March Madness: Spotting the Market’s Bracket-Busters

Do you have your bracket fine-tuned ahead of the tourney? Are you confident in your final four? Maybe more importantly, how much do you have riding on the line going into March Madness?

It’s an exciting couple of weeks for basketball enthusiasts and casual sports fans alike. At Dana, we enjoy filling out brackets and taking in the unpredictability of the games as much as anyone. We do not, however, play around when it comes to investments. All investors should have a process and disciplined approach to choosing stocks and bonds. But that doesn’t mean we cannot have some fun at times, too.

Last year, we assessed the economic landscape sort of like how you might go about dissecting the 64 teams earning a spot into the college basketball tournament. Let’s step onto the court once more and see how the market is shaping up this season.


2023.03 Dana Blog March Madness GraphicThe 1 Seeds

Dare to flip on financial TV or open up The Wall Street Journal any given morning, and you’ll be inundated with the major players in the macro environment right now. The 1 seeds in our investment bracket are issues that are so obvious that they make the daily headlines and don magazine covers. Think of these as the consensus views. Thinking as an astute investor, if the base case fails to come to fruition, then the market will likely shift course quickly (and many brackets will quickly get tossed into the circular file).

The Fed

Making a back-to-back appearance as a top seed, Chair Powell and the rest of the Federal Open Market Committee (FOMC) remain the immovable force of today’s stock and bond markets. Consider that just a handful of weeks ago, the market had priced in a small amount of further tightening while the Federal Reserve’s forecast showed much more aggressive rate increases planned. Investors quickly gravitated to the Fed’s outlook following some hot inflation data for January. That consensus-view shift caused a dip in both equity and fixed-income prices as yields rose. In this pre-tournament game, the Fed appeared to have eked out a buzzer-beater. What is in store for the balance of 2023? Well, we are not macro forecasters. Dana sticks to our knitting of identifying securities that we determine to be undervalued with reasonable growth potential.

2023.03 Dana Blog March Madness Quote 1The Economy

Driving the Fed’s action is the strength of the economy. Thus, macro indicators are no doubt a top seed heading into the second quarter and beyond. And this team is stacked right now. The captain is a robust labor market and key role players include the resilient consumer and powerhouse services sector. The manufacturing portion of the economy has suffered a few injuries in the last year. And here’s the thing about the Fed and the economy — they often meet in the championship game. Right now, many market participants expect a Fed vs. Economy showdown. We assert that the two may be able to reconcile without much more damage done to investors. As we outlined in a recent Viewpoint, second-half 2022 GDP was in the sweet spot (and that appears to be continuing into the first quarter of this year) even amid one the most aggressive rate-tightening cycle in history. We believe that the Fed may have its small victories, but the economy — like many “blue chips” — should emerge without much damage done.

Corporate Earnings

Another common view out there is that S&P 500 earnings per share (EPS) must come down further. Perhaps the skeptics and bears are right, but so long as the consumer keeps spending and the jobs market hangs in there, it’s hard to see profitability dipping much more. In the end, earnings drive equity market performance — it is like one of the college basketball blue bloods that will always matter. In 2023, however, S&P 500 EPS is being sharply critiqued following the most recent reporting season being the worst earnings growth period since Q3 2020, and another year-on-year drop in per-share profits is forecast for the Q1 season that begins in just a few weeks. Still, it has been somewhat encouraging to see earnings hang in there in the face of steeply rising interest rates, a strong U.S. dollar, and a troubled housing market.


The 12 Seeds

You must watch out for the 12 seeds. These are the bracket busters. Year-in, year-out it seems like March Madness is rocked by a 12 taking out a strong-seeded 5. But let’s be honest – your chances of completing a perfect bracket were never that strong anyway. It’s said the odds are about 1 in 120 billion.i Warren Buffett himself has offered $1 billion to anyone lucky enough to have an untarnished bracket. He can make that wager since like any great investor, he understands the math.ii Several underdogs inevitably upend stalwart teams. So, what are the 12 seeds that could surprise investors? We found a few.


Cinderella stocks may come out of the housing industry. Many of these names trade at cheap valuations even after a strong rally during the back half of 2022. Of course, the headlines are rather dreadful right now with mortgage rates north of 6% and affordability levels that are just about the worst since the early to mid-1980s. The housing market is not like it was back in 2006, though. Consumers today have stronger balance sheets and demographic trends support the notion that there will be sustained demand for single-family homes in the coming decade-plus. Don’t count out these underdog equities.

Consumer Discretionary

More broadly, the Discretionary sector contains some areas we find attractive. While Tesla is always in the spotlight, cheaper traditional automakers fit the bill of a 12 seed – out of the limelight, not a sure-fire play, but with upside potential to knock out a 5. The thing about the Consumer Discretionary sector is that the expectation is for an eventual downward turn in retail spending. With improving real wage growth later this year, though, we see ample room for a positive surprise. It’s all about what plays out relative to expectations.

