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Market Strategy 11/25/2019

  • John Stoltzfus
  • November 25, 2019

Gobble Gobble

Even as Americans take time to give thanks this week, the forces that move markets persist

Key Takeaways

  • After closing higher five out of six of the previous weeks, the S&P 500 slipped 0.33% last week on trade, earnings, and election year worries.
  • Skeptics and bears suggested last week that the bull run of the prior five weeks had ended hard. We suggest not, considering that tax loss selling season is gaining momentum and providing near term a catalyst for taking profits without FOMO (fear of missing out).
  • This week’s economic data is concentrated in the first three days of the week, with investor attention split between Black Friday and Cyber Monday sales and a full menu of holiday sporting events.
market strategy

With a Thanksgiving Day Holiday abridged week ahead of us look for market action (notwithstanding any surprises) to be pretty much front-end-loaded through Wednesday.

Over and after the holiday look for investors to track Black Friday and Cyber Monday sales with attention that rivals their focus on national sports.

The last six weeks saw the S&P 500 post five consecutive weekly gains capped with last week showing a slight decline (off 0.33% on the week) as trade negotiation worries and some weakness in Q3 reported earnings (including those from several widely followed names in retail and technology), along with some easing in the 10-year Treasury’s yield provided a catalyst for some investors to take profits while minimizing the dreaded FOMO (fear of missing out).

Skeptics and bears exclaimed and growled that the recent run-up over the previous five weeks had ended hard while bulls suggested last week’s weakness more than likely reflected the aforementioned earnings disappointments and trade worries along with the beginning of annual tax loss harvesting and seasonal rotation.

Quotation from Aenean Pretium

We suggest investors maintain exposure to cyclical sectors particularly information technology, industrials, consumer discretionary and financials— each of which we rate outperform.

We won’t look a gift horse in the mouth

With 476 of the S&P 500’s member companies having thus far reported Q3 earnings season, earnings growth was down 0.98% on the back of 3.6% sales growth. So far that’s better than expected by consensus analyst projections at the start of the season when as we recall earnings were expected to fall a little more than 4%. Considering the ongoing trade dispute with China, tougher comps versus 2018 (the first year of tax reform, which boosted earnings to double digit growth for the S&P 500 as corporate tax rates fell dramatically) Q3 earnings season has been “ok” if not pretty darned good.

Of the sectors experiencing a drop in earnings growth in Q3 earnings season, information technology and consumer discretionary thus far have seen earnings growth respectively fall for Q3: 0.67% and 5.07%. Materials and energy sector firms have taken the brunt of the declines respectively off 14.4% and 37.6%. (See page 7 of this report for more detail in our earnings season scorecard).

Over the weekend news flow looked more positive to us on the election front as a prominent individual, widely well liked (by people of diverse political persuasions), added his name to the roster of candidates for the Democratic Party’s nomination.

On the trade front the weekend news flow suggested that the US and China were getting closer to a “Phase One” agreement with some progress apparently being made at addressing intellectual property issues between the two countries.

We continue to suggest that investors avoid looking for an all or nothing resolution to the trade war but rather right size their expectations when it comes to negotiations, toning down the trade dispute and moving progressively forward longer term to a workable resolution.

We maintain that the positive effects of the trade war have been mostly to gain all parties’ attention to the problems outstanding in trade practices that have developed over the past few decades and the need to address them fairly for all parties. From that perspective it would appear to us that the time is ripe to move forward with a Phase One resolution rather than get further mired in a potentially costly trade war to the detriment of both the US and China as well as for their trading partners worldwide.

For now investors should benefit from practicing patience, looking for any babies that get thrown out with the bath water in the process of year-end tax loss harvesting, rotation and rebalancing.

We suggest investors maintain exposure to cyclical sectors particularly information technology, industrials, consumer discretionary and financials—each of which we rate outperform.

We also find attractive health care and materials—the former appears undervalued based on its demographic importance worldwide and its relentless developments by way of technology (notwithstanding some election year political risks ahead); the latter (materials sector) stands likely to benefit when and if a trade resolution emerges from the ongoing negotiations, which we believe could cause global growth expectations to rise.

Defensive sectors, particularly those that harbor bond proxy stocks (utilities and real estate) appear less attractive to us on valuation as a result of investors having piled into them for yield and defensive portfolio positioning since September of 2018.

In the international realm we persist in maintaining what we call “meaningful exposure” to both international developed and emerging markets (see page 10 of this report for our global asset allocation model).

While the trade war between the US and China has garnered the most attention among investors and observers its effects on their trading partners across the world have been substantially greater. Many countries around the globe have export driven GDP dependency that leaves them at the mercy of a global supply chain centered around the US and China.

The US economy’s 70% exposure to its consumers for growth and the Chinese economy’s 40% exposure to its consumers have served somewhat to insulate both combatants from the effects of the trade war compared with many of their other trading partners.

In our view a trade war resolution—even just a Phase One agreement—will help relieve much of the pressure of the negative overhang that the trade war has held over many economies and multinational corporations around the world. We look for economist and analyst projections to increase sizably for the world economy and corporate earnings when the US and China manage to materially move toward resolving their dispute.

We wish our readers, their families, and friends a Happy Thanksgiving!

John Stoltzfus of Oppenheimer Asset Managment Inc.

John Stoltzfus


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.

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