Market Strategy 5/28/2019
So Close and Yet So Far
Key Takeaways
- Economic data and trade war news are likely to garner investors’ attention as Q1 earnings season moves toward a close, with earnings up 1.6% on the back of 4.4% revenue growth.
- Investors will be seeking clues for the markets’ next moves after the Dow Jones Industrial Average fell for five weeks straight and the ten-year Treasury yield dropped to levels last seen in 2017.
- The recent escalation of the trade war between the US and China and a ramp-up in rhetoric volume counter-intuitively may signal that a resolution is more likely than not.
Investors stateside return to a holiday-abridged week. Economic data on housing, inflation, manufacturing, economic growth (Q1 GDP), wholesale inventories, retail inventories, personal spending and consumer confidence will cross the proverbial transom, with at least a few of those carrying enough weight to influence investor and trader sentiment over the next four days of trading.
First-quarter earnings season, which has garnered considerable attention of late, will edge toward a close this week. With close to 97% of companies in the S&P 500 having thus far reported, earnings grew a modest 1.6% on the back of 4.4% revenue growth. Results, while anemic when compared to last year’s earnings seasons in the first year of tax reform, have thus far exceeded consensus expectations that had called for an earnings recession in Q1.
With tariff war escalation and day-to-day rhetoric from both sides of the trade war oscillating from belligerent and loud to almost conciliatory, investors are finding uncertainty to be the order of the day. The markets have to manage a negative overhang for now.
In times such as these, our experience reminds us to keep things in context in separating the noise from the signal.
Here are a few items to consider:
The VIX (a gauge of market volatility) closed at a level of 15.85 last Friday, or about 32% higher than its recent low of 12.01 on Aril 12th. That said, the VIX on Friday stood 22% lower than where it was at its recent spike, when it closed at 20.55 on May 13th.
Markets Are Still in Positive Territory for 2019
While much was made of the fact last week that the Dow Jones Industrial Average had lost ground for five weeks straight –a feat it hadn’t achieved since 2011 – it was not much mentioned that the venerable index as of last Friday was still up 17.4% from its December 24th low and rising 9.7% year to date. The S&P 500, which has shed 4.2% from its latest record high reached on May 3, has climbed a little over 20% from its December 24th low and is up 12.7% year to date.
Economic data, while showing signs of a slowing in manufacturing, continue to indicate job and wage growth. Also, with the recent drop in yields, we have seen a pickup in some areas of housing including new home sales and mortgage applications.
While news and data flow lately points to some economic slowing so far, it is not in our view indicative of a recession. Rather, these reflect the confluence of uncertainties that present themselves on several fronts including: the geopolitical and local political front; transitions in the market place both cyclical and secular; and the effects of the trade war on business planning and investment. Rather than portraying a vision of gloom and doom, these uncertainties remind us that there never is an all-clear signal sounded over the markets. There’s always trouble somewhere, challenges to be met and opportunities to be found. It’s the way of business and for that matter of life itself.
We remain constructive on prospects for a resolution to the trade war as the costs of a protracted trade war are too dear for either side to consider practical longer term. The addition of specific corporate names to the trade fracas increases the pain likely to be felt by both sides as issues of cybersecurity and the theft of intellectual property put corporate interests at risk as they go under the microscope.
For all the volume of the rhetoric expressed over the last few weeks from both camps, it appears to us that the underlying currents point toward a desire to get back to a resolution that lets both sides “get back to business.” The markets stateside and in the international realm appear in our view to adhere to that message on a daily basis.
We continue to favor cyclical sectors over defensives. At this juncture, defensive sectors look to be overbought as do US Treasuries. From our perch on the Radar Screen and in consideration of the upcoming 10th anniversary of the stateside economic expansion that began in June of 2009, we are reminded of the adage, “A detour does not a journey end.”
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.