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Market Strategy 9/21/2020

  • John Stoltzfus
  • September 21, 2020

Don’t Change Horses in the Middle of the Stream

Although other sectors are in vogue at the moment, don’t count the tech sector out
Key Takeaways
  • Investors are likely to start the week looking for signs that the recent pullback in equity prices may be overdone.
  • The importance of the technology sector across the US and global economies points to the likelihood that technology’s leadership among the sectors will return as an economic recovery becomes more visible.
  • The outperformance by mid-and small-cap stocks as well as international equity benchmarks last week suggests a healthy broadening in the appeal of equities.
  • Economic data released last week reinforces our view that the economy remains remarkably resilient despite the stalemate in Washington and resurgences of Covid-19. 
abstract map

For all the drama around the drop in technology share prices from their peak on September 2 through last Friday and expectations by more than a few investors for new sector leadership to emerge and stick—secular trends driven by technology and globalization deeply embedded in the global economy would lead us to expect the old adage “the more things change, the more they stay the same”.

We’re not suggesting that the sell-off tech stocks have undergone thus far is unwarranted but rather that even as a broadening of investor appeal for stocks and sectors outside of tech is in process technology’s importance to the lives of corporations, individual consumers, governments, health and educational institutions remains solidly in place.

In our view tech in the current cycle is likely just beginning a process of not so much changing what humanity does but rather persists in driving a watershed effect for a prolonged period of time in which it continues to change the way people do the things they do.

We won’t disagree that valuations in the technology sector had gotten stretched across the tech complex and even bubbly in a number of names in tech-related IPOs and in a few established pockets of innovative leadership. That said, the purposefulness of technology today is felt on so many levels of society that in our view it engenders a virtuous upgrade cycle among its varied constituencies across the globe that is relentless.

Quotation from Aenean Pretium

Concerns about the risk of increases in corporate, personal and capital gains tax rates should the Democrats win the White House in the election ahead have also likely contributed to the current sell-off.

The tech sector today is not the same as it was 20-plus years ago during the “dot com bubble” when companies romanced investors with visions of how many eyeballs their websites would attract at some point in the future and investors worried about cash burn. Rather, today’s technology companies often are not just cash flow positive but significantly profitable in a world in which hardware replaced by software has led to software replaced by subscriptions linked to the cloud— producing a more durable cycle.

Concerns about the risk of increases in corporate, personal and capital gains tax rates should the Democrats win the White House in the election ahead have also likely contributed to the current sell-off.

As of last Friday, segments of the market including technology, consumer discretionary and communication services were beginning to look somewhat oversold and likely sooner than later to encourage investors to seek “babies that have been thrown out with the bath water.”

Over the course of the recent sell off we have been asked a number of questions by private investors, institutional investors and the press. We provide a “sampler” of several questions that we have been asked repeatedly, including:

Recent Q&A from investor meetings

As of last Friday, the S&P 500 is down 7.3% from its most recent record high on September 2. So far, the market has over-shot our expectations for a 4% to 6% haircut from recent highs on near-term extended valuations, as well as economic and Covid-19 risks. That said, the declines through last Friday are not all that surprising. It is that September—traditionally but not always—can be tough month for stocks. The S&P 500 had delivered a massive rally rising 60% from the lows on March 23 through September 2. Markets tend to overshoot to the upside as well as to the downside

Based on the economic data that’s crossing the transom and the news on vaccines so far, we see a good chance that the S&P 500 will revisit its latest record high from September 2.

In our view to go much above the highs from September 2 for both the S&P 500 and the NASDAQ Composite we’d likely need to see:

  • An approval of a vaccine to stem Covid-19
  • An outcome to the election that would be considered friendly to the domestic economy, business, job growth and the taxpayer;
  • Q3 earnings season could also help define the direction of the market;
  • A pick-up in guidance may be forthcoming from more companies in the Q3 earnings season. That could help too. 

A broadening in investor appetite for sectors other than information technology, consumer discretionary and communication services over the course of the summer through now. Investor buying of stocks in the industrials, materials and other cyclical sectors as well as evidence of increased investor interest in mid-caps and small caps in anticipation of an economic recovery also augers well for stock performance. We view some lightening up of tech by leveraged market players and a broadening of interest in other sectors as normal and healthy. The pullback has taken some of the froth and speculation out of segments in the market particularly within tech and in IPOs.

Recent flows into the international markets in anticipation of economic recovery in a number of regions around the world are also a positive sign. We view global diversification as a good thing.

Near-term risk would include a catalyst that could sour consumer and business sentiment such as a second wave of COVID-19 (not just resurgence) that might trigger another shutdown of the economy.

That depends on an investor’s experience, goals and objectives as well as tolerance to fluctuation and volatility.

In our view materials and industrials appear attractive as well as those “babies that have been thrown out with the bathwater” in the tech and other sectors such as consumer discretionary and financials.

We don’t believe that this is a “back up the truck moment” but rather an opportunity for thoughtful “layering-in,” rotation and rebalancing.

Action at this time depends on how the investor was positioned beforehand. If they were suitably diversified going into the pull-back then a portfolio review may be appropriate.

Trillions of dollars remain on the sidelines from earlier this year. We’d expect much of that money to stay sidelined until investors get improved clarity on a number of things including:

  • The approval of a vaccine to stem Covid-19;
  • An outcome to the election that would be considered friendly to the domestic economy, business, job growth, and taxpayers;
  • The shape of the Q3 earnings season, which should also be critical in defining the direction of the market ahead of year end. 

We would be hesitant to write off technology’s ability to regain its leadership in the market based on the ubiquitous nature of tech that serves both business and the consumer. Innovation trends in tech appear far from plateauing in this cycle

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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