Market Strategy 5/20/2019
- May 20, 2019
When It Comes to Trouble I’ve Had My Share
An escalation of the trade/tariff dispute and increased geopolitical tensions keep markets on alert
Key Takeaways
- In the week ahead investors will continue to monitor US-China trade developments and economic data leading into the Memorial Day holiday weekend.Stocks declined for a second week with cyclicals coming under pressure.
- That notwithstanding, the S&P 500 and its 11 sectors still managed to retain much of their gains from the start of the years.
- Earnings season continues to wind down with nearly 92% of companies in the S&P 500 having reported. Thus far earnings growth has totaled 1.4% on the back of 4.5% growth in revenues. Three quarters of firms have reported positive earnings surprises.
Stocks worldwide took a bit of a drubbing last week as the trade/tariff war ramped higher, tensions between the US and Iran escalated and the US initial public offering market reminded investors that new issues—no matter how highly anticipated by the market ahead of launch date—can stumble either on change of investor perception, or on their own merit (or lack thereof) or as collateral damage when markets are experiencing a downdraft—even if relatively unrelated to the new issue.
We found ourselves “on the road again” last week in meetings with institutional clients in the UK and on the European continent.
One of the benefits of traveling abroad is the reminder that we’re (the USA) not the only place on earth currently managing significant transitions and challenges tied to trade, politics, demographics, globalization and technology.
For all the challenges societal, governmental and business related (including from increased regulations regional and country specific) —business was broadly said to be good if not great and better than just okay.
Notwithstanding broad uncertainties and risks from Brexit, trade war, populism, regional and geopolitical tensions stocks appeared to be generally regarded as still representing enough opportunity over the intermediate term to offset the risks at hand—particularly when considering how low yields are generally in fixed income in the region. The current volatility in the equity markets was generally perceived as presenting opportunity rather than untoward risk.
The process of interest rate normalization common to prior periods of “recovery, boom, bubble, bust” cycles in this period has been stretched longer with central bankers feeling less pressure from the economy to raise rates at a fast pace.
When we asked about how Brexit would likely be resolved almost everyone seemed to consider it a toss-up with politicians in control of how it is ultimately addressed.
Whatever the outcome to Brexit expectations were broadly that business would manage and adjust its way around the result.
In the UK and Europe most investors expressed concern about the trade war with China as well as about yet unresolved trade issues that exist between the US and their specific countries (particularly with regard to automobile exports to the US). Expectations seemed to be that their own country and regional trade issues with the US would likely be resolved without reaching the same levels of tension that the US and China have experienced.
President Trump was seen to stand a good chance of being re-elected in 2020 benefitting from the current US economic expansion (particularly job growth); as well as his success launching tax reform and raising issues about trade with China (not without some concern about the administration’s way of going about it); and the President’s popularity with a loyal constituency.
Among the questions we were asked at many meetings the most popular were:
Q) Will the dollar continue to gather strength?
A) We attribute much of the dollar’s current strength as tied to its role as a safe haven currency since the start of the trade war as well as the differential in US interest rates compared with much of the rest of the world.
We also see the comparative strength of the US economy as having attracted significant investment flow into US assets including foreign direct investment (FDI), which has also served to produce upside to the dollar.
Lastly, we feel the dollar’s status as a positive carry trade for currency players likely also contributes to its current strength.
We expect that a resolution to the trade/tariff dispute between the US and China will see the dollar weaken some as the currencies of many international export driven economies should rise on a re-rating of global growth with the removal of the trade war overhang on projections.\
Q) Will a suitable resolution to the trade/tariff dispute between the US and China be reached before long or is the trade war likely to become protracted and have a long-term negative overhang on the global economy?
A) While the trade/tariff dispute has already lasted longer than we initially expected it still looks likely to end sooner than later from a point of practicality.
Both countries would suffer economically (if to different degrees) from a protracted trade war. Historically trade wars are not good for the economic trajectory of participant countries.
Furthermore the Presidential election stateside in 2020 and China’s goals of its “Made in China” policy for 2025 would seem to provide significant incentive to “get things resolved” sooner than later for both sides.
Q) Will interest rates remain low?
A) Our expectations are for interest rates to remain relatively low for some time. We believe monetary policy (stateside and abroad) has proven over the past ten years to be remarkably sensitive to both strengths and weakness inherent in economies around the world. As a result the process of interest rate normalization common to prior periods of
“recovery, boom, bubble, bust” cycles in this period has been stretched longer with central bankers feeling less pressure from the economy to raise rates at a fast pace.
We also believe that cyclical and secular trends driven by technology and globalization have contributed to the creation of a counter inflationary environment that keeps a lid on wage growth (even with record low unemployment as a result of robotics and algorithms on factory floors and in offices); lower barriers of entry to competition in a myriad of businesses around the world and commodity prices that are contained as technology facilitates exploration and production of resources with risk skewed toward abundance and even overcapacity as opposed to shortages and supply disruptions.
In the week ahead as Q1 earnings season winds down economic data tied to a wide swath of key gauges will traverse the proverbial transom ahead of the Memorial Day holiday weekend. Investors will be looking for clues amidst data including: manufacturing, housing, and employment, as well as the minutes of the last Federal Reserve meeting.
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.
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