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Market Strategy 7/18/2022

  • John Stoltzfus
  • July 18, 2022

Summertime and the Markets are Uneasy

Volatility is likely to persist as markets and economies remain in a transitional phase

Key Takeaways

  • Worries about economic growth and the potential for a recession remain prominent concerns among market participants and pundits.
  • Q2 earnings results will garner investors’ focus this week as 73 companies across key sectors report results. Last week saw several disappointments rattle markets and raise volatility.
  • A generation gap exists among investors today between those who have experienced numerous fed funds rate hike cycles and others who have experienced few and or none until the current hike cycle Key economic data released last week showed new inflation highs even as consumer sentiment showed a slight improvement.
  • We note the S&P500 forward P/E hasn’t been this low since April 3, 2020 or during the depths of the December 2018-January 2019 correction.
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The S&P 500 Q2 earnings season got underway last week as the big banks and several widely followed names in other sectors including technology and consumer staples reported results. Market reactions to mixed results among companies reporting illustrated the markets’ sensitivity this earnings season as growth prospects are lowered and uncertainty remains not unexpectedly high.

Traders and investors will be kept busy this week with a pick-up in the number of companies reporting as 73 member companies across key sectors report results.

With just 33 companies in the S&P500 (under 7%) having reported through last Friday it’s much too early to conclude the outcome of the earnings season now underway.

That said, an early glance at sector results (with five or six of the 11 sectors in the S&P 500 having had companies report thus far) shows just one sector (financials) showing aggregate negative earnings growth.

Quotation from Aenean Pretium

It’s reasonable to expect that some time and more hikes will be required before we’ll see the Fed’s efforts have a positive effect in stemming the current high levels of inflation.

Based on last week’s market reaction to disappointments as well as to positive surprises as companies reported results, investors should expect day to day action will likely reflect high sensitivity to earnings reports across the sectors and particularly to any guidance as to what might lie ahead from management teams in their earnings calls.

The stateside CPI (Consumer Price Index) last week posted yet another 40-year high at 9.1% year over year in June—exceeding expectations and rattling markets. The PPI (Producer Price Index) released the next day showed its own high at 11.1% which contributed further to the volatility experienced last week.

As disconcerting as the inflation numbers were we found them easier to ponder when placed in context of the overstimulation of the economy as a result of outsized fiscal policy deployed to counter the potential negative impact of the pandemic. In such context what we are experiencing stateside in terms of inflation should be taken as a likely if unwelcome outcome to be managed rather than an unexpected and overwhelming shock.

Also, we are of the view that it is much too early to expect the first three Fed rate hikes (in April 0.25%, in May 0.50%, and in June 0.75%) to have had much of an effect on inflation. It’s reasonable to expect some time and more hikes will be required before we’ll see the Fed’s efforts have a positive effect in stemming the current high levels of inflation.

In the meantime the recent declines in the prices of copper, aluminum and wheat (among other key commodities), along with slower economic growth in China (in part as a result of recent zero tolerance policy related to COVID lockdowns—as well as global slowing) would appear to assist the Fed in its efforts to contain inflation and reduce the likelihood that monetary policy stateside will need to become overly aggressive to have any effect as some fear.

For those of us with three and four decades of experience with the markets, the current Fed “rate hike cycle” can seem less disconcerting than for those who have experienced mostly the largesse of QE, negative yields (real and nominal) and even “free money” in their time with the markets. In our nearly four decades of tracking markets a rate hike cycle still presents a challenge, but not something to be considered insurmountable but rather a rough sea to properly navigated.

In our view patience, prudent portfolio diversification, historical context and an eye for “babies that get thrown out with the bathwater” (solid stocks marked down with the bad and the ugly on volatile days) remain key to staying on course and navigating the current transitional period toward “the next new normal.”

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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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