AlphaProfit Sector Newsletter: March Indicator Update
March 1, 2022
Current Model Portfolio Composition
Dear Valued Subscriber,
AlphaProfit will reposition the Core and Focus model portfolios for the evolving market environment at the market close on Thursday, March 31. To help you closely track the model portfolios, we will publish the Repositioning Alert by 10:00 am Central Time on March 31 in the Subscriber Login area. We will notify you via e-mail when we put out the Repositioning Alert on the website.
We are not making any changes to the sector and industry recommendations or the model portfolios at present. The current model portfolio compositions and exchange-traded fund (ETF) & mutual fund recommendations are available in the Subscriber Login area of the website. View Current Model Portfolio Composition
Market Developments
Stocks were notably volatile in February. Russia’s invasion of Ukraine, inflation worries, rising bond yields, and fourth-quarter earnings contributed to volatility.
Russian military built positions to surround Ukraine and Russia recognized two self-proclaimed Ukrainian states. The United States, the European Union, and other Western allies announced sanctions on Russia in a broad effort to isolate Moscow from the global economy.
The U. S. and its allies took a series of measures to isolate Russia economically and diplomatically. The measures seek to make ordinary business matters & international trade difficult for Russia. They also seek to prevent Russia from using $630 billion in central bank foreign currency reserves in the invasion of Ukraine and to defend its plunging currency.
Germany halted certifying the $11 billion 750-mile Nord Stream 2 undersea pipeline that transports Russian natural gas to Germany and other countries in the European Union. Germany also announced a significant increase in military spending, marking a paradigm shift in German foreign & defense policy.
In economic data, the U. S. Bureau of Economic Analysis reported the core personal consumption expenditures price index (excludes food & energy expenditures) rose 0.5% in January. The report showed a 5.2% increase in the Federal Reserve’s primary inflation gauge for the 12 months ending in January, the highest increase since April 1983. Economists forecasted a 5.1% rise in a Dow Jones survey.
Before the invasion, fears of the Federal Reserve aggressively raising interest rates to fight inflation caused bond yields to continue their ascent from January. St. Louis Federal Reserve President Bullard pressed his case for a 0.5% hike in the benchmark interest rate in March. Rising oil prices added to inflation worries. The yield on the 10-year Treasury note rose as high as 2.06% before pulling back to close February at 1.84% as the situation in Ukraine drove a fight to safety.
The S&P 500 companies moved close to wrapping up the fourth-quarter earnings season. FactSet data shows nearly 76% of the 480 companies topped analysts’ EPS forecasts. Earnings in total grew 30.7% compared to analysts’ forecast of 21.2% growth at the end of 2021.
Investors, however, did not reward companies for posting upside EPS surprises. They were wary of stock valuations in this milieu of rising bond yields. Companies reporting negative surprises suffered massive losses. Facebook parent Meta Platforms, for example, fell over 26% in a single day after its results and forecasts disappointed investors. The decline wiped out more than $200 billion off Meta Platform’s market capitalization, the highest one-day loss in the value of a U. S. company.
Performance Data
The large-cap S&P 500 index lost 3.0% in February. The benchmark was down over 14% from its all-time high at its worst point in February, exceeding the typical definition of a 10% correction. The index lost its hold on the psychologically important 200-day moving average (DMA) after briefly climbing above this trendline in early February.
Small-cap stocks in the Russell 2000 index advanced 1.1%. Small-cap stocks have been in a bear market for some time. At its worst point in February, the Russell 2000 was down 23% from its all-time high, exceeding the typical bear market threshold of a 20% decline.
All four AlphaProfit model portfolios held up better than the S&P 500 in February. The ETF Focus and Fidelity Focus model portfolios gained 0.2% and 0.8%, respectively, while the ETF Core and Fidelity Core model portfolios lost 0.9% and 0.8%, respectively.
The Monthly Report, due for publication on March 12, will include the longer-term performance data of the AlphaProfit model portfolios and benchmarks.
Rating Sector Portfolio Indicator ‘Buy’
The worsening political crisis in Ukraine is likely to impair the supply of Russian oil into the global market. Investors await Fed Chairman Powell’s comments on how the conflict in Ukraine and sanctions on Russia would impact Fed policy. Market volatility can provide an opportunity to increase exposure to U. S. stocks that appear more appropriately valued.
Stocks surged late last week in a knee-jerk reaction to sanctions on Russia after the invasion. The exclusion of energy & agriculture products from the sanctions came as a relief.
Investors are now pondering on the future of the political landscape. Fighting between Russia & Ukraine extends into the sixth day with a large Russian convoy headed towards the Ukrainian capital Kyiv and Ukraine appealing for help. The first round of talks between the two countries since the conflict ended without an agreement. Meanwhile, Russian President Putin has put his nuclear deterrence forces on high alert amid a growing global backlash against the invasion.
Russia is a large supplier of oil to global markets. Even though the U. S. did not directly sanction Russian energy products, analysts believe the measures would reduce oil supplies from Russia.
UK-based oil companies BP and Shell have abandoned their assets in Russia. Oil has risen in price since Russia invaded Ukraine and exceeded the $100 a barrel mark. The extent to which sanctions will impact oil flow from Russia is hard to quantify. A continued rise in oil prices will increase inflation and dampen economic growth.
Federal Reserve Chair Powell testifies before Congress on Thursday and Friday this week. Investors eagerly await to hear how Powell sees the conflict in Ukraine and sanctions on Russia impacting the Fed’s interest rate policy. Specifically, investors are looking for clarity on whether the Ukraine situation would cause the Fed to slow down the pace of tightening interest rate policy.
Markets will likely remain volatile for the next few weeks as investors focus on events in Ukraine, oil prices, and the outlook for inflation & interest rates in the lead-up to the Federal Reserve meeting on March 15 & 16.
From a market perspective, U. S. stock valuation metrics are starting to fall in line with historical norms for the first time since the pandemic hit in March 2020. The forward 12-month price-to-earnings valuation ratio for the S&P 500 index now stands at 18.5, in line with the ratio’s 5-year average.
The impact of the events in Ukraine on the global economy should be relatively limited as long as the conflict stays within Ukraine & Russia. Both nations collectively account for about 2% of global market-based GDP.
We rate the Sector Portfolio Indicator ‘Buy.’ Current subscribers can allocate 25-50% of total investable assets to stocks & stock equivalents, the specific percentage dependent on investment objective and risk tolerance. The remainder of the assets can be held in cash or income investments.
We also recommend subscribers to increase allocation to stock and stock equivalents by 10% to the 35-60% range if the S&P 500 drops below 4,110. (On February 28, the S&P 500 closed at 4,373.94.)
Stock Recommendations
Stock recommendations will be included in the March Report due for publication on the 12th.
We welcome your comments.
Best regards,
Sam Subramanian PhD, MBA
AlphaProfit Investments, LLC
Ideas. Insights. Results.
https://www.alphaprofit.com
