Market Strategy 3/29/2021
- March 29, 2021
Are We There Yet? Not Quite
Markets remain vulnerable to volatility even as “things keep getting better.”
- News flow and market action suggest that we are in the midst of a transition on a multiplicity of levels: from Covid-19-related, to resurgent economic growth, to monetary policy, to fiscal policy, inflation projections, Treasury yields and more.
- Oil prices continued to move lower last week on risks projected to economic re-openings.
- As of last Friday, the yield on the US 10-Year Treasury stood 76 basis points (or up 83.2%) higher from the start of the year.
- Value stocks continue to outperform growth stocks across all market cap segments.
Progress not perfection is likely to remain the order of the day for longerterm goal oriented investors as the process of transition on multiple levels remains in flux stateside and around the world. Near-term potential for market volatility to appear intermittently is likely to favor short-term traders while presenting opportunities for longer-term investors to pick up “babies that get thrown out with the bath water.”
With as much as has been done in recent weeks to fix the initially challenged distribution of the Covid-19 vaccines much is left to be accomplished before the US economy and the markets are “out of the woods” and into the “next new normal”. For now economic data while continuing to show significant resilience remains subject to intermittent disappointments and setbacks such as we saw with weaker-than-expected February results for retail sales and durable goods orders.
Considering the differences in what caused the Great Financial Crisis of a little more than 12 years ago--a systemic risk in real estate and finance that got way out of hand--and the current crisis which was caused by an exogenous shock: the global pandemic, it’s little wonder that as good as things are when compared to this time last year there remains much to be revealed as to how the exit and the legacy of the pandemic crisis will take shape to achieve success and at what cost financially and societally.
Near term a continuation of supply chain disruptions are likely to persist until manufacturers stateside and around the world ramp up production.
For now we’re stuck midst a transition on a multiplicity of levels:
- The Covid-19 vaccine news appears to be getting better by the day as more people are inoculated. On the negative side of things news on variants of the virus and risks associated with them creates uncertainty as to whether or not the current approved vaccines will be effective in dealing with those variants or if scientists will have to tweak the current vaccines or perhaps even seek out further discoveries to meet the challenge.
- The high cost of accommodative monetary policy, rescue programs, and fiscal stimulus has raised concerns in the bond market and elsewhere about risks of untoward levels of inflation as the economy more broadly reopens and reflates on its way towards an economic recovery.
- The recent direction and pace of market priced yields on mid and longer-term Treasuries pose questions from Main Street to Wall Street and to Capitol Hill as to whether the near-term direction of Treasury yields justifies the varied projections on inflation coming from a reflationary process.
- Stateside equity markets in recent weeks have seen day to day action reminiscent in our view of an earlier period during the recovery process from the Great Financial Crisis of 2007-08 wherein stocks move from “risk on” to “risk off” and then back to “risk on” depending on the news and the worry du jour and its interpretation by market participants and observers.
- Within the equity market questions have recently surfaced as to whether the recent run up in value oriented companies has gotten ahead of itself on one hand while others ponder the likelihood that technology and growth issues have ceded for the foreseeable future the leadership they enjoyed previously.
- In Washington the argument is growing louder between those who believe big spending is the solution for what ails the economy versus those who see the flood of red ink and the potential for even bigger spending as the problem.
- Rising political tensions in DC and globally add to the dysfunction already prevalent in that neck of the woods.
- The risk of “one party decision making” versus a sharing of the power through fruitful negotiation or even just navigating gridlock adds to risks for the markets and investors to consider.
- Near term a continuation of supply chain disruptions are likely to persist until manufacturers stateside and around the world ramp up production. In the interim, demand could outstrip supply in areas as diverse as technology and agriculture causing projections of inflation on the horizon.
A mixed bag of positive and negative components--- as worrisome as it might seem to those short on experience in market cycles, or those who might have a shy memory of all the troubled history that has preceded the current period of sizeable uncertainty----in our view likely presents more opportunity than risk for investors who right size their expectations, practice diversification among asset classes, have suitable tolerance for risk and who practice patience.
Where We Stand
- We continue to favor equities in the current transitional environment.
- We remain overweight US equities while maintaining meaningful exposure to international developed and emerging equity markets.
- We persist in favoring information technology and cyclicals over defensive sectors as well as exposure across large, mid and small capitalizations.
- For style we prefer a barbell approach with both value and growth in what is likely to remain a low interest rate environment even after yields move higher in response to what we expect will be a sustainable economic expansion stateside that will feed a global economic recovery.
- Among the immediate risks that lie on the landscape are Covid-19 and its variants, the process of economic re-openings stateside and elsewhere around the world that lie ahead, perception of inflation risk, domestic politics, geopolitics and the perennial risks that lie in the realm of the unexpected.
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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