Despite contending with a hatful of headwinds, the broad U.S. and global markets held up exceptionally well last week, with the S&P Composite 1500 closing essentially flat. Component asset classes fared a similar fate, as the S&P 500 also posted little movement, while the S&P MidCap 400 fell 0.1% and the S&P SmallCap 600 rose 0.2%. Even the S&P Global 1200 slipped only 0.2%.
On a sub-industry level, however, the magnitude of sub-surface turmoil was eye-opening, as 70% of all 150 sub-industries saw advances or declines of 1% or more. In addition, 50% were up or down by at least 1.5%, and 34% rose or fell by 2% or more. And the dominance of volatility was to the downside, since 75% of all declining sub-industries fell by 1% or more, 57% declined at least 1.5%, and 46% slipped by 2% or more.
The events of last week aren’t likely to throw the U.S. economy into recession, in our opinion, which usually is a cause for bear markets. While recent sector changes demonstrate our preference for defensive growth, we remind investors that during periods of seasonal softness, it is typically better to rotate than retreat.
As a result, S&P Capital IQ made four sector changes in the past week.
- Lowered Energy to underweight from marketweight,
- Reduced Industrials to marketweight from overweight
- Reduced Information Technology to marketweight from overweight
- Raised Telecom Services to overweight from underweight
So there you have it. S&P Capital IQ forecasts the S&P 500 to rise to 2250 by mid-2016, implying a 9% price gain based on an improving U.S. economy, a 13.4% growth in aggregate operating EPS growth expectations from Q2 2015E through Q2 2016E, and inflation that remains relatively tame at or below 2%.
Accompanying this above-average price appreciation will be elevated volatility from ongoing macro concerns and the impact from the start of the Fed’s recalibration efforts. We continue to recommend a neutral exposure to equities, but suggest investors focus more on underlying STARS recommendations in this defensive growth environment.