Market Strategy 5/28/2019
- May 28, 2019
So Close and Yet So Far
Markets express frustration as prospects for a trade war resolution appear further away
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.
We continue to favor cyclical sectors over defensives. At this juncture, defensive sectors look to be overbought as do US Treasuries.
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.”
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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