Market Strategy 1/14/2019
- January 14, 2019
Leave the Party Hats in the Box and Right-Size Expectations
Even as reality appears to have overwhelmed the voices of doom for now, challenges remain on the landscape that should keep animal spirits at bay
Key Takeaways
- Stocks rebounded in the first full week of trading in 2019.
- Progress in trade talks between the US and China bolstered investor sentiment.
- Improved communication from the Federal Reserve has reduced, to some degree, expectations of a Fed misstep.
- A rally in the price of oil further improved investor perspective on global demand.
- Economic data released last week showed that inflation in the US continued to moderate in December.
If 2018 in the rearview mirror can be characterized as a year of mounting uncertainties and tensions political, geopolitical and otherwise, 2019 has thus far shown a predilection for signaling a reduction of at least some of the major issues and tensions that challenged the markets throughout last year and tested investor conviction about the economy and markets in the fourth quarter just ended.
It’s not that an “all clear” signal has been sounded over the marketplace (it never has been in our experience nor in our opinion will ever be) but perhaps simply that the noise of a hitherto:
- Projection of an impending recession,
- Expectations of a near-term misstep by the FED,
- Anticipation of a continued plunge in oil prices, and
- Fears the trade/tariff war would ramp higher and turn protracted
was countered by the signal of a reality which presented evidence that a recession was indeed not likely around the corner as persistent expectations by some of a downturn were repeatedly countered by:
- Economic data that signaled instead a spate of interim slowing or a pause in economic growth within an expansion
- The Federal Reserve made efforts to communicate that it could show sensitivity not just to strengths but to vulnerabilities within the economy
- Oil prices rallied as the US and global economy showed some resilience and OPEC reinstated policy to curb oil production
- Fears that the trade war was about to turn protracted and further impact foreign growth dissipated as signs of progress emanated from the latest round of trade talks between the US and China.
It’s clear to us that we’re not out of the woods yet in what we expect will be a do-over or work-out year…
As reality so far this year has managed to counter much of the noise that had turned what might have been compared to a sleigh ride for investors in 2017 into a roller coaster in 2018, it’s clear to us (and to many investors we’d think) that we’re not out of the woods yet in what we expect will be a do-over or work-out year as political, geopolitical, economic and corporate matters both negative and positive play out in the ensuing months ahead.
One thing that the US equity market has made clear to us so far since the peak period of the gnashing and grinding of teeth in the fourth quarter is that it favors cyclical sectors over defensive sectors as well as small- and mid-cap equities which were particularly brutalized in the downdraft in the fourth quarter of last year.
We believe that ultimately where the markets take us this year will depend on further and significant progress on trade, continued economic growth in the US and a recognition by investors that the effects of tax reform are unlikely to boost corporate earnings in 2019 in the same way they did in year 1 of the reform. We believe much of the concerns that took the market lower last year into a bottom on December 24th have been priced in and possibly discounted by investors as valuations have become more attractive than they have been in some time.
Prospects that an agreement between the US and China would prove beneficial not just to the two countries but also for most of the world point to opportunities supported as well by attractive valuations in emerging and developed markets even as Brexit in the U K, yellow vests on the streets of Paris, changing leadership in Europe (including Germany and Greece as well as at the ECB─the European Central Bank) and a partial government shutdown stateside capture headlines and point to potential speed bumps ahead.
We continue to suggest that investors consider their objectives and tolerances toward risk, as well as right-size their expectations, know what they own, why they own it and have a realistic view of how diverse asset classes can be expected to perform in different scenarios.
John Stoltzfus
Title:Chief Investment Strategist, Oppenheimer Asset Management Inc.
John is one of the most popular faces around Oppenheimer: our clients have come to rely on his market recaps for timely analysis and a confident viewpoint on the road forward. He frequently lends his expertise to CNBC, Bloomberg, Fox Business, and other notable networks.
Other Disclosures
This report is issued and approved by Oppenheimer & Co. Inc., a member of all Principal Exchanges, and SIPC. This report is distributed by Oppenheimer & Co. Inc., for informational purposes only, to its institutional and retail investor clients. This report does not constitute an offer or solicitation to buy or sell any securities discussed herein in any jurisdiction where such offer or solicitation would be prohibited. The securities mentioned in this report may not be suitable for all types of investors. This report does not take into account the investment objectives, financial situation or specific needs of any particular client of Oppenheimer & Co. Inc. Recipients should consider this report as only a single factor in making an investment decision and should not rely solely on investment recommendations contained herein, if any, as a substitution for the exercise of independent judgment of the merits and risks of investments. The strategist writing this report is not a person or company with actual, implied or apparent authority to act on behalf of any issuer mentioned in the report. Before making an investment decision with respect to any security discussed in this report, the recipient should consider whether such investment is appropriate given the recipient's particular investment needs, objectives and financial circumstances. We recommend that investors independently evaluate particular investments and strategies, and encourage investors to seek the advice of a financial advisor. Oppenheimer & Co. Inc. will not treat non-client recipients as its clients solely by virtue of their receiving this report. Past performance is not a guarantee of future results, and no representation or warranty, express or implied, is made regarding future performance of any security mentioned in this report. The price of the securities mentioned in this report and the income they produce may fluctuate and/or be adversely affected by exchange rates, and investors may realize losses on investments in such securities, including the loss of investment principal.
Oppenheimer & Co. Inc. accepts no liability for any loss arising from the use of information contained in this report. All information, opinions and statistical data contained in this report were obtained or derived from public sources believed to be reliable, but Oppenheimer & Co. Inc. does not represent that any such information, opinion or statistical data is accurate or complete and they should not be relied upon as such. All estimates and opinions expressed herein constitute judgments as of the date of this report and are subject to change without notice. Nothing in this report constitutes legal, accounting or tax advice. Since the levels and bases of taxation can change, any reference in this report to the impact of taxation.
Investment Strategy should not be construed as offering tax advice on the tax consequences of investments. As with any investment having potential tax implications, clients should consult with their own independent tax adviser.
This report may provide addresses of, or contain hyperlinks to, Internet web sites. Oppenheimer & Co. Inc. has not reviewed the linked Internet web site of any third party and takes no responsibility for the contents thereof. Each such address or hyperlink is provided solely for the recipient's convenience and information, and the content of linked third party web sites is not in any way incorporated into this document. Recipients who choose to access such third-party web sites or follow such hyperlinks do so at their own risk. The S&P 500 Index is an unmanaged value-weighted index of 500 common stocks that is generally considered representative of the U.S. stock market. The S&P 500 index figures do not reflect any fees, expenses or taxes. This research is distributed in the UK and elsewhere throughout Europe, as third party research by Oppenheimer Europe Ltd, which is authorized and regulated by the Financial Conduct Authority (FCA). This research is for information purposes only and is not to be construed as a solicitation or an offer to purchase or sell investments or related financial instruments. This report is for distribution only to persons who are eligible counterparties or professional clients and is exempt from the general restrictions in section 21 of the Financial Services and Markets Act 2000 on the communication of invitations or inducements to engage in investment activity on the grounds that it is being distributed in the UK only to persons of a kind described in Article 19(5) (Investment Professionals) and 49(2) High Net Worth companies, unincorporated associations etc.) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (as amended). It is not intended to be distributed or passed on, directly or indirectly, to any other class of persons. In particular, this material is not for distribution to, and should not be relied upon by, retail clients, as defined under the rules of the FCA. Neither the FCA’s protection rules nor compensation scheme may be applied. This report or any portion hereof may not be reprinted, sold, or redistributed without the written consent of Oppenheimer & Co. Inc. Copyright © Oppenheimer & Co. Inc. 2015.