term averages. Investor sentiment has shifted from last year’s fear of further price declines to fear of missing out on future returns. The go-to justification for the ravenous demand for the mega-cap tech names has been their promising prospects in “AI” or artificial intelligence. While we certainly wouldn’t bet against the ability of AI to increase and enhance productivity levels, we do get skeptical when the Wall Street hype machine kicks into full gear. The current exuberant sentiment surrounding anything AI related feels very similar to other “revolutionary” technologies, such as blockchain and the metaverse, that have yet to take over the world.

Going forward, we see more attractive opportunities in areas such as healthcare, energy, and financials that haven’t fully participated in the market rebound and are currently out of favor. Valuations aren’t demanding, business fundamentals are strong, and we’d expect these sectors to be significant near-term beneficiaries if market breadth improves and broadens into areas that have lagged the broader market on a year-to-date basis.

Fort Pitt Capital Group (FPCG) is an investment advisor registered with the United States Securities and Exchange Commission (“SEC”). For a detailed discussion of FPCG and its services and fees, see the Form ADV Part 1 and 2A on file with the SEC at www.adviserinfo.sec.gov. Registration with the SEC does not imply any level of skill or training.

Any opinions expressed are opinions held at the time of publishing and are subject to change. It does not constitute an offer, solicitation, or recommendation to purchase any security. The information herein was obtained from various sources; we do not guarantee its accuracy or completeness. Past performance does not guarantee future results. The performance shown is for illustrative purposes only and the intent is to show the performance of certain segments of the markets. This information is not reflective of the performance of any FPCG client, or the impact of security selection on actual client portfolios. Actual results and developments may be substantially different from the expectations described in the forward-looking statements included herein.

The S&P 500 is a broad-based index of 500 stocks, which is widely recognized as representative of the equity market in general. The Bloomberg U.S. Aggregate Bond Index is a broad-based index of intermediate term investment grade bonds traded in the U.S. These indices are unmanaged and may represent a more diversified list of securities than those recommended by FPCG. In addition, FPCG may invest in securities outside of those represented in the indices. The performance of an index assumes no taxes, transaction costs, management fees or other expenses. Additional information on any index is available upon request.

Fort Pitt and its representatives may, from time to time, make forward-looking statements about developments, results, conditions or other events that the firm anticipates will occur in the future. Forward-looking statements are based the firm’s views as of the date of this publication. Actual results may differ materially from those projected.

Copyright 2023 by Fort Pitt Capital Group LLC.  All rights reserved.

Fort Pitt votes proxies for client accounts as requested by our clients. A copy of Fort Pitt’s proxy voting policies, as well as information regarding how a particular issue was voted, is available by contacting the firm at 412-921-1822.

The post Quarterly Commentary for 2nd Quarter 2023 appeared first on Fort Pitt Capital Group.

Equity markets rallied from mid-June through mid-August, with the S&P 500 Index advancing by almost 18% over that two-month stretch. This bounce was primarily attributable to the narrative that the Federal Reserve would pause or pivot away from their aggressive interest rate hiking campaign. However, Fed Chairman Jerome Powell torched the idea of a policy pivot with his Jackson Hole speech in late August. Instead, Powell reiterated the Fed’s commitment to taming inflation and showed little concern for the resulting “pain” for households and businesses. The short speech could have been condensed further by Powell simply stating that aggressive interest rate hikes will continue, and they firmly recognize that they are going to have to put some people out of work to curb demand.

The Fed cemented their hawkish stance last week with their third consecutive outsized, 75 basis point increase which sets the new Federal Funds range at 3.00% to 3.25%. The median projections for the Federal Funds rate also increased significantly to 4.4% by the end of the year before peaking out at 4.6% sometime in 2023. Markets have reacted swiftly to tighter monetary policy projections, with short-term government bond yields spiking to 15-year highs and equity markets cascading back down to the mid-June lows.

