Market Strategy 9/3/2019
Don't Let It Bring You Down
Key Takeaways
- With Q2 earnings season winding down and an escalation in tariff regimes between China and the US, we look for investors to focus on economic data tied to manufacturing, housing, wages and jobs.
- For all the volatility experienced in the US equity markets over the summer, stocks showed their resilience with the S&P 500 gaining 6.34% in price from the end of May through last Friday.
- From now through the beginning of Q3 earnings season, expect trade and economic data to garner investor focus.
- Last week’s economic data reflected slowing in the US economy as well as the likely sustainability of economic growth ahead.
Over the summer months stocks bounced between gains and losses leading some to feel that it was not the holiday they’d planned on. Had the old Wall Street adage, “Sell in May and go away” worked once again?
While we “won’t count our chickens before they hatch,” we must say that stocks have shown considerable resilience since the end of May and over the summer months considering the challenges heaped upon them and the skepticism of many observers and investors.
And yet when we checked our market radar screen stocks as represented by the S&P 500 had once again defied their detractors and “climbed a wall of worry.”
In the 13 weeks from the end of May through last Friday’s close the S&P 500 managed to gain 6.34% in price (total return 6.87%) notwithstanding a slew of negatives including:
- Presidential tweets tied to the trade war that rattled the market on a too regular basis;
- Retaliatory trade actions by China;
- More than a few stateside Treasury yield curve inversions;
- Numerous predictions for a recession “lurking around the corner;”
- Countless bearish projections for the stock market; and
- Negative yields on sovereign debt around the world reaching an aggregate amount of near $17 Trillion as central bank bond purchases in Europe and Japan helped exacerbate a surge in demand for yield as bond prices surged and yields plunged.
Now with the Northern Hemisphere’s summer behind us professional investors will return from the Labor Day holiday weekend to parse the details of the latest ramp up in hostilities in the trade war after the US added to its tariff regime and China quickly moved to retaliate with tariffs against US goods.
With the trade war more than 18 months old the stakes appear to be getting higher for businesses and consumers in both countries that are expected to feel the pain and inconvenience of a skirmish that’s beginning to hit its stride and sharpen its bite in cost and effect.
Trade wars historically have not been known as vehicles for making friends and influencing people. Trade disruptions tied to tariffs historically have been shown to be capable of destabilizing countries and even regions of the world.
That said, so far the trade war between the US and China as measured by GDP (economic growth) around the world has been much more disruptive to countries other than the two combatants. From our perch on the market radar screen the collateral damage to trading partners linked to the supply chains of both countries has thus far been greater as reflected in country and regional economic data.
In the months ahead (should the US and China fail to reach an agreement on their trade dispute) the risk to the economies of the combatants and the entire world is expected to get worse according to many economists and monetary policy officials. However, so far the performance year to date of many equity markets around the world reflects expectations that a settlement if not at hand is not too far distant in the future.
The global bond markets based on valuations suggest to us that investors are hedging their bets on a positive resolution to the trade war while at the same time showing great appetite for yield at any cost as they compete with central banks to buy bonds.
We remain believers that cooler heads will ultimately prevail leading to some kind of resolution that will halt trade war hostilities and develop into a trade agreement that will morph over time into a workable structure to “keep the peace” on the trade front. The alternative is simply too impractical and too costly for both sides and their trading partners across the world. Time will tell.
The Week Ahead
Opportunities for investors have been known to show up midst such times of uncertainty. We continue to favor cyclical sectors over defensive sectors. We remain overweight US equities while maintaining meaningful exposure to international equities based on our expectations for a trade agreement and a subsequent ramp up in growth expectations around the world (.
This report is issued and approved by Oppenheimer & Co. Inc., a member of all Principal Exchanges, and SIPC. This report is distributed by Oppenheimer & Co. Inc., for informational purposes only, to its institutional and retail investor clients. This report does not constitute an offer or solicitation to buy or sell any securities discussed herein in any jurisdiction where such offer or solicitation would be prohibited. The securities mentioned in this report may not be suitable for all types of investors. This report does not take into account the investment objectives, financial situation or specific needs of any particular client of Oppenheimer & Co. Inc. Recipients should consider this report as only a single factor in making an investment decision and should not rely solely on investment recommendations contained herein, if any, as a substitution for the exercise of independent judgment of the merits and risks of investments. The strategist writing this report is not a person or company with actual, implied or apparent authority to act on behalf of any issuer mentioned in the report. Before making an investment decision with respect to any security discussed in this report, the recipient should consider whether such investment is appropriate given the recipient's particular investment needs, objectives and financial circumstances. We recommend that investors independently evaluate particular investments and strategies, and encourage investors to seek the advice of a financial advisor. Oppenheimer & Co. Inc. will not treat non-client recipients as its clients solely by virtue of their receiving this report. Past performance is not a guarantee of future results, and no representation or warranty, express or implied, is made regarding future performance of any security mentioned in this report. The price of the securities mentioned in this report and the income they produce may fluctuate and/or be adversely affected by exchange rates, and investors may realize losses on investments in such securities, including the loss of investment principal.
Oppenheimer & Co. Inc. accepts no liability for any loss arising from the use of information contained in this report. All information, opinions and statistical data contained in this report were obtained or derived from public sources believed to be reliable, but Oppenheimer & Co. Inc. does not represent that any such information, opinion or statistical data is accurate or complete and they should not be relied upon as such. All estimates and opinions expressed herein constitute judgments as of the date of this report and are subject to change without notice. Nothing in this report constitutes legal, accounting or tax advice. Since the levels and bases of taxation can change, any reference in this report to the impact of taxation.
Investment Strategy should not be construed as offering tax advice on the tax consequences of investments. As with any investment having potential tax implications, clients should consult with their own independent tax adviser.
This report may provide addresses of, or contain hyperlinks to, Internet web sites. Oppenheimer & Co. Inc. has not reviewed the linked Internet web site of any third party and takes no responsibility for the contents thereof. Each such address or hyperlink is provided solely for the recipient's convenience and information, and the content of linked third party web sites is not in any way incorporated into this document. Recipients who choose to access such third-party web sites or follow such hyperlinks do so at their own risk. The S&P 500 Index is an unmanaged value-weighted index of 500 common stocks that is generally considered representative of the U.S. stock market. The S&P 500 index figures do not reflect any fees, expenses or taxes. This research is distributed in the UK and elsewhere throughout Europe, as third party research by Oppenheimer Europe Ltd, which is authorized and regulated by the Financial Conduct Authority (FCA). This research is for information purposes only and is not to be construed as a solicitation or an offer to purchase or sell investments or related financial instruments. This report is for distribution only to persons who are eligible counterparties or professional clients and is exempt from the general restrictions in section 21 of the Financial Services and Markets Act 2000 on the communication of invitations or inducements to engage in investment activity on the grounds that it is being distributed in the UK only to persons of a kind described in Article 19(5) (Investment Professionals) and 49(2) High Net Worth companies, unincorporated associations etc.) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (as amended). It is not intended to be distributed or passed on, directly or indirectly, to any other class of persons. In particular, this material is not for distribution to, and should not be relied upon by, retail clients, as defined under the rules of the FCA. Neither the FCA’s protection rules nor compensation scheme may be applied. This report or any portion hereof may not be reprinted, sold, or redistributed without the written consent of Oppenheimer & Co. Inc. Copyright © Oppenheimer & Co. Inc. 2015.