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Market Strategy 8/10/2020

  • John Stoltzfus
  • August 10, 2020

Nothing Comes Easy

Even as progress is made on a number of fronts significant challenges remain
Key Takeaways
  • With stocks just shy (1.04%) of their February 19 peak, investors this week will pay close attention to economic data, earnings results, and any developments on the Covid-19 front.
  • At current levels, the equity market appears vulnerable to any catalysts that could justify near-term profit taking without FOMO.
  • In our view the level of 3,500 on the S&P 500 could be reached and possibly exceeded this year before earnings growth projections could justify the move on traditional P/E metrics.
  • With 89% of companies in the S&P 500 index having reported results for Q2, about 80% have beaten expectations.
  • Last week’s employment report exceeded analyst forecasts, providing further evidence of the resilience of the US economy.
washington dc at night

No lack of challenges on the landscape likely points to opportunities for investors willing to contend with uncertainties including those that lie ahead tied to the process of addressing the Covid-19 crisis and the US presidential election.

The current environment reminds us that anybody who thinks that successful investing is an easy game or a walk in the park will inevitably be proven wrong. Like life investing has its ups and downs and could try the patience of a saint. That said many find the process of living life and investing rewarding.

Political wrangling and gridlock in Washington, DC over a fourth rescue program that stretched into the weekend has prompted the President to move according to the news closer toward taking executive action to bridge the gap to provide rescue funding. Such prospective effort should likely provide impetus for Congress to find a way to agreement and a broader solution sooner than later.

As of early evening on Sunday as we prepared to publish, Bloomberg News reported that cases of Covid-19 had reached over 19.6 million worldwide with deaths totaling some 727,000. The positive-test rate in the US had risen to 5 million infections.

With more than 160 vaccines to combat Covid-19 now under development across the globe—including 14 candidate vaccines in the US government’s Operation Warp Speed program that aims to deliver 300 million doses by January, 2021— news of positive developments crosses the proverbial transom on almost a daily basis. The news is providing hope for communities around the world, boosting prospects for a global economic recovery in the not too distant future and providing lift to stocks stateside and abroad.

Quotation from Aenean Pretium

We believe stocks at current levels remain vulnerable to catalysts that might surface near term that could enable short-term and nervous investors, as well as traders, to take some profits without FOMO.

In large part equity markets in the US and around the world are reflecting expectations that the efforts of scientists around the globe will arrive at the development of a vaccine (or a number of them) that will safely and effectively be able to stem the spread of the virus and enable countries around the world to move forward with re-openings of their respective economies with greater levels of confidence.

With today’s state of the art technology and scientific processes pressed into action in a worldwide effort to find a positive solution to stem the virus’ spread and toll, expectations for success may prove reasonable and correct. The immediate challenge for public and investor sentiment will be the impediments and hurdles to be traversed along the way to success.

The S&P 500 Climbs Wall of Worry

For all the attention the S&P 500’s significant rally from the low on March 23rd (up 49.8% through last Friday) has received, recent gains in the benchmark have been in aggregate moderate since the end of the first week in June. From June 8 through last Friday’s close the benchmark is up just 3.7% suggesting that the market has not so much been taken hostage by animal spirits and irrational exuberance (as the action in some individual stocks might suggest) but rather that investors and traders have been practicing rebalancing and rotation among cyclicals and defensive sectors as well as among market capitalization segments that could lead to a broadening of the rally.

The S&P 500 has closed higher on-the-week in six of the past nine weeks beginning with the week that started on June 8. This occurred in a period that has seen among other things: a resurgence of Covid-19 that has challenged the process of economic re-openings in a large number of US states; a deterioration in geopolitics and domestic politics; concerns about the risks of not extending government economic rescue programs; as well as worries about potential negative longer-term effects from the current magnanimously accommodative Federal Reserve monetary policy.

These negatives and concerns have been in our view offset by a number of positives including: progress with vaccines being tested; news about drugs of greater efficacy to treat those falling ill from infection; economic data (that while not necessarily robust) illustrates the resilience and strengths of the US economy in a period of unprecedented challenges; and a significant percentage of companies (81%) beating analyst estimates in the S&P 500’s earnings season for Q2 2020.

Where We Stand

In our view diversification, patience, self-knowledge, right-sized expectations, and keeping things in context remain key factors for investors in positioning their portfolios and navigating market conditions. 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, and 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).

We believe stocks at current levels remain vulnerable to catalysts that might surface near term which could enable short term and nervous investors, as well as traders, to take some profits without FOMO (fear of missing out). A pull back of 4% to 6% could take place should such a catalyst appear. We are reminded that stocks tend not to move in a straight line higher unchallenged for long. However, such a pullback (depending on the catalyst for profit taking) could likely present an opportunity to buy “babies that get thrown out with the bathwater.”

Our 2020 target price of 3,500 for the S&P 500 (initiated last December) remains in suspension (suspended the morning of March 23rd) at this time while we await earnings visibility to improve further.

The market’s persistent strength and resilience notwithstanding the challenges that remain in place tell us that the level of 3,500 for the S&P 500 could be reached and possibly exceeded this year before earnings growth projections can justify such a move on traditional and historic price to earnings metrics.

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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