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Market Strategy 7/8/2019

  • John Stoltzfus
  • July 8, 2019

We Won’t Look a Gift Horse in the Mouth

Good news isn’t always recognized as good news if markets have priced in another outcome

Key Takeaways

  • We expect markets to rally this week after a positive surprise in the nonfarm payroll figures caused the market to stumble last Friday.
  • Investors will be focused on Fed Chair Powell’s testimony to Congress on Wednesday and Thursday as well as any news on the trade talks.
  • Second-quarter earnings season is likely to gain increased focus when it gets underway mid-month.
  • In addition to the strong payroll figures, the ISM report last week showed some softening, particularly in manufacturing, but conditions still expansionary.

Though investors may not get the rate cut they were looking for from the Federal Reserve at the end of this month after last Friday’s significantly-better-than-expected June nonfarm payrolls gain, last week’s brace of economic data signaled that the economy remains in good stead which ultimately could deliver a boost to corporate earnings and serve equities well.

For now it may require a little patience while the market gets over the hissy fit that it threw last Friday after the jobs data were released.
Once the market considers that the economic reports released last week (including the
“NFP gain”, the unemployment rate, the participation rate and hourly wage growth) are signaling that the economy is doing well enough for the Fed to forego cutting its benchmark rate at its FOMC meeting at the end of this month investors might take a moment to relax and “surf the thought” that the jobs number on Friday was actually a good thing. From our perch on the radar screen we’ll venture that the market could realize this later in the week—notwithstanding any bad news on the trade/tariff front or concerns around Fed Chair Powell’s testimony to Congress this Wednesday and Thursday.

abstract stocks

As to whether or not the Fed will actually hold or cut rates at the end of the month? We’ll know on July 31. Until then clues will be sought on a daily basis by traders, players and pundits amidst data and comments that come across the transom from a wide variety of sources governmental, corporate, domestic and foreign. Jerome Powell’s testimony on Capitol Hill this week should add some fodder for bulls and bears to ponder and gnaw on.

The S&P 500 crossed and closed above our year-end target price of 2960 (which we initiated last December), a week ago today. Last Thursday it closed at its latest record high of 2,995.82; we expect to review our target price as developments occur over the course of the next few weeks if not earlier.

Quotation from Aenean Pretium

In our view equities remain more attractive than fixed income at these levels with Treasuries still looking somewhat overbought.

The market’s reaction to the jobs number on Friday saw the VIX jump 5.65% on the day but only managing by the end of the day to shave just 0.2% off the price of the S&P 500 leaving it just 5.41 points away from its record high earlier in the week.

For all the noise and drama we heard from some corners in the market around the 10-year Treasury’s yield moving higher on Friday (from 1.95% on July 3 to 2.035% on July 5) it appeared to us to be a proverbial
“much ado about nothing.” Placing the move in context we recall the 10-year Treasury’s yield had started last week at 2.026%. That makes the 4.35% increase in the note’s yield from July 3 to July 5 (the day after the holiday) closer to a “roundtrip” in the course of a week rather than an issue worthy of the drama that it appeared in our opinion to generate in some corners of the market.

Yields Provide Plenty of Drama

We also suggest investors consider that the average yield of the 10-Year Treasury note in 2019 to date through last Friday stands at around 2.47% with its average yield over the past 12 months at 2.72%. Put in that context the jump in yield from last Wednesday through last Friday looks more like an emotional reaction to economic data points than an indication of a worrisome trend in rates ahead.

In our view, equities remain more attractive than fixed income at these levels with Treasuries still looking somewhat overbought.
As to what will the Fed actually do on July 31 as a result of the next FOMC meeting? In our view it’ll be a question of fundamentals (economics) at that time and in consideration of developments between now and the end of the month.

For now we look for investors and the markets to keep focused on news of any improvement or deterioration in the trade talks; clues from the Fed on monetary policy; and how Q3 earnings season shapes up once it really gets underway.

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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