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Market Strategy 8/5/2019

  • John Stoltzfus
  • August 5, 2019

Give Peace a Chance

Sentiment is rattled by worries about monetary policy and the prospects for an expansion of the trade war

Key Takeaways

  • In the aftermath of last week’s Federal Reserve FOMC meeting and a Presidential tweet on the trade war, look for investors and traders to parse the details to figure what it all means.
  • Data shows stateside economic growth continues to exhibit signs of strength and resilience—if not of a robust nature.
  • With the 10-Year US Treasury note near record lows, investors should keep global interest rates in perspective.
  • The 1990s offer two examples for what a “mid-cycle policy adjustment” might bring.
  • With 77% of S&P 500 companies having reported, second-quarter earnings are up 1.3% on the back of 3.3% revenue growth.

Last week’s move lower in stock prices reflected the markets’ persistent mistrust of the Federal Reserve and the potential for an escalation in the tariff regime in the trade war as early as the start of September. This set the week ahead up for more turbulence while traders and investors sort out what it all means for the direction of stock prices in the near term.

federal reserve building

The possibility that negotiators from both sides may not find their way to a resolution of the trade war before the end of summer (and perhaps not at all in 2019) appeared clearer last week after both sides met in Shanghai without much evidence of progress having been made. President Trump’s tweet late last week after the US delegation had returned from Shanghai suggested that tariffs could be placed on an additional $300 billion of Chinese goods at the start of September if progress towards resolution fails to surface. Such an expansion of the trade war would take it to a breadth that would cover virtually all imports from China to the US.

With odds for a resolution worsening markets could feel the effects of rotations and rebalancing across sectors, market capitalizations, and styles over the course of the next few weeks. Ironically in our view the worse things begin to look the more likely opportunities could surface for investors willing to practice patience while having their convictions tested over the near term.

Monetary policy in our view remains prudently data-dependent with sensitivity to vulnerabilities as well as strengths in the US economy. While the effect of a 25 basis point cut in the Fed’s benchmark rate last week may have disappointed some who were looking for a 50 bps cut, to us it seemed more than enough considering the level of sustainability in the current stateside expansion exhibited in the latest data crossing the transom (see pages 6 and 7 of this report for details on the July payrolls report and other data released last week).

Quotation from Aenean Pretium

We persist in positioning with an overweight to US equities while maintaining meaningful exposure to developed, emerging, and frontier international markets.

Trade War is No Stairway to Heaven

It’s not that things are so great but rather that they are much better than one might expect into the second year of a trade/tariff war. Stateside economic growth continues to show signs of strength and resilience if not of a robust nature. The consumer continues to drive growth stateside as jobs remain plentiful, unemployment hovers at around a 49-year low and wages creep higher. That manufacturing has shown weakness as a result of the trade war should come as no surprise. The good news is that the consumer accounts for around 69% of US GDP, manufacturing amounts to around 11-12%.

The risk of course is that an extension and expansion of the trade war could begin to affect the consumer—particularly if the round of tariffs still pending for September is implemented. The next phase would include a wide array of consumer goods imported from China.

The dollar’s strength and position as a safe haven currency could continue to support it (as it did in year one of the tariff war) and somewhat help offset tariff-sourced inflation in goods imported from China.

For China prospects for further diversification by stateside corporate entities away from dependence on China-linked supply chains (as the costs of doing business with China increase) could result in a trend with long-term implications for its export growth, including the goals of its “Made in China 2025” program.
For now the market landscape appears to offer longer-term investors yet another opportunity to build shopping lists and watch for “babies that get thrown out with the bathwater” on days when volatility and drama pass through the market landscape. For short-term investors—the impatient and the nervous—market volatility like that experienced over the past week offers a chance to take some profits without experiencing FOMO (the fear of missing out) in the near term.

We continue to have a favorable outlook for equities favoring cyclicals over defensives, growth, as well as blended growth and value. Our favorites (Outperform-rated sectors) remain information technology, consumer discretionary, industrials, and financial sector stocks. We persist in positioning with an overweight to US equities while maintaining meaningful exposure to developed, emerging, and frontier international markets.

With interest rates low, central banks’ sensitively accommodative, and with the cyclical and secular trends of technology and globalization very much intact, there continues in our view to be enough opportunity to offset current risks.

Over the course of the past week prospects of a resolution to the trade war may have been pushed further out near term but the likelihood of a resolution remains in place as neither side has much to gain but rather too much to lose from extending the trade war much further.

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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