Market Strategy 3/23/2020
- March 23, 2020
Back to the Future
A dramatic market pullback offers opportunity for a recovery process that likely lies ahead
- We have suspended our price and earnings targets for the S&P 500 in 2020 until length of the “hard stop” of the US economy can be determined.
- A bull market that proved nearly invincible from the lows of March 2009 has ended—not by normal excess or policy errors but by a “bolt from the blue.”
- We highlight risk of “timing the market” with an illustration of market returns over a 48-year period through 2019.
- We revise our S&P 500 sector allocation to reflect recent changes in market tone and activity.
This week as we prepared to go to press, news crossed the tape that the coronavirus rescue bill had failed to pass in a key vote in the Senate as Republicans and Democrats could not agree on how the $2 trillion dollar package should be spent. That news combined with an upward move in the number of cases of the virus in Italy, Spain, Australia and the US over the course of the weekend further rattled markets that were opening or poised to open as the sun’s rays began their trek across the globe into Monday.
Gains that had been re-won and even added to by stocks in the S&P 500 in 2019 from the pullback of the fourth quarter of 2018 were given back over the course of the past week as uncertainty on a multiplicity of levels remains a negative overhang on economic and corporate revenue and earnings growth around the world.
A bull market that proved nearly invincible from the lows of March 2009 through the peak it attained in February 2020 has ended—felled not by the normal excesses or policy errors that bring down a bull market but by a “bolt from the blue” in the form of a novel virus global pandemic. For now, equity markets around the world are caught in the grip of a bear market caused by an insidious virus outbreak that has no exit date visible as of yet on the proverbial horizon.
With the level of activity increasing by the day against Covid-19 it is likely that the cost of the process that leads to recovery should be worth it.
At the start of the weekend New York City’s Mayor identified New York as having become the “epicenter” of the Covid-19 virus’ presence in the US with the leading number of confirmed cases among the states. By midday on Sunday the Covid-19 count in New York City stood at more than 9,000 cases.
The S&P 500 Down 31.93% from February 19
Beyond the human tragedy and societal disruptions, equity markets have been in disarray and have given up their record high levels achieved as recently as just one month ago. As of last Friday’s close the S&P 500 index stood at 2304.92 off 28.7% in 2020 year to date and down 31.93% from its record high closing price of 3,386.15 reached on February 19th of this year.
Other major equity indices stateside have experienced similar dramatic moves to the downside in a very short period of time as well, interrupted by intermittent rallies some of which have been very powerful suggesting “the shape of things to come” to the upside once the virus passes from ramp up to peak and begins to lose its power. The key question is when does that happen? How long will the extreme measures of social distancing, sheltering in place, isolation, self-quarantine and economic activity broadly on “pause” remain the order of the day? How many individuals will catch the virus, how many will experience a severe reaction to it or even succumb to it? The extreme response that has been initiated of late in the US and in several other countries would appear to signal there is hope that Covid-19 stateside and elsewhere could follow the trajectory it has followed in China and South Korea leading to an economic recovery.
For now the focus is on how and when do we get out of this mess? With the level of activity increasing by the day against Covid-19 it is likely that the cost of the process that leads to recovery should be worth it. The alternative is not acceptable for our country or the world.
The biggest challenge near term outside of the battle versus Covid-19 is the assessment of the damage sustained by the markets and projection of outcome. In our view it is likely that the equity markets as well as other markets for other asset classes will remain volatile until the virus begins to roll over stateside and elsewhere and communities can move towards the normalization of day to day activity.
Economic forecasts at this time reveal a wide divergence of expectations among institutions within the government and private sector. The volume of news and opinions crossing the proverbial tape reminds the reader of the expression “TMI!” (too much information!) and causes us to reminisce about the Tower of Babel as we parse through projections from around the world.
Suspending our Price Target for the S&P 500
With a large portion of the world on economic pause for now we are suspending our target price and earnings target (initiated on December 17 of last year) for the S&P 500 of 3,500 and $175 respectively until further notice.
These targets were initiated in the period prior to the emergence of the Covid-19 virus and the radical—but likely well justified—actions taken over the course of the last week by health and other governmental authorities stateside. The impact on the US economy of being broadly placed on hold will be determined to large degree by how long this remains in place and how quickly it can be removed. Until the virus exhibits a decline in its trajectory and rolls over, “normalcy” is likely to remain out of reach. In such an environment the risk and the extent of damage will vary greatly within segments of the economy and sectors of the markets causing us to suspend our target at this time.
For now the markets are trading on a combination of fear and technical factors with fundamentals clouded by the uncertainty around the virus. That said, advancements in technology, pharmacology and biotechnology and medical equipment design give us expectations that the risk will be met likely sooner than many expect but not as quickly as we’d like to see.
Diversification, patience and right-sized expectations appear to us to be the most practical order of the day (this requires discipline) with an eye for “babies that get thrown out with the bathwater.” Defensive sectors which have done well in the current market turmoil are likely to experience less favor as investors turn to focus on more cyclical sectors including technology, consumer discretionary, and industrials when the course of the virus appears to turn.
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.
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. 2020.