We still view inflation as the linchpin for near-term outcomes. The Fed can’t pivot away from their hiking path with inflation still at 40-year highs, and they also need to manage future inflation expectations to ensure price pressures do not become ingrained in our economy. While progress on the inflation front has been disappointingly slow, we are seeing some encouraging signs of relief as well as some early trends that we anticipate continuing. An abbreviated list of these data points is listed below.

• Oil prices dropped below $80/ barrel last week. This represents a 35% decline from the March peak and oil prices are now lower than before Russia invaded Ukraine. This is translating into measurable declines in gasoline prices, a broad decline in shipping/transportation costs, and a 14% drop in airline fares compared to the May peak. (From J.P. Morgan Markets report published on 09/20/22 under the title of “Under the Hood”)
• Used car prices have declined by 13% from the January peak. (Based on price comparisons from the Manheim Used Vehicle Value Index)
• We expect new car prices to start rolling over as supply chains continue to improve and semiconductor capacity is freed up due to reduced demand for PCs and smartphones.
• In addition to these indicators, we have also been encouraged that longer-term (3-5 year) inflation expectations have not only remained well-anchored but have declined since the first quarter of the year. Market-based measures, consumer surveys, and professional forecasters all anticipate that the Fed is the ultimate winner in the inflation battle.

There has been less observable progress within services inflation. And that’s a problem since services account for more than 70% of core inflation. Rental inflation is the big problem here, with rents representing approximately 40% of the overall inflation basket. It’s no surprise rental prices have skyrocketed given the massive appreciation in real estate assets driven by the long stretch of ultra-low interest rates and unprecedented government stimulus. Historically, rents have followed housing prices with about a 12-month lag. This explains the Fed’s recent comments about the need for a correction in the housing market. We are seeing the early stages of a rollover in the housing market and indications that this is starting to translate into easing rental prices. An abbreviated list of these data points is listed below.

• 30-year mortgage rates at close to 7% are translating into a stunning decline in affordability and discouraging home buying.
• In July, the CoreLogic HPI (Home Price Index) showed the largest month-over-month decline in home prices in 10 years.
• Homebuilders are having trouble selling the houses that they have already built or are building, sales have plunged, and inventories have spiked to the highest since 2008. Homebuilders have started cutting prices, buying down mortgage rates, and piling on other incentives to get their inventory moving.
• The asking rents on new leases peaked at 17% year-over-year in February of this year, with year-over-year increases easing to 12% in August. This is still dramatically higher than the 4% average annual increase pre-pandemic but headed in the right direction.

We expect home prices to continue to moderate and start to translate into significantly lower rental inflation by Q1/Q2 of 2023. A significant drop in the component that represents 40% of the entire inflation calculation is what is desperately needed to move us back toward the Fed’s 2% inflation target.

We also believe we are entering the peak Fed hawkishness zone. Fixed income markets have already priced in about 90% of the Fed’s final destination within the tightening cycle. While their view on the final destination could change, we think at some point, the Fed is going to want to slow the pace of rate hikes and take some time to observe the lagged outcome of their policy decisions. We expect the impacts of higher interest rates to become more evident in the coming months and quarters. Housing weakness, rising unemployment, and lower consumer spending should result in stabilizing interest rates. While we don’t like rooting for bad economic data, we need interest rates to stabilize in order for equity markets to find their footing.

Stocks have gotten significantly cheaper as a result of this year’s market decline. The S&P 500 Index is trading at roughly 15 times 2023 earnings estimates. That’s pretty cheap compared to long-term historical averages and not too far from where markets bottomed in previous selloffs (December 2018 & March 2020). However, 2023 estimates are still calling for about 8% earnings growth. We feel these estimates are too optimistic given the wide range of potential economic outcomes, which are skewed to the downside given the Fed’s goal of softening the labor market and below-trend economic growth. However, market indices aren’t too far away from trading at reasonable valuations, even with a pessimistic assumption for earnings in 2023. That scenario comes into greater focus with another 5%-10% downside from current levels and could set up for a more durable market bottom.

