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Market Strategy 9/3/2019

  • John Stoltzfus
  • September 3, 2019

Don't Let It Bring You Down

As the trade war heated up further over the long weekend the potential for a jump in market volatility increased

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.

shipping containers

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.

Quotation from Aenean Pretium

…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.

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 (.

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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