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Market Strategy 2/16/2021

  • John Stoltzfus
  • February 16, 2021

Déjà Vu

Fundamentals continue to improve even as plenty of uncertainty remains on the landscape
Key Takeaways
  • Q4 earnings growth for the S&P 500 continued to exceed expectations through last week, adding justification for recent equity price gains.
  • In the week ahead investors will have a host of economic data to consider as well as minutes from the Fed’s January FOMC meeting.
  • With stocks hitting new highs last week professional and private investors ask us about the likely longevity of the current bull run.
  • We discuss the attractiveness of industrial sector stocks, which offer the opportunity to benefit from a global economic expansion as Covid-19 lessens its grip on the global economy and US politicians consider the importance of infrastructure spending. 
power lines

The S&P 500 and the Russell 2000 closed at new record highs a week ago last Monday while the S&P 400 (mid-caps), S&P 600 (small-caps) and the NASDAQ each closed at new record highs last Friday.

Traders and investors return to a Presidents’ Day holiday-abridged week which will see 54 companies of the S&P 500 report Q4 earnings, a brace of economic data which includes retail sales and housing starts along with day to day news regarding progress on Covid-19, news on mutant virus risk and prospects for a brace of reopenings of local and regional economies stateside and around the world.

While there’s an element of the movie Groundhog Day in the sameness of the work-from-home days many of us have been living since last March, there are signs of significant progress that have and are being made on the Covid-19 front as millions of people are getting vaccinated worldwide and more than a few segments of the economy tied to business and the consumer stateside continue to show resilience that appears in economic data points and in better-than-expected earnings results.

With major US equity indices at or near record highs the question we hear from professional investors, private investors and members of the press most often is “how long can stocks move higher before there’s at least some give back of these day to day gains in market indices?”

Quotation from Aenean Pretium

We expect that a process of reflation rather than untoward levels of inflation will see interest rates rise modestly to levels that are unlikely to provide much competition for equities in 2021.

Our initial response is usually “be careful what you wish for.” To that we might also add, “The market is always looking for a catalyst that traders, shortterm and nervous investors can use to take some profits without FOMO (Fear of Missing Out) in the midst of a bull run in equity markets. After that we’ll remind them of the pull-back near the start of the fourth quarter of last year and the extreme volatility experienced last March.

Then we’ll make note of recent developments from the fourth quarter of 2020 through now that suggest that even as many things remain challenging and worrisome, fundamentals appear to be improving aided by progress on the vaccination front that provides some justification for the major benchmarks to be valued where they are at this time—if not for each and every stock.

We also point out that while markets as discount mechanisms pricing the future can indeed get ahead of themselves, history suggests that the valuations reached after a great financial crisis are often found in hindsight to have been justified by what lay ahead. Consider the bull market that began in 1982, the bull market of the mid to late 1990s and the bull market post the Great Financial Crisis to name a few.

Risks Always Abound

We have found that the stock market (and for that matter most investments outside of the stock market) can be subject to serious corrections. In life and in business there is never a resolution to all problems or barrier to risks that can emerge unexpectedly. “Bolts from the blue,” “socks to the Jaw,” “black swans”—essentially exogenous shocks are always possibilities even at the best of times.

Other than the stock market consider the New York City real estate market just prior to the Covid-19 pandemic. Commercial and residential real estate in the City which had enjoyed a near 11-year period of sequential gains in prices and in rents were broadsided by the risks and challenges to the local economy from the pandemic as well as the shuttering of large segments of the city’s economy. Taxes already among the highest in the nation could leap even higher to bail the city out of its current predicament as some residents move to taxfriendlier states. Those of us who have lived and worked in the city over the decades have seen our beloved city not just “survive for another day” but emerge stronger, more diverse and greater than before from previous crises, including fiscal emergencies, the attacks on the World Trade Center, several recessions over the decades and the current pandemic. This time should mark no exception for the city to recover and thrive once again.

On a national and global scale there are widely known risks that can come from factors tied to: economic conditions, earnings, monetary policy, fiscal stimulus, domestic politics, geopolitical risk, health crisis (the pandemic), the effectiveness of the response to the pandemic, and climate change among other things. In addition the current cycle has potential for challenges to come from outcomes tied to reflation, inflation and even longer-term disinflationary trends.

We suggest that it is important to recognize that the aforementioned present not just risk but opportunity for investors, innovators and the work force.

How Did Equity Markets Recover so Quickly?

We are often asked what has enabled the equity markets to recover from the dramatic crash in equities that took place from February 19 to March 23, 2020 as investors and traders considered the impact of what was likely a widespread pandemic with severe repercussions for the world economy that led to a grossly oversold equity market.

Among the factors we identify as having enabled the equity markets to recover as quickly as they did in 2020 and which continue in large part through today are:

  • A recognition by market participants that the crash that had occurred in a little over a month’s time was, like most crashes, likely overdone; 
  • A dramatic rally that carried major equity benchmarks back to pre-pandemic levels and then even higher, however, was provided by the quick response of the Federal Reserve and by fiscal stimulus provided by Congress and the Administration;
  • The resilience of a significant number of companies across the sectors of the S&P 500 (and other indices) provided an ability to navigate the crisis.
  • Among publicly and privately held companies the ability to deliver services or products to a large degree via technology made a significant difference in determing winners and losers. Those businesses able to capitalize on the digitalization of business and the consumer proved to be winners. The losers were unfortunate in that technology was not the defining factor in the delivery of their service or product (consider the problems restaurants, theaters, stadiums, hotels and commercial airlines have had to deal with).
  • Advanced technology in health care (pharma and biotechnology) enabled scientists to develop vaccines of efficacy capable of stemming the spread of the virus and likely enabling (in the not too distant future) the re-opening of large segments of the economy that have been shuttered or nearly shuttered since March.
  • Low interest rates brought about by monetary policy as well as higher bond prices (which lowered yields further) as worries within the bond market of just how high the risks were with the pandemic provided a platform that has resulted in a sustained rally among equities as historically low yields in bonds cut near-term into the competitive appeal of fixed income products for goal oriented intermediate and longer-term investors.
  • An improvement in the deployment of the vaccines after an initial stumble boosted hopes for widespread inoculation in the US to be achieved as early as the summer. The equity market has latched on to this possibility and taken it into account in the current rally on expectations that a sizable part of the US economy which has either been shuttered or nearly shuttered could be on the cusp of reopening.
  • Q4 earnings season for the S&P 500 has thus far produced results that have exceeded expectations. Through last Friday earnings are up 6.42% on the back of 2.7% revenue growth. With 373 (near 75%) of the S&P 500’s companies having reported thus far for Q4 eight of its eleven sectors show positive earnings growth. Among those eight sectors five show double digit earnings growth.
  • Economic data, while mixed, (the Labor Department’s non-farm payroll gain for January largely disappointed while the ADP jobs number exceeded expectations nicely) overall data points to economic resilience and a light at the end of the tunnel.
  • Inflation data so far does not indicate reason for concern even as the Federal Reserve remains highly accommodative and another round of fiscal stimulus is poised to flow.
  • In our view secular (long-term) counter inflationary trends deeply embedded in technology and globalization are likely to keep inflation in check allowing interest rates to rise at a moderate pace as the economy stateside and around the world gain traction as the pandemic lessens its grip
We Continue to Favor Cyclical Stocks

Among the sectors we expect to benefit from the economic expansion beyond the pandemic our favorites are consumer discretionary, information technology, financials and the industrials sector.

Near term the industrial sector (which is heavily exposed to aerospace and the energy sector) could benefit on anticipation of increased demand for leisure travel with greater demand for jet engine parts and rising demand for energy sector related components as the economy gains traction. Infrastructure spending with nationwide perspective could further boost the industrial sector as well as many of the other eleven sectors.

While the energy sector (after being the worst performing sector in 2020) has rebounded so far in 2021 on expectations of an economic rebound stateside and around the world (it’s currently the best performing of the S&P 500’s 11 sectors on a year to date basis) we expect longer term as the year unfolds that increased production, pressuring the price of oil. Beyond that alternative energy and the Biden administration’s favoring it could likely limit the traditional energy sector’s upside and its relative performance as the year moves ahead.

We look for continued progress on the economic and the pandemic front. In such an improving environment defensive sectors particularly consumer staples and utilities could come under pressure or at best suffer relative underperformance versus the cyclical sectors.

We expect that a process of reflation rather than untoward levels of inflation will see interest rates rise modestly to levels that are unlikely to provide much competition for equities in 2021.

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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