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Market Strategy 8/12/2019

  • John Stoltzfus
  • August 12, 2019

Smoke on the Water

Market action last week reminds us that sometimes the signal can be lost in the noise

Key Takeaways

  • The equity market’s ability to discount quickly both good and bad news was on display last week as the spike in the VIX index early in the week had mostly faded by Friday’s close.
  • A confluence of concerns tied to tit-for-tat retaliation in the US-China trade dispute should not obfuscate the compelling reasons for the two countries to find a resolution.
  • Gold and bitcoin have likely benefitted from outflows of funds from China.
  • With 90% of S&P 500 companies having reported, second-quarter earnings are up 2% on the back of 3.9% revenue growth.

So far August has lived up to its reputation as a month known to challenge equity upside, as stocks bounce between gains and losses on any given day depending on a combination of news flow, economic and corporate data.

Better than expected results in Q2 earnings season (see page 4 of this report for details) have helped provide some of the resilience seen in equities during this period as well as a recent pick-up in buybacks as stocks exit their various blackout periods.

shipping containers

Some bargain hunting by investors seeking “babies thrown out with the bathwater” along with the market’s tendency to discount both good and bad news pretty quickly has also helped offset the current spate of volatility.

Economic data stateside continues to reflect an economic expansion showing sustainability even as it reflects some mid cycle slowing, particularly in areas linked to manufacturing that have exposure to global trade and China in particular.

Market views expressed by both bulls and bears of late reflect the elevated level of uncertainty around a trade war resolution in the near term. Increased prospects for an expanded set of tariffs to be levied by the US on September 1 against Chinese imports along with worries that China’s retaliatory currency devaluation last week could introduce an element of currency war to the trade/tariff war’s profile raised concerns.

Quotation from Aenean Pretium

With many market observers and market participants focused on economic data and the potential for earnings growth to slow further, the contrarian in us senses these folks could be missing the forest for the trees.

Counterintuitively when things get this complex and elevate levels of worry to a high degree, that’s when a resolution to the trade war could be closer at hand than one might think.

For China the trade war would seem to have the potential to compound problems with its domestic economy that are tied to corporate debt as well as speculation in its property markets. Another risk it faces is further diversification of US and other foreign supply chains away from China to its regional competitors. This shift away from China could have negative effects on its long-term growth prospects and market share.

From a US perspective the cost of the tariff war could begin to be felt more directly by the stateside consumer if the expansion of the trade war tariff regime on consumer goods made in China (including cell phones, other consumer electronics products, clothing and diverse household items) occurs on September 1. Ironically the actual impact on the US consumer may initially be greater on sentiment than on prices as a cheaper yuan could help offset some of the sting of tariffs.

Near-term looking ahead

With earnings season winding down investors will sharpen their focus on economic data, company specific news and political items in the day to day activity of the markets.

We continue to favor equities over fixed income as yields stateside and around the world hover near record low levels and with some countries (including Germany, Japan, the Netherlands, Switzerland and Sweden) posting negative interest rates along their yield curves.

Cyclical and secular trends (including globalization and technology) in our view persist in pointing to greater opportunity among equities than in fixed income at this time. With many market observers and market participants focused on economic data and the potential for earnings growth to slow further, the contrarian in us senses these folks could be missing the forest for the trees.

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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