Geopolitical Risks

What else might be lurking? Tensions overseas. True, this is always a wild card, but uncertainty with how the Russia/Ukraine war unfolds along with many unknowns with respect to China’s policy and military decisions, there is a lot at stake and many ways geopolitical issues could unfold.

M&A Pickup

On an optimistic note, after more than two years of troubled capital markets following the IPO and SPAC booms of late 2020 and early 2021, dealmaking could be back on the mend as this year presses on. It’s something few pundits are currently discussing, but as volatility potentially eases compared to a rocky 2022, mergers and acquisitions might help support valuations across sectors.


The Respectable (But Vulnerable) 5 Seeds


The former golden children of the market (Facebook, Apple, Amazon, Netflix, Google, among others) had a hot start to this year after enduring a beating in 2022. Some suggest that a few names among U.S. mega-cap growth are now attractively priced — and that might be the case, however there will likely be winner and losers within the group. FAANG comes into this year’s tournament beaten up a bit, but the squad still possesses a ton of valuable experience as a market leader. More wobbly today, we see the group as eventually getting taken out before reaching the proverbial Final Four. At the same time, one or two of the 2010s’ darlings will likely go on to make new highs while others will have to go through tough rebuilding seasons.

Consumer Staples

A lot of investors were overweight the Staples sector coming into this year, and they still may put tried-and-true household brand-name stocks as top seeds. The chink in the armor here is the price you pay for such companies. Valuations across the Consumer Staples sector are stretched with price-to-earnings (P/E) ratios in the mid-20s or higher using forward estimates. Many of these stocks have solid management teams with strong dividend histories, but they may not live up to the hype.


The Tough-to-Predict 8/9 Seeds

The 8/9s typically go up against a top seed early on. While many will be on the bus back home to campus, one or two might surprise to the upside and knock out a 1. When that happens, ESPN puts the school in the spotlight since it can make a remarkable story. The bottom line is that the 8/9s are unpredictable. Instead of distinct sectors, we identified three themes that are unknowns today.

Supply Chain

Victory laps are being taken on the once-embattled global supply chain. You can’t argue with some of the data such as a much lower Drewry World Container Index showing more modest costs to transport goods around the world, delivery times that have retreated to pre-pandemic levels, and an easing semiconductor market.iii Still, it is not a slam dunk and there’s a downside here that makes the supply chain tough to forecast. It's called the bullwhip effect, and it hits when firms over-order during periods of supply chain stress in fears that they will not be able to procure materials to meet demand. Think back to everyone (including you and me) getting our hands on as much toilet paper as possible precisely three years ago. Supply chain woes could still rear their head. Maybe a telltale sign is in the used car market — just recently, the Manheim Used Vehicle Value Index notched its biggest February gain since 2009.iv


The Energy sector is the reigning back-to-back sector champ. In 2021, this small portion of the S&P 500 was up more than 53% with dividends included, and it defended the title last year with a 64% total return. The ESG movement was then called into question since so-called dirty oil and gas names had become in vogue. How ESG unfolds this year and beyond remains a question mark, but we believe owning stocks that we deem as strong across many ESG metrics remains an enduring investment approach.

Debt Ceiling

Being honest, you’ll hear us take a sigh when mentioning the debt ceiling. It is no doubt a hot-button political issue, and it can rattle markets on occasion. If volatility were to spike, we see that happening not until June or later in the summer when the major deadlines near. History proves that even if we do see a pullback in stocks, that could turn out to be a decent buying opportunity.


Bonus Round: 15-16 Seed


Artificial intelligence quickly thrust into the headlines with ChatGPT and other “chatbots” unveiled by tech companies. The tip-off has just happened in this space in terms of the public’s adoption of AI, all while corporations have been hard at work investing billions into AI for years. Will there be a transformational AI-related tech product hitting the market this year, akin to the iPhone’s launch in 2007? Unlikely, but it would be a game-changer.

2023.03 Dana Blog March Madness Quote 2

The Bottom Line

Being back in the office for March Madness means competing with colleagues over whose bracket looks the best when it’s all said and done. Dana takes investing seriously, but we are not robots either. At least a few of our analysts and portfolio managers will have an eye on how the tournament is unfolding while researching stocks and bonds. Indeed, the parallels between investing and weighing the probabilities in March Madness are many. At least we like to think so.


Find out more about Dana’s investment strategies and meet our team. Dana Investment Advisors was built on the belief that adhering to a defined investment process allows our professionals to focus on the fundamentals of consistent outperformance through security selection.

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