A few parting words:

• As all previous market bottoms have taught us, markets are forward-looking and tend to bottom well before all the bad news, data, and headlines go away.
• We feel strongly that there are opportunities being created in this environment. Our conviction level is high that current market prices don’t adequately reflect the long-term earnings power of the businesses that we own.
• After every bear market is a bull market.

Fort Pitt Capital Group (FPCG) is an investment advisor registered with the United States Securities and Exchange Commission (“SEC”). For a detailed discussion of FPCG and its services and fees, see the Form ADV Part 1 and 2A on file with the SEC at www.adviserinfo.sec.gov. Registration with the SEC does not imply any level of skill or training. You may also visit our website at www.orchid-ibex-388317.hostingersite.com.

Any opinions expressed are opinions held at the time of publishing and are subject to change. It does not constitute an offer, solicitation, or recommendation to purchase any security. The information herein was obtained from various sources; we do not guarantee its accuracy or completeness. Past performance does not guarantee future results. The performance shown is for illustrative purposes only and the intent is to show the performance of certain segments of the markets. This information is not reflective of the performance of any FPCG client, or the impact of security selection on actual client portfolios. Actual results and developments may be substantially different from the expectations described in the forward-looking statements included herein.

The S&P 500 is a broad-based index of 500 stocks, which is widely recognized as representative of the equity market in general. The Bloomberg U.S. Aggregate Bond Index is a broad-based index of intermediate term investment grade bonds traded in the U.S. These indices are unmanaged and may represent a more diversified list of securities than those recommended by FPCG. In addition, FPCG may invest in securities outside of those represented in the indices. The performance of an index assumes no taxes, transaction costs, management fees or other expenses. Additional information on any index is available upon request.

Fort Pitt votes proxies for client accounts as requested by our clients. A copy of Fort Pitt’s proxy voting policies, as well as information regarding how a particular issue was voted, is available by contacting the firm at 412-921-1822.

Copyright 2022 by Fort Pitt Capital Group LLC.  All rights reserved.

The post Third Quarter Market Update appeared first on Fort Pitt Capital Group.

Equity markets declined sharply in the second quarter, with the S&P 500 Index falling by 16.1%. When combined with the negative equity market returns in the first three months, the broad market has suffered its worst first half since the Nixon administration. Selling pressure was driven by a host of factors but could be more narrowly attributed to another leg higher in interest rates, stubbornly high inflation, and the Federal Reserve’s more aggressive policy stance. All of which are occurring against the backdrop of a rapidly slowing economy.

It was also another tough quarter for bonds. Bond markets were rattled by the Federal Reserve’s outsized interest rate hikes and their more hawkish rhetoric as the Fed emphasized their pledge to combat inflation. The intermediate-maturity U.S. Bloomberg Aggregate Bond Index declined by 4.7%, while longer-maturity and more credit-sensitive fixed income benchmarks fared even worse.

Interest rates have risen aggressively in a short period. For example, 10-year Treasury bond yields doubled in the first six months of the year. This spike in interest rates has translated into significantly lower bond prices. Not to discount the damage the bond market has undergone, but going forward, much higher bond yields can contribute mightily to long-term returns for fixed income portfolios. From these levels, bonds look more attractive than they have in quite a while.

As we have discussed previously, inflation will be the linchpin for near-term outcomes for the economy and financial markets. If inflationary pressures remain elevated, it forces the Fed’s hand to continue their aggressive interest rate hiking cycle, which increases the risks of a policy mistake/recession. If inflation starts to fade, it may allow the Fed some flexibility and the ability to take a more patient approach. The Fed may not need to raise short-term interest rates as high as currently projected if demand moderates and prices cool.

While there has been no moderation in the backward-looking inflation reports, our more real-time internal research indicates inflationary pressures are starting to ease. The list includes:

• Cooling off in housing starts as well as new and existing homes sales as mortgage rates have spiked to around 6%.
• Global shipping rates and domestic freight costs have started to decline.
• Retailers are no longer scrambling for inventory to stock the shelves. Instead, many retailers are now holding too much inventory and discounting merchandise to clear the glut.
• Commodity prices have been in sharp retreat since the mid-June highs. The chart below shows the recent pullback in a commodity index which includes precious and industrial metals, agricultural commodities as well as energy.

Bloomberg Commodity Index Total Return 07/07/2021 – 07/07/2022

While the debate among economists continues over how long inflation will stay elevated, market-based inflation expectations have declined dramatically since the late-March peak. The chart below shows 5-year breakeven rates, or, in simpler terms, a proxy for the bond market’s expectation for the average inflation rate over the next five years. The markets believe that the Fed will win the fight against inflation.

5-Year Breakeven Inflation Rate 07/06/2021 – 07/06/2022

While we welcome the signs of moderating inflation, we also recognize that a rapidly slowing economy and softer demand have been key contributors to the equation. In fact, our economy may already be in at least a technical recession with a negative GDP print in the first quarter and estimates for another negative reading for the second quarter. While that outcome might not meet everyone’s definition of a recession, it’s close enough to provide some thoughts on a recessionary outcome.

Our banking system is well-capitalized. Consumers have strong and underleveraged balance sheets. And large corporations are well-positioned after significant capital raises in 2020 and years of healthy profits. If we are amid an economic contraction, or it is on the horizon, these factors should help mitigate the severity.

Also, looking back at the past dozen or so post World War II recessions, the median broad market (S&P 500 Index) decline has been 24%. We have already experienced a drawdown in-line with these historical averages. That data point doesn’t tell us that the bottom is in, or stocks couldn’t decline more. But it indicates that a lot of bad news and negative outcomes have been priced in.

We will close with the most important point. The market is forward-looking and tends to bottom well before all the bad economic data and negative headlines go away. A look at the previous six recessions provides a solid illustration of that point. On average, the equity market bottomed almost 4 months before GDP bottomed, stocks were up 19% before GDP bottomed, and up by 31% by the time that the economy started to grow again.

Investors that attempt to “time” the market in order to avoid bouts of volatility often fail to adequately account for the forward-looking nature of markets and end up on the sidelines when markets recover. While not always comfortable, leveraging long investment time horizons and adhering to well-established investment plans have proven to be successful strategies for navigating periods of market volatility. We feel this time will be no different.

Fort Pitt Capital Group (FPCG) is an investment advisor registered with the United States Securities and Exchange Commission (“SEC”). For a detailed discussion of FPCG and its services and fees, see the Form ADV Part 1 and 2A on file with the SEC at www.adviserinfo.sec.gov. Registration with the SEC does not imply any level of skill or training. You may also visit our website at www.orchid-ibex-388317.hostingersite.com.

Any opinions expressed are opinions held at the time of publishing and are subject to change. It does not constitute an offer, solicitation, or recommendation to purchase any security. The information herein was obtained from various sources; we do not guarantee its accuracy or completeness. Past performance does not guarantee future results. The performance shown is for illustrative purposes only and the intent is to show the performance of certain segments of the markets. This information is not reflective of the performance of any FPCG client, or the impact of security selection on actual client portfolios. Actual results and developments may be substantially different from the expectations described in the forward-looking statements included herein.

The S&P 500 is a broad-based index of 500 stocks, which is widely recognized as representative of the equity market in general. The Bloomberg U.S. Aggregate Bond Index is a broad-based index of intermediate term investment grade bonds traded in the U.S. These indices are unmanaged and may represent a more diversified list of securities than those recommended by FPCG. In addition, FPCG may invest in securities outside of those represented in the indices. The performance of an index assumes no taxes, transaction costs, management fees or other expenses. Additional information on any index is available upon request.

Copyright 2022 by Fort Pitt Capital Group LLC.  All rights reserved.

The post Quarterly Commentary July 2022 appeared first on Fort Pitt Capital Group.