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Market Strategy 8/03/2020

  • John Stoltzfus
  • August 3, 2020

Hang on Sloopy

No summer doldrums this week as negotiations on another rescue program drag on
Key Takeaways
  • The week ahead will be chock full of further earnings announcements, the nonfarm payroll report on Friday, along with any progress on breaking the stalemate in Washington over the next economic rescue package.
  • We provide our responses to the three questions most frequently asked by investors in our conversations.
  • S&P 500 Q2 earnings season with 63% of companies having reported so far has proven to be better than expected.
  • M&A activity ramped up last week on a trend for consolidation among sectors.
check from the government with american flag

As we enter the “dog days” of August, we discuss three questions we hear regularly from both institutional investors as well as private investors:

1) What do you make of the stock market that keeps moving higher even as Covid-19 continues to a large extent to hold the economy hostage?

Our answer: The equity market traditionally serves as a discount mechanism with its sights set on what lies ahead. Based on the level of fiscal policy rescue efforts and monetary policy put in place so far recent market action much as it did in the recovery from the GFC (Great Financial Crisis) in March of 2009 currently views a successful outcome to the current challenges.

2) Do you expect the Fed’s highly accommodative monetary policy and the fiscal stimulus programs from Congress and the administration to generate high levels of inflation down the road?

ur answer: We do not expect high levels of inflation to result from the extraordinary stimulus and monetary policy taken to deal with the Covid-19 pandemic. Federal Reserve vigilance against inflation (as well as vigilance by central banks around the world) is likely to be able to suitably address any flare up of inflation. Longer-term secular trends of globalization and technology (robotics on the factory floor, algorithms in the office—both of which are counter inflationary) are likely to remain firmly in place beyond current economic rescue efforts and the eventual economic recovery that we expect once the virus is better contained. A reflation of the economy and a move toward more normal (i.e., higher) rates would seem likely to parallel what was experienced post the 2008-09 crisis but with the recovery process being quicker.

Quotation from Aenean Pretium

The S&P 500 earnings season has seen 84% of the companies that have thus far reported exceed earnings expectations while 69% have beat revenue projections.

3) Should we be concerned with the recent decline of the dollar against major foreign currencies?

Our answer: In our view the effects of 22 months of trade war and the seven of damage to the world economy from Covid-19 had resulted in the dollar for most of that period rising to levels of extreme overvaluation as the US currency became a safe haven instrument for the world. With prospects increasing for a global economic recovery to emerge once the spread of the virus is stemmed, foreign currencies have begun to strengthen against the dollar. Record low interest rates that have resulted from the US rescue efforts and magnanimous monetary policy have also narrowed the interest rate differential between low yielding foreign debt and US debt instruments. This has also near term caused the dollar to weaken. In our view, the US dollar’s recent weakness does not represent evidence of a systemic or long lasting problems for the greenback.

We also view projections that the dollar’s current weakness could lead to a substantial curtailing of its role as the world’s lead reserve currency to be premature and likely to be ultimately proven erroneous as similar calls over the past nearly 40 years have been. Transparency, governance and accountability, which the US has been recognized to have by those who depend on reserve currencies are what history has shown determines the perseverance of a particular reserve currency.

For now dollar weakness could help improve the competitiveness of US multinational corporations abroad as well as enhance the opportunity for US investors in foreign securities via more favorable currency translation of foreign-based results.

The Week Ahead

There’s not a lot of time for investors to snooze on the beach this week with rescue package #4 negotiations dragging along in DC, the latest news on Covid-19 always pending, 129 S&P 500 companies slated to report and a slew of economic data scheduled to be released throughout the week that culminates Friday with the non-farm payroll report, the unemployment rate and hourly earnings growth.

Beyond that expect that there’ll be a wave of political and geopolitical rhetoric to parse and navigate as political party conventions draw near.

The Week That Was

On the virus front news, Covid-19 resurgence and risks was offset last week by news of progress on development of a number of vaccines to stem the virus as well as progress being made with drugs of greater efficacy to treat those who have fallen ill to the virus.

The immediate challenge on the Covid-19 front appears to be getting folks to wear protective face masks and practice social distancing as they yearn to get back to even a semblance of what life was pre-Covid.

Adherence to the relatively simple recommendations health authorities suggest and local governments propose ironically appear to remain a challenge for some in the land of the free elevating the risk of resurgences as states strive to reopen.

On the political front in Washington a preponderance of political rhetoric instead of compromise and suitable action in putting together another link in “a bridge over troubled waters” rescue programs kept investors on edge.

Earnings Season Rolls Along

On the positive end of the roster the S&P 500 earnings season has seen 84% of the companies that have thus far reported exceed earnings expectations while 69% have beat revenue projections according to data provider FactSet.

Among the sectors information technology, materials, health care and industrials had the highest percentage of companies reporting earnings above expectations while energy and real estate had the lowest percentages of companies reporting earnings above expectation according to FactSet.

M&A activity ramped up last week while a trend for consolidation also takes hold among sectors as investors, corporations and the markets navigate the effects of these unprecedented times.

Where We Stand

We remain diversified in our investment portfolios; maintain an overweight in equities versus fixed income; and favor cyclical sectors over defensive sectors.

Our favorite sectors remain: information technology, consumer discretionary, industrials with our contrarian pick, financials.

From a global perspective we remain overweight US equities while maintaining meaningful exposure to both developed and emerging markets on expectations that an economic recovery stateside coming out of the Covid-19 shutdown will help boost economic growth around the world and lead to a global economic expansion (similar to the one the world was experiencing just prior to the trade war between the US and China).

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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