A Rotation Back Into Defensive Stocks

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In his Daily Market Notes report to investors, Louis Navellier wrote:

Stocks languish as earnings wind up, banks are still soft, and the debt ceiling simmers.

It feels like most of the good news is in for the time being. Earnings were better than the bears had warned, but there were plenty of disappointments along the way. Expectations for 2H23 earnings don’t reflect a pending recession, and the labor market remains strong.

Hopes for a Fed pause or pivot still exist in the futures market but not in the Fed rhetoric. Further profit growth surprises will likely come from cost-cutting rather than higher prices or more robust consumer spending.

Can’t Complain About 2023

It’s not easy for investors to complain about 2023 with the S&P 500 up 7.8% YTD, up 3.3% LTM, albeit still 14% off record highs. The NASDAQ is up 17.4% YTD, up 4.9% LTM, though 24% below its all-time high. Pretty impressive considering how far interest rates have risen over the last year.

Current risks on the table to overcome are the regional banking situation, where the outflow of deposits for better yields and restrained lending appears unavoidable though difficult to assess the damage, whereas the debt ceiling brinkmanship appears very avoidable and the potential major damage very undeniable.

Defensive Stocks Back in Favor

We’re seeing a rotation back into defensive stocks, like healthcare and consumer names with pricing power, while cyclicals have become weaker. The mega techs continue to carry the weight of the indexes, with the top 10 stocks of the S&P now over 29% of market cap, the highest in at least 40 years.

Consider that Apple’s $2.6T valuation equals the entire UK stock market value and is double Germany’s. The high +18.5X P/E is driven by these large names and should leave plenty of opportunities in quality smaller names with lower P/Es.

Trim Big YTD Winners

Today we find yields flat, as is gold, high-yield bonds lower, the VIX higher, and energy lower. Overall market indexes appear to be priced for no recession and it’s probably time to trim big YTD winners and focus on underperforming names with good fundamentals.

Coffee Beans: Daddy’s Boy

A man has been caught storing his dead father’s body in his freezer when he died of natural causes 18 months ago, so he could “continue to talk to him”. The corpse was discovered after concerns were raised by a family doctor who was worried about the 101-year-old father’s health. Source: Sky News. See the full story here.