Market Strategy 8/17/2020
- August 17, 2020
An Unprecedented Year Brings Unconventional Conventions
The disruptions brought by COVID-19 test the resilience of the economy and earnings
- The US presidential election moves to forefront of investor attention with the Democratic convention this week, followed by the Republicans’ next week.
- Modest gains across US equity markets last week were in contrast to international developed-nation markets, which broadly outperformed.
- The yield on the ten-year US Treasury note backed up late last week as Consumer Price Index data showed evidence of reflation as the economy showed further resilience.
- As politics, geopolitics, and COVID-19 contribute to investor unease, we embrace our mantra from the start of the recovery in 2009: “Embrace the uncertainty.”
This week and next will bring the US presidential election campaign to center stage with investor interest in the face-off and potential outcome garnering increased focus. The Democratic convention starts today, and the Republican gathering convenes next week. Shaped and influenced in more ways than one by COVID-19 and its impact on gatherings of all sizes, 2020 may come to be remembered as the year of the “unconventional conventions” driven by virtual connectivity.
Former vice-president Joseph Biden’s announcement of his choice of Senator Kamala Harris as his running mate seemed to have little effect either positive or negative on the direction of the markets last week.
In the week ahead and next, we would expect that some ripple effects could begin to be felt in market performance. Campaign platform positions from both parties will surface, and pundits and political commentators will flush out positives and negatives with the purpose of providing their assumptions of where the country and the markets might be headed over the course of the next few months leading to the election and post-election, depending on the outcome.
The memory of how inaccurate the polls were in 2016 adds a level of uncertainty for all sides that may feel uncomfortable to embrace.
As professional investors, we’ll opt to embrace the uncertainty, hedge the perceived risks as best we are able, and seek opportunities that match our goals, objectives, and the mandates we serve.
That said, we are reminded of a mantra we utilized in 2009 after that market’s bottom on March 9 and throughout that year which served us well: “Embrace the uncertainty.”
Uncertainty is found in most aspects of life whether tied to relationships, health, business, travel—you name it. With uncertainty come choices to be made that could prove in their outcome to be pointless, useless, or damaging, or that could be fruitful, beneficial, and constructive or that could be a mix of all the aforementioned. Regardless, uncertainty usually comes with opportunity and risk—two considerations essential in making investments. As professional investors, we’ll opt once again to embrace the uncertainty, hedge the perceived risks as best we are able (mainly via diversification), and seek opportunities that match our goals, objectives, and the mandates we serve.
In the week ahead
In addition to the Democratic convention, this week’s agenda of items for investors to consider will be the winding down of the second-quarter earnings season. With just under 92% (456) of S&P 500 companies having reported results for the second quarter of 2020, earnings have shown a decline of 9.18% on back of an 11.53% slide in revenue growth. Overall results thus far indicate that enough companies have surprised to the upside (with overall earnings growth not as bad as had been projected by consensus analysis at the start of the earnings season) to suggest that the worst from a corporate earnings perspective may well be in the rearview mirror, notwithstanding a significant COVID-19 setback or some unforeseen occurrence or series of events.
Economic data in the last few months suggests that the economy has proven more resilient than surveys of economists had earlier projected.
In our view much of the resilience has reflected the earlier quick and decisive action by the Federal Reserve, the Trump administration and Congress in offsetting the effect of the economic shutdown implemented to stem the spread of COVID-19.
The current stalemate in Washington over the amount to be committed to the next tranche of economic rescue presents risks which we expect all sides will recognize before irreversible damage is dealt the economy. The economy remains sizably impacted by levels of shutdown still in place as well as by the recent resurgence in COVID-19 around the country that has already led to a slowing of the process of economic reopenings underway.
Economic data scheduled for release this week includes regional Federal Reserve Bank gauges of manufacturing activity; data on housing market activity; mortgage delinquencies; housing starts; the Fed’s FOMC minutes from the July meeting; initial and continuing jobless claims; the Conference Board’s leading economic indicator; Case Shiller20-city housing prices; and existing home sales.
Where We Stand
In our view, diversification, patience, self-knowledge, right-sized expectations, and keeping things in context remain key for investors in positioning their portfolios and navigating market conditions, and in particular during these times.
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).
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 pullback 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. Such a pullback, however, (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 the earnings outlook 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 the move on traditional and historical price to earnings metrics.
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.