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Market Strategy 3/23/2020

  • John Stoltzfus
  • March 23, 2020

Back to the Future

A dramatic market pullback offers opportunity for a recovery process that likely lies ahead
Key Takeaways
  • 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.
    markets and financials

    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.

    Quotation from Aenean Pretium

    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.

    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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