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Market Strategy 5/13/2019

  • John Stoltzfus
  • May 13, 2019

Ain’t No Stopping Us Now

Developments on the U.S.–China Trade War

Key Takeaways

  • Investors likely to focus this week on any positive news on the trade negotiations.
  • Last week’s pullback reset the S&P 500’s valuation from 16.9 times forward earnings to the five-year average of 16.6 times.
  • Earnings season to wind down as 90% of companies have reported with earnings growth so far totaling 1.7% YoY on 4.8% growth in revenues.
  • Both the headline and core inflation rates in the CPI data kicked a tenth in April as a downward trend in apparel prices was offset by upward price pressure in services.

With no resolution to the trade/tariff war between the US and China last week an overhang of uncertainty pertaining to business planning and investment is likely to persist through the first half of this year and contribute to market volatility.

So far economic data stateside from the inception of the trade/tariff dispute last year has shown resilience in the face of tariff hikes and an increase of discomforting rhetoric. With a new round of tariff hikes being imposed as a result of the lack of a trade agreement last week we think it’s key for investors to keep things in context of a situation in which the door most likely will remain open to finding a resolution rather than a move toward a protracted trade war.

Beyond the Presidential election stateside in 2020 for President Trump and the goals of the “Made in China 2025” program for China’s President Ji, consideration of the effects on the economies of the trading partners of both countries calls for resolution to the dispute sooner than later. It’s no secret that the interconnectivity of the world’s supply chains has caused no shortage of economic and corporate collateral damage greater than just “speedbumps” since the trade/tariff skirmish and subsequent retaliatory responses were put into action. We think for example of farmers stateside, auto makers in Europe and exporters in Asia to mention just a few.

Up to now delays in corporate planning, investment and to some extent hiring have had at least some effect on economic forecasting and projections of revenue and earnings growth. The recent ramp up of hostilities in the trade dispute proffer prospects for more knock-on effects on countries, world regions and the entire globe.

Notwithstanding the damage to economic and corporate growth that a trade war can cause, the relentless nature of innovation in technology at this juncture along with its implications for business and the consumer appears unstoppable and remains a significant source of positive offsets to the trade war. These might not have been possible in an earlier period along the timeline of history when innovation was tied to a larger extent on capital intensive equipment tied to production of physical goods.

Quotation from Aenean Pretium

While the trade/tariff overhang remains a worry for the markets for now we believe investors should consider volatility not solely as a sign of increased risk in the markets but also as likely to be a harbinger of opportunity.

The Nature of Trade and Production is Changing

Today, the next new thing is often tied to an upgrade in software or tweak in code that sparks investment leading to a new chapter in progress and profitability.

The streaming and subscription nature of contemporary innovation in technology also shortens the time from thought to innovation to widespread delivery and usage.

The importance of upgrades to existing technology are key to corporate success across all sectors in a challenging and highly competitive environment as well as in delivering many applications which can provide affordable conveniences and services to the consumer.

Volatility Can Bring Opportunity

While the trade/tariff overhang remains a worry for the markets for now we believe investors should consider volatility not solely as a sign of increased risk in the markets but also as likely to be a harbinger of opportunity. Whether it’s “babies that get thrown out with the bathwater” or solid value or growth that gets ignored in times of increased volatility, history suggests times like these are often in hindsight not the best to run for the exits but times for considering the opportunities that are at hand.

We remain constructive on equities and continue to favor cyclical sectors over defensive sectors. Regarding market capitalizations we are moving once again toward a market cap agnostic position that weighs large, mid and small market capitalization near equally in an environment that remains prone to rotation and rebalancing as catalysts for market positioning shift with frequency.

In the week ahead, aside from watching headlines for any progress that might develop on the trade front, investors will look for news on the effects of the tighter sanctions on Iran, the continuation of Q1 earnings season and a flow of economic data that will keep investors and traders on watch for clues to the sustainability and pace of the expansion stateside.

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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