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Market Strategy 8/17/2020

  • John Stoltzfus
  • August 17, 2020

An Unprecedented Year Brings Unconventional Conventions

The disruptions brought by COVID-19 test the resilience of the economy and earnings
Key Takeaways
  • 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.” 
pile of voting pins

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.

Quotation from Aenean Pretium

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.

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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