Market Strategy 7/15/2019
- July 15, 2019
How Long Can This Keep Going On?
With several major US indexes at new all-time highs, some market participants may get antsy near term
Key Takeaways
- Second-quarter earnings are likely to take center stage this week as the season gets underway with a number of big banks reporting results.
- With the S&P 500 up 20.2% year to date and 28.2% from its low on December 24, 2018 we illustrate three views of market performance to put the rally and the downturn from whence it emerged into historical context.
- Last week’s CPI data showed inflation growing more than expected between May and June, further complicating the monetary policy debate.
The S&P 500 reached another record last week closing above 3,000 for the first time. The benchmark found encouragement to clear its latest hurdle after the Chairman of the Federal Reserve, Jerome Powell, testified before Congress as part of a semiannual tradition. The twice a year event affords the chief monetary policy maker occasion to present before the nation’s lawmakers on the state of the economy and monetary policy televised live from the halls of Congress over a two-day period.
After the Chair’s presentation (a state of the economy message) there’s time allotted for Q&A that in our experience illustrates too often the capacity for some elected officials to politically grandstand in their allotted five minutes rather than ask questions relevant to monetary policy and the Fed’s mandate.
Despite the televised event’s shortcomings the Fed Chair’s testimony provides the markets and their respective constituencies with live coverage over the course of two days of the Fed Chairman’s views in a venue that offers opportunity for impromptu and candid queries and responses.
In our view last week’s testimony elevated Jerome Powell’s capabilities and showed him more at ease in his role than when he has previously appeared in similar official forums wherein his relationship with investors has been tested a number of times.
With the minutes of the last FOMC meeting and the Fed Chairman’s semi-annual testimony in the market’s rearview mirror we expect investors will now take time to weigh the results of S&P 500 Q2 earnings as the big banks begin reporting their financial results for the prior quarter this week. All-told 56 member companies of the benchmark representing a number of sectors are scheduled to report this week with 122 companies expected to report in the week thereafter and another 121 companies in the week that follows that.
Our view remains that patience and keeping things in historical context will serve investors well through a period when a number of important outcomes remain in flux.
With consensus analyst expectations for Q2 earnings low we are expecting enough positive surprises to turn projections of a slight decline in earnings for the S&P 500 into a modest gain. In our experience this has often happened when analysts have slashed forecasts ahead of the start of an earnings season.
Economic Data Will Likely Determine the Fed’s Action
After last week’s testimony by the Fed chair before Congress market participants will also focus on economic data, corporate, political and geopolitical news for any clues of what they believe could influence the Fed’s interest rate decision on July 31.
We’d expect a pick-up in volatility over the course of the next two weeks on any item that might serve to make investors nervous or doubtful of a Fed rate cut at the end of the month. Conversely news that would suggest a Fed rate cut is more likely than not could add a few percentage points of upside in the near term.
In our view the economy is in good enough stead to withstand no rate cut while the market appears a tad too convinced of a rate cut (expecting more than one cut from here to the end of the year) to avoid showing disappointment at the end of the month should the Fed decide there isn’t sufficient weakness to cut at that time.
From our perch on the radar screen we believe fundamentals will ultimately carry the Fed’s decision and the market’s direction.
We remain positive on the equity markets favoring stocks over bonds stateside and globally. We remain overweight US equities while staying exposed to foreign equities in developed and emerging markets.
Our expectations are that a resolution to the trade/tariff war would cause global economic and corporate growth projections to jump pushing stocks higher near term while pressuring bond prices and the dollar lower. We persist in favoring cyclical stocks over defensive stocks. We’d note that the latter have outperformed in the period from September 20, 2018 through last Friday.
Our view remains that patience and keeping things in historical context will serve investors well through a period when a number of important outcomes remain in flux.
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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