Market Strategy 8/03/2020
- August 3, 2020
Hang on Sloopy
No summer doldrums this week as negotiations on another rescue program drag on
- 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.
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.
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).
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.