Clark Capital’s Economic Gauges
Monthly Moves: Charting Our Strategies, January 2023
Clark Capital’s Bottom-Up, Fundamental Strategies
Declining inflation, leading economic indicators, and their associated impact on future Fed tightening helped equities firm up in January. Risk assets started the year strong with small-cap U.S. equities, large-cap U.S. equities and international equities all rallying more than 8% as lower goods inflation, easing home prices, current rent growth rates, less tight labor markets, and sub-50 Purchasing Manager Indices all point to a Fed that is likely to slow its pace of interest rate increases.
We expect the market to look past the current earnings recession to a stronger second half supported by a resilient consumer, lower inflation, and a potential pause in rate hikes. In our bottom-up strategies, we continue to seek out what we believe are undervalued, high-quality companies in both developed and emerging markets. Growth stocks may narrow the performance gap relative to value, but we expect traditional quality metrics including valuation, free cash flow, earnings growth, and revenue guidance to perform well.
Inflation has continued to moderate and interest rates have followed suit. The 10-year Treasury Note yield declined 35 basis points during the month as it looks increasingly likely that the Fed will pause rate hikes after March. Bonds have been well bid in this environment, with what we consider attractive yields supporting the asset class.
Below are strategy updates from January:
All Cap Core U.S. Equity
- The Navigator® All Cap strategy is positioned with approximately 68.4% in large-cap stocks and the remainder in mid/small-cap companies and cash.
- During the month, we added a real estate company, a financial services company, and a streaming service to the portfolio. We exited our positions in a telecommunications company, a variety store chain, and a scientific instrumentation company.
- Albeit underweight to the benchmark, Information Technology remains the largest sector weight in the strategy at 19.7%.
High Dividend Equity
- Financials represent the largest sector weight at 19.9% and below the benchmark at 20.5%. The next two largest portfolio weights are Healthcare and Information Technology at 15.3% and 12.1%, respectively.
- The top performing sectors were Real Estate, Consumer Staples, and Industrials versus laggards Information Technology, Healthcare and Basic Materials.
- January sales included reducing companies that we believe have weak business momentum including a biotech company, an insurance company, a beverage company, and a petroleum company. New positions included a chemical materials company, two financial services companies, and an industrial technology company.
International Equity ADR
- Britain, Canada, China, Japan and Switzerland are the strategy’s largest country weights, all ranging between 8% and 14%.
- During the month we added a Japanese multinational conglomerate, a Chinese technology and entertainment conglomerate, and a Brazilian metals and mining company to the portfolio. We exited our positions in a Brazilian financial services company, a Canadian agriculture company, and a Dutch semiconductor company.
- ADR’s exposure to China is now 9%, which is slightly more than its weighting in the All-Country World ex-US benchmark.
- Communication Services, Consumer Discretionary, Financials, Industrials and Information Technology are our largest sector weights.
Taxable Fixed Income
- Within the portfolio, the focus was once again on improving liquidity while also increasing the current yield in the portfolio. This was most prevalent in the banking sector as banks unexpectedly did not issue a large amount of new bonds.
- The portfolio also continued to add to the Utilities sector in the longer end of the as they had cheapened up recently.
- The market continues to discount the Fed and push higher beta names tighter as rates rally.
Tax-Free Fixed Income
- Tax-exempt issuance for the month increased compared to the prior month: $14.7 billion observed in December versus $23.2 billion in January.
- Despite strong market technicals and rich muni valuations benefitting issuers, higher rates and Fed uncertainty are keeping issuers at bay.
- During the prior month, our strategy continued to consolidate positions for better economies of scale, increase block size where possible, and aggressively manage duration and extension risk.
- Moving forward, we are repositioning portfolio exposures into a barbell-like structure. This includes being overweight maturities inside 3-years, underweight 4 to 9-year maturities, neutral weight in the 10 to 12-year maturity bucket, and overweight maturities greater than 12 to 16 years.
Clark Capital’s Top-Down, Quantitative Strategies
We believe the strength of the markets in January bodes well for continued gains. Our view has been that the October 2022 lows marked the cycle bottom and disinflation trends would provide a good backdrop for risk assets. After a near record year of greater than 1% moves in the S&P 500, volatility across both equities and fixed income fell sharply in January.
Our tactical strategies maintain their risk-on positioning with credit very firm as financial conditions ease in the face of Fed tightening. Market breadth has been strong with broad participation and leadership developing in small and mid-cap stocks.
We are also seeing strength across sectors that normally perform well in the early stages of bull markets including semiconductors, consumer discretionary, and homebuilders.
Below are strategy updates from January:
- The portfolio enjoyed gains in its equity holdings, including growth stocks, copper miners, and natural resources. As a result, we slightly reduced some of that exposure.
- The tactical fixed income portion of the portfolio favors investment grade and high yield credit.
- Options-based, managed futures, and long-short equity led the core portion of the portfolio, while alternative credit and market-neutral real estate trailed.
Fixed Income Total Return
- Easing inflation concerns helped drive interest rates down and fixed income and credit in general higher.
- Our models were fairly close to turning defensive in mid-to-late December, but improving credit conditions drove our models to new highs in January. Our risk-on position in high yield is stable at this time.
- Our credit-based models were fairly close to turning defensive in mid-to-late December, but easing inflation concerns drove rates lower and risk-on assets higher.
- Our credit models that drive the portfolio made new highs and are broadly positive.
- The S&P 500 ended January up 6.3%, and the portfolio’s other three holdings in U.S. small-cap, broad international, and international small-cap, each outperformed the S&P 500 by at least an additional 2.0%.
- As the risk-on rally accelerated in January, the remainder of the portfolio’s defensive-oriented holdings fell off in our rankings and exited the portfolio.
- Consumer Discretionary and Technology were big underperformers last year, but their relative breakouts during January were impressive.
- The portfolio continues to have a value-oriented bias, and mid and small-cap value have grown in emphasis as January moved forward, while buybacks and high dividend stocks were sold.
- Growth stocks’ relative strength has neutralized, but there is zero evidence of a sustained trend.
- It is worth noting that value indexes now include some Technology, while growth indexes are overweight Energy versus the S&P 500.
U.S. Strategic Beta
- The portfolio favored growth stocks and U.S. mid and small-caps, each of which enjoyed strong months during the risk-on rally.
- September 2022 displayed the most extreme negative investor sentiment in many years, and since 6 to 12-month returns after such extremes are very positive, we expect to continue a risk-facing stance.
Fixed income securities are subject to certain risks including, but not limited to: interest rate (changes in interest rates may cause a decline in market value of an investment), credit, payment, call (some bonds allow the issuer to call a bond for redemption before it matures), and extension (principal repayments may not occur as quickly as anticipated, causing the expected maturity of a security to increase).
Foreign securities are more volatile, harder to price and less liquid than U.S. securities. They are subject to different accounting and regulatory standards and political and economic risks. These risks are enhanced in emerging market countries.
The MSCI ACWI ex USA Index captures large and mid cap representation across 22 of 23 Developed Markets (DM) countries (excluding the US) and 26 Emerging Markets (EM) countries*. With 2,206 constituents, the index covers approximately 85% of the global equity opportunity set outside the US.
The Bloomberg US Corporate High Yield Bond Index measures the USD-denominated, high yield, fixed-rate corporate bond market.
The Bloomberg Barclays 7-10 Year Index measures the performance of the U.S. Government bond market and includes public obligations of the U.S. Treasury with a maturity of between seven and up to (but not including) ten years.
The Russell 2000 Index is a small-cap stock market index that represents the bottom 2,000 stocks in the Russell 3000.
The Russell 2000 Value Index measures the performance of the small-cap value segment of the U.S. equity universe. It includes those Russell 2000 companies with lower price-to-book ratios and lower expected and historical growth values.
The Russell 2000 Growth Index measures the performance of the small-cap growth segment of the U.S. equity universe.
The 2 Year Treasury Rate is the yield received for investing in a US government issued treasury security that has a maturity of 2 years. The 2 year treasury yield is included on the shorter end of the yield curve and is important when looking at the overall US economy.
The 10 Year Treasury Rate is the yield received for investing in a US government issued treasury security that has a maturity of 10 year. The 10 year treasury yield is included on the longer end of the yield curve. Many analysts will use the 10 year yield as the “risk free” rate when valuing the markets or an individual security.
A municipal bond is a debt security issued by a state, municipality, or county to finance its capital expenditures, including the construction of highways, bridges, or schools. They can be thought of as loans that investors make to local governments.
The S&P 500 measures the performance of the 500 leading companies in leading industries of the U.S. economy, capturing 75% of U.S. equities.
Non-investment-grade debt securities (high-yield/junk bonds) may be subject to greater market fluctuations, risk of default or loss of income and principal than higher-rated securities.
The securities of mid-cap companies may be subject to more abrupt or erratic market movements and may have lower trading volumes.
This document may contain certain information that constitutes forward-looking statements which can be identified by the use of forward-looking terminology such as “may,” “expect,” “will,” “hope,” “forecast,” “intend,” “target,” “believe,” and/or comparable terminology (or the negative thereof). Forward looking statements cannot be guaranteed. No assurance, representation, or warranty is made by any person that any of Clark Capital’s assumptions, expectations, objectives, and/or goals will be achieved. Nothing contained in this document may be relied upon as a guarantee, promise, assurance, or representation as to the future.
Clark Capital Management Group, Inc. is an investment adviser registered with the U.S. Securities and Exchange Commission. Registration does not imply a certain level of skill or training. More information about Clark Capital’s advisory services and fees can be found in its Form ADV which is available upon request. CCM